Under paragraph 20(1) of the Fourth
Schedule to the Income Tax Act 58 of 1962, amended (“the Act”), if the actual taxable income of a provisional taxpayer, as finally
determined under the Act, exceeds R1 000 000 and the estimate made in the
return for the payment of provisional tax, that is the so-called second
provisional tax payment, is less than 80% of the amount of the actual taxable
income, the Commissioner is obliged to levy a penalty, which is regarded as a
percentage based penalty imposed under chapter 15 of the Tax Administration Act
28 of 2011 (“TAA”).
The penalty, in the case of a
company, amounts to 20% of the difference between the amount of normal tax
calculated using the corporate tax rate of 28% in respect of the taxable income
amounting to 80% of the actual taxable income and the amount of provisional tax
in respect of that year of assessment
paid by the end of the year of assessment.
Paragraph 20(2) of the Fourth
Schedule to the Act confers a discretion on the Commissioner to remit the penalty
or a part thereof where he is satisfied that the estimate of taxable income was
seriously calculated with due regard to the factors as having a bearing thereon
and was not deliberately or negligently understated.
The Port Elizabeth Tax Court
was recently required to adjudicate a matter relating to the imposition of a
penalty on the underpayment of provisional tax in Case No. IT14027, as yet
unreported, where judgment was delivered on 7 December 2016.
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The Tax Court had to consider whether the company could lawfully amend its grounds of objection even though the matter was already on appeal ©iStock.com/ "Alert Judge" by junial |
ABC (Pty) Ltd was a
provisional taxpayer which delivered its return for payment of provisional tax for the 2010 year of
assessment on 30 June 2011. In its return of provisional tax it estimated the
taxable income for the year of assessment and made payment in accordance with
its estimate. Sometime later it appeared that the actual income received
exceeded the estimate made by the company substantially. As a result the South
African Revenue Service (“SARS”) imposed an underestimation penalty in terms of
paragraph 20 of the Fourth Schedule to the Act.
The company lodged an
objection which was rejected by SARS and resulted in an appeal which was
decided in its favour by the Tax Board. SARS subsequently appealed the decision
of the Tax Board to the Tax Court for a hearing de novo and subsequently filed a statement of grounds of assessment
and opposing the appeal.
In reply, ABC (Pty) Ltd filed
its statement of grounds of appeal according to the Tax Court rules. In its
grounds of appeal the company abandoned all of the grounds raised in its
original objection and in its notice of appeal and sought to rely only on the
procedural ground raised for the first time by the chairperson of the Tax Board
upon which he had found in favour of the company.
SARS subsequently filed a
notice of exception arguing that the company could not rely on a new ground of
objection not previously contained in its grounds of objection.
The company originally
estimated its income for the 2011 year of assessment in an amount of R431 638,00 and made payment of provisional tax amounting to R64 905,54. Later,
on 30 September 2011 the company made a further payment of R1 377 466,22. Subsequently,
the company filed its income tax return reflecting a taxable income for the
year of assessment amounting to R5 050 076,00.
By virtue of the large
difference between the tax actually due per the final taxable income and the
provisional tax paid, SARS imposed the underestimation penalty under the
provisions of the Act. SARS considered the objection lodged by the company on
the basis that the company did not seriously calculate its tax income as
required.
The TAA had not yet come into
force by the time that the company’s objection had been disallowed and its
notice of appeal lodged. The Tax Board decided that the Commissioner was
correct in rejecting the company’s objection and that the appeal should be
dismissed on its merits.
However, the chairperson of the Tax Board mero motu raised a procedural issue
under the TAA which had since come into force and decided in favour of the
company. The chairperson of the Tax Board reached the view that the manner in
which SARS had dealt with the imposition of the penalty was in conflict with
chapter 15 of the TAA, especially sections 214 and 215 thereof.
The Tax Court
had to consider whether the company could lawfully amend its grounds of
objection even though the matter was already on appeal. Tax Court Rules do not
provide for an amendment to the taxpayers’ grounds of objection and the Court
therefor referred to the rules of the High Court.
The Tax Court considered the
various provisions of the TAA and made the decision that SARS’s exception to
the company’s application should be upheld and that the application for the
amendment of the company’s grounds of objection should be dismissed. The Court
therefore dismissed the company’s appeal and confirmed the penalty imposed on
the understatement of provisional tax.
Based on the judgment it is
concluded that taxpayers need to exercise extreme caution in calculating
taxable income for purposes of provisional tax, failing which they will become
liable to the 20% underpayment penalty.
Furthermore, when a taxpayer disputes
the imposition of a penalty, or in fact any assessment, it is important that
the grounds of objection are properly formulated as it is not possible to
subsequently amend the grounds of objection.
Dr Beric Croome is a Tax Executive at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, February 2017. Image purchased www.iStock.com ©iStock.com/"Alert Judge" by junial
Dr Beric Croome is a Tax Executive at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, February 2017. Image purchased www.iStock.com ©iStock.com/"Alert Judge" by junial
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