Understatement penalties : SARS needs to provide clarity

• Jurisdiction: South Africa
• Author: Ernest Mazansky
• DOI: 10.10520/EJC194781
• Published date: 01 January 2016
• Date: 01 January 2016
• Pages: 1-4
• Published By: Siber Ink

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© SIBER INK

Understatement Penalties:

SARS NEEDS TO PROVIDE CLARITY

ERNEST MAZANSKY1

ABSTRACT

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, respec-

tively. 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 de minimis 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 de minimis threshold

of 5%/R1 million?

The author concludes with a plea for clarity from SARS as to how the under-

statement penalties should be imposed, preferably in the form of a binding

general ruling.

Introduction

As any tax practitioner knows by now, any income tax or value-added

tax (VAT) audit, if culminating in additional tax payable, is automatically

accompanied by an understatement penalty (USP) in terms of section223

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Head of Tax Practice, Werksmans Attorneys.