South Africa: Understatement Penalties In Terms Of The Tax Administration Bill

Last Updated: 3 July 2012
Article by Robert Gad and Taryn Solomon

Most Read Contributor in South Africa, September 2018

The status of the Tax Administration Bill

The Tax Administration Bill ("TAB") was passed by parliament (including the National Council of Provinces) on 7 December 2011 and the status of the TAB on the Parliamentary Monitory Group website is currently "to be sent for assent".  Accordingly, the TAB has been sent to the President for signature and could be promulgated at any time.  The TAB comes into operation on a date to be determined by the President by proclamation in the Gazette and it was mentioned in the 2012 Budget Speech that the TAB is expected to be promulgated and most of its provisions brought into force in 2012.

The TAB provides for two types of penalties to be imposed, being administrative non-compliance penalties (Chapter 15 of the TAB) and understatement penalties (Chapter 16 of the TAB).  This article focuses on the latter.

Meaning of "understatement"

"Understatement" is defined as any prejudice to the South African Revenue Service ("SARS") or the fiscus in respect of a tax period as a result of:

  • a default in rendering a return;
  • an omission from a return;
  • an incorrect statement in a return; or
  • if no return is required, the failure to pay the correct amount of tax.

In addition to the tax payable for the relevant tax period, the understatement penalty must be paid by a taxpayer in the event of an "understatement". 

Levying of understatement penalties- SARS has the burden of proof

The understatement penalties will replace what is currently known as additional tax levied in terms of section 76 of the Income Tax Act No. 58 of 1962 ("the Act").  Section 76 currently allows the Commissioner for SARS ("the Commissioner") to levy up to 200% additional tax in respect of defaults described in that section and permits the Commissioner to remit as he may think fit.

The additional tax of up to 200% is now limited by a new structure whereby the percentage of the understatement penalty will be determined by the taxpayer's behaviour and objective criteria listed in a table contained in clause 223 of the TAB ("the Table") set out below for ease of reference.  As is evident from the Table, it also provides for reduced percentage penalties where a taxpayer makes disclosure in terms of the permanent voluntary disclosure programme which is also contained in Chapter 16 of the TAB.

1
Item

2
Behaviour

3
Standard case

4
If obstructive, or if it is a 'repeat case'

5
Voluntary disclosure after notification of audit

6
Voluntary disclosure before notification of audit

(i)

'Substantial understatement'

25%

50%

5%

0%

(ii)

Reasonable care not taken in completing return

50%

75%

25%

0%

(iii)

No reasonable grounds for 'tax position' taken

75%

100%

35%

0%

(iv)

Gross negligence

100%

125%

50%

5%

(v)

Intentional tax evasion

150%

200%

75%

10%

 The onus to prove the grounds for imposing of an understatement penalty and the applicable percentage of the penalty now rests on SARS.  Specifically, clause 102(2) of the TAB provides that the burden of proving the facts upon which SARS based the imposition of an understatement penalty under Chapter 16, is upon SARS. 

SARS accordingly has the burden of proving that the taxpayer falls within one of the five categories of behaviour set out in the Table.  Other than "substantial understatement" which is defined as meaning a case where the prejudice to SARS or the fiscus exceeds the greater of 5% of the amount of tax properly chargeable or refundable under a tax act for the relevant tax period, or R1 000 000, it is not clear from the TAB what would be required to be proved by SARS in respect of the other categories of behaviour.  It is also not clear what is meant by a "standard case" or by the term "obstructive". 

Remittance and objection and appeal

Clause 223(3) provides that SARS must remit a penalty imposed for a "substantial understatement" if SARS is satisfied that the taxpayer:

  • made full disclosure of the arrangement, as defined in clause 34 of the TAB, that gave rise to the prejudice to SARS or the fiscus by no later than the date that the relevant return was due; and
  • was in possession of an opinion by a registered tax practitioner, as defined in clause 239 of the TAB, that:
    • was issued by no later than the date that the relevant return was due;
    • took account of the specific facts and circumstances of the arrangement; and
    • confirmed that the taxpayer's position is more likely than not to be upheld if the matter proceeds to court.

As is evident from clause 223(3), remittance of an understatement penalty in terms of the TAB is only provided for in circumstances where a "substantial understatement" exists and not in the other four categories.  Where a taxpayer finds itself in a position where SARS alleges a "substantial understatement" and where there is a decision by SARS to not remit the penalty levied in such circumstances, clause 224 of the TAB, makes provision for the objection and appeal procedures as set out in Chapter 9 of the TAB in respect of such a decision.   

It therefore appears to be the position that in relation to a penalty where, for example, SARS alleges that reasonable care was not taken in completing a return or alleges gross negligence or one of the other types of behaviour listed in the Table (other than that of "substantial understatement"), remittance cannot be requested without submission of a formal objection (in terms of the provisions of Chapter 9) against the assessment in which such penalty is raised by SARS.

Final thoughts

Even though there will be an objective framework in respect of the levying of the understatement penalties and the Commissioner can no longer assess a taxpayer for an understatement penalty as he may think fit (as is currently the case in respect of additional tax levied in terms of section 76) which is positive for taxpayers, the ambit of the various categories of behaviour contained in the Table is not clear and accordingly will be open to interpretation and dispute. 

Should a taxpayer be given the opportunity to make representations in respect of understatement penalties before an assessment is raised, it will be important for the taxpayer to make representations in respect of the specific types of behaviour listed in the Table some of which, it should be noted, have accepted legal meanings in various legal contexts.  A point to note in respect of the current period of limbo which taxpayers find themselves in, is that it is possible that the types of considerations that the Commissioner currently has regard to in practice in respect of the levying of additional tax in terms of section 76 may well be those contained in the Table and therefore it may be worthwhile making representations in respect of additional tax on this basis even before the TAB takes effect.

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.

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