The South African Revenue Service ("SARS") may impose penalties on taxpayers who make errors in their tax returns, but relief is available under certain circumstances.

Understatement penalties ("USPs") are levied in terms of section 222(1) of the Tax Administration Act, 2011 ("TAA") and provide that in the event of an "understatement" by a taxpayer, the taxpayer must, in addition to the "tax" payable, pay a USP, unless it is the consequence of a "bona fide inadvertent error".

A provision in the TAA further states that SARS must remit a penalty imposed for a "substantial understatement" if it is satisfied that:

  • the taxpayer was in possession of an opinion by an independent registered tax practitioner that was issued by no later than the date the relevant return was due;
  • the opinion was based upon full disclosure of the specific facts and circumstances of the arrangement; and
  • the opinion confirmed that the taxpayer's position is more likely than not to be upheld if the matter proceeds to court.

A "substantial understatement" is defined as where the prejudice to SARS exceeds 5% of the amount that should have been paid, alternatively, exceeds ZAR1-million. A "substantial understatement" is also one of the behavioural categories in the understatement penalty percentage table that assigns a level of blameworthiness to a taxpayer in determining the percentage at which a USP is imposed.

In the recent judgment by the Supreme Court of Appeal ("SCA") in the case of the Commissioner for the South African Revenue v Coronation Investment Management SA (Pty) Ltd the SCA considered whether a taxpayer, who placed reliance on an opinion, was liable to a USP.

The SCA found in favour of SARS in respect of the merits of the matter and then proceeded to consider Coronation Investment Management SA (Pty) Ltd's ("CIMSA's") appeal against the USP imposed by SARS.

CIMSA argued that it relied on a tax opinion procured from a leading tax expert in the country and was therefore not liable for USP. The opinion in question was never disclosed to SARS and SARS relied on non-disclosure to draw a negative inference that the tax opinion did not support CIMSA's position as disclosed in its tax return (and in respect of which the SCA found in SARS' favour) and that a deliberate and conscious decision was taken to exclude the relevant income from its return.

The SCA said:

"...there [is nothing] to suggest that CIMSA's tax returns were not submitted in the bona fide belief that CGFM may be eligible for a s 9D exemption. The fact that this Court has now found that this course is not open to it, does not in any manner reflect on the bona fides of CIMSA, any more than it reflects on the bona fides of any losing party in litigation".

"Insofar as the tax opinion is concerned, it was not incumbent on CIMSA to disclose a tax opinion that it had obtained, any more than it would be on any other party which litigates on the basis of a procured legal opinion ..."

To speculate that a tax opinion must have gone against CIMSA merely because it was not produced to SARS, is simply speculative. It is not sufficient to attribute bad faith on the part of CIMSA.

For the above reasons, the SCA found that SARS' claim for USP must fail.

It is interesting that the focus was not on section 223(3) of the TAA and whether the USP should be remitted on the basis of that the taxpayer had an opinion, but whether the taxpayer made a bona fide inadvertent error and is thus not liable for USP.

In reaching its conclusion the SCA made reference to its earlier decision in Commissioner, SARS v Thistle Trust where the taxpayer had obtained a tax opinion on the specific tax treatment of consecutive or back-to-back distributions by trusts. The taxpayer accepted the position taken in the opinion, and completed and submitted its tax returns on that basis.

SARS disagreed with the position taken by the taxpayer, assessed the taxpayer accordingly, and imposed an USP. The SCA found in favour of SARS with regard to the tax assessment but commented as follows with regard to SARS' concession in respect of the USP imposed:

"SARS initially adopted the position that, in the light of the legal opinion, it should be concluded that the Thistle Trust had consciously and deliberately adopted the position it took when it elected to distribute the amounts of the capital gains as it did. However, during the argument before us, counsel for SARS conceded, correctly, that the understatement by the Thistle Trust was a bona fide and inadvertent error as it had believed that section 25B was applicable to its case. Though the Thistle Trust erred, it did so in good faith and acted unintentionally. In the circumstances, it was conceded that SARS was not entitled to levy the understatement penalty."

These SCA decisions therefore supports the view that a legal opinion does not only provide relief from USP in the case of a "substantial understatement" contemplated in section 223(3) but could go further. A taxpayer who does not disclose their tax opinion to SARS (due to the fact that same is subject to legal privilege or for some other reason) may nevertheless place reliance thereon in arguing for a remission of USP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.