The Tax Administration Act 28 of 2011 ("TAA"), which
came into operation on 1 October 2012, levies penalties on
taxpayers who understate the amount of tax which they owe to the
fiscus. These penalties are known as "understatement
penalties" and will be imposed on taxpayers when the fiscus is
prejudiced by the taxpayers conduct in reporting its taxable
income. Such prejudice arises to the fiscus when there is a
difference between the amount of tax that should have been reported
by the taxpayer and the actual amount reported by the taxpayer.
However these understatement penalties may be reduced in certain
circumstances by obtaining a tax opinion from a registered tax
practitioner or by making a voluntary disclosure of the
The rate at which the understatement penalty is imposed depends on
the behaviour of the taxpayer and the circumstances in which the
taxpayer reported the understatement. The maximum penalty
percentage that can be charged is 200%. The South African Revenue
Services ("SARS") has no discretion when levying an
understatement penalty and is obliged under the TAA to levy the
As mentioned above, there are certain instances where a taxpayer
can have the SARS remit an understatement penalty or have the rate
of penalty reduced.
The first instance applies where there is a "substantial
understatement". A "substantial understatement" is
where the prejudice to the SARS or the fiscus exceeds the greater
of 5 per cent of the amount of tax properly chargeable or
refundable under the relevant tax period, or R1 million. A penalty
for "substantial understatement" is imposed at 25 per
cent in a standard case or 50 per cent in a repeat case.
Section 223(3) of the TAA provides that the SARS must remit the
understatement penalty if it is satisfied that (1) the taxpayer has
made full disclosure of the arrangement giving rise to the
prejudice by no later than the date the relevant return was due and
(2) the taxpayer was in possession of an opinion prepared by a
registered tax practitioner. The opinion of the tax practitioner
must be issued no later than the relevant return date, take into
account the specific facts and circumstances of the arrangement,
and confirm that the taxpayer's position is more likely than
not to be upheld if the matter proceeds to Court.
Second a tax opinion may go a long way in assisting a taxpayer in
avoiding understatement penalties when a penalty is imposed in
circumstances where the SARS alleges that there are "no
reasonable grounds" for the tax position taken by the
taxpayer. According to the SARS Short Guide to the TAA a taxpayer
may have reasonable grounds for a tax position which the taxpayer
has adopted, after having given regard to relevant authorities such
as income tax law, a Court decision or a general ruling. By
obtaining a tax opinion from a registered tax practitioner the
taxpayer would then be in a position to argue that it did in fact
have reasonable grounds for adopting its tax position and the SARS
would then bear the onus of proving the contrary.
Lastly, where the taxpayer makes voluntary disclosure of the
understatement in its tax liability then the rate of the penalty
will be reduced. The amount of the reduction depends upon the time
at which the taxpayer makes the disclosure to the SARS, either
before or after notification of an audit.
As such, under the TAA obtaining independent tax advice from a
registered tax practitioner in respect of one's tax affairs can
assist a taxpayer in reducing or eliminating any understatement
penalties that the SARS may levy.
Understatement penalty percentage table as set out in section
223(1) of the TAA:
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