n Business Tax and Company Law Quarterly - Understatement penalties : SARS needs to provide clarity

Volume 7, Issue 3
  • ISSN : 2219-1585


Chapter 16 of the Tax Administration Act 28 of 2011 (the TAA Act) provides for the imposition of an understatement penalty. In essence the magnitude of the understatement penalty is dependent on the type of behaviour that gave rise to the understatement. Section 223 of the TAA Act describes five types of behaviours, namely, (a) substantial understatement, (b) reasonable care not taken in completing return, (c) no reasonable grounds for tax position taken, (d) gross negligence, and (e) intentional tax evasion. It is abundantly clear to the author that SARS continues to adopt the approach it used under the previous penalty regime, when section 76 of the Income Tax Act 58 of 1962, applied and taxpayers were asked to motivate why penalties should not be imposed in the specific circumstances. The author argues that this approach is at variance with the new understatement penalty provisions and that the onus is in fact on SARS to motivate why a specific penalty percentage is to be imposed.

The major thesis of the article is, however, that SARS lacks an understanding of the scheme and policy behind the understatement penalty regime and how it should properly be interpreted and imposed. It is argued that where the understatement in monetary terms is less than the substantial understatement threshold of 5%/R1 000 000, and therefore does not qualify as substantial understatement, it is incorrect for SARS to seek to impose a penalty at the rate of 25% or 50% on the basis that reasonable care was not taken in completing the return, or there were no reasonable grounds for the tax position taken, respectively. The author argues that if one looks at the behaviours described above, it will be apparent that as the penalty rate goes higher, it relates to a behaviour that is more egregious than the one before. It must follow, therefore, that if one has not even met the substantial understatement threshold of 5%/ R1 million, because there is no substantial understatement as defined, how can one then be accused of more egregious behaviour? It is therefore surely wrong for SARS to impose the higher applicable understatement penalties that attach to the other behaviours that require a more gregarious behaviour when the taxpayer has not even met the substantial understatement threshold of 5%/R1 million?
The author concludes with a plea for clarity from SARS as to how the understatement penalties should be imposed, preferably in the form of a binding general ruling.

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