When un­der­state­ment is the or­der of the day

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Beric Croome

JUDGE Wepener de­liv­ered a judg­ment on Novem­ber 18 last year in Mr Z v The Com­mis­sioner for South African Rev­enue Ser­vice, (case num­ber 13472 in the Tax Court Jo­han­nes­burg).

The judg­ment in­di­cated that dur­ing Novem­ber 2003, A In­vest­ments Ltd dis­posed of its shareholding in B (Pty) Ltd. Dur­ing Au­gust 2007 Mr Z, to­gether with an­other share­holder, Mr X, dis­posed of 600,000 or­di­nary shares in B (Pty) Ltd to F. The shares rep­re­sented 30% of the to­tal is­sued share cap­i­tal of B (Pty) Ltd, with the tax­payer hold­ing 27,005% and Mr X hold­ing the bal­ance.

Mr Z dis­posed of his shares for R841,655,833. A In­vest­ments Ltd in­formed the tax­payer that it had dis­cov­ered that Mr Z had with­held ma­te­rial in­for­ma­tion from it when he rep­re­sented A dur­ing its trans­ac­tion with F. SARS im­posed an un­der­state­ment penalty of R46,907,820 on the amount paid by Mr Z to A. In ad­di­tion, SARS im­posed in­ter­est on the al­leged un­der­pay­ment of pro­vi­sional tax in terms of sec­tion 89quat of the act.

The Com­mis­sioner ad­justed the tax­payer’s tax­able in­come for the 2008 year of as­sess­ment and ap­plied the pro­vi­sions reg­u­lat­ing the un­der­state­ment penalty in terms of sec­tion 221 of the Tax Ad­min­is­tra­tion Act No 28 of 2011. The Com­mis­sioner con­cluded the tax­payer had not taken rea­son­able care in sub­mit­ting the tax re­turn to SARS or al­ter­na­tively that there were no rea­son­able grounds for the tax po­si­tion taken. The Com­mis­sioner ap­plied the un­der­state­ment penalty ta­ble with the re­sult that the penalty was im­posed at a level of 75%, the rate of penalty ap­pli­ca­ble at the time.

Mr Y gave ev­i­dence on be­half of SARS and in­di­cated that the 75% penalty was determined by tak­ing ac­count of the fact that there were no rea­son­able grounds for the tax po­si­tion taken by the tax­payer.

Most of the pro­vi­sions of the act took ef­fect on Oc­to­ber 1 2012 and at the time of its com­mence­ment, the level of penalty im­posed on the ba­sis of no rea­son­able grounds for tax po­si­tion taken amounted to 75%.

That was sub­se­quently re­duced to an amount of 50% by way of the Tax Ad­min­is­tra­tion Laws Amend­ment Act No 39 of 2013 with ef­fect from Jan­uary 16 2014. How­ever, the court in­di­cated that should the court de­cide that Mr Z had no rea­son­able grounds for the tax po­si­tion taken the penalty pro­vided for is 50%.

The court in­di­cated that Mr Z’s un­chal­lenged ev­i­dence was that the tax po­si­tion he took was based on his be­lief that his cal­cu­la­tion of cap­i­tal gains tax was cor­rect and that there was no in­ten­tion to evade or de­lay the pay­ment of tax.

The tax­payer sought pro­fes­sional ad­vice re­gard­ing the com­ple­tion of his tax re­turns and de­nied be­ing neg­li­gent in the re­turns sub­mit­ted to SARS. Judge Wepener ac­cepted that the tax­payer ob­tained pro­fes­sional ad­vice re­gard­ing the sub­mis­sion of his tax re­turns to SARS and the de­duc­tion which was the sub­ject of dis­pute in the case.

The court con­cluded that the pro­vi­sions of sec­tion 270(6D) of the Tax Ad­min­is­tra­tion Act ap­plied and the tax­payer had rea­son­able grounds for the tax po­si­tion taken by him. The court reached the con­clu­sion that there was a sub­stan­tial un­der­state­ment with the re­sult that trig­gered the pay­ment of a 10% un­der­state­ment penalty. The court de­cided there were no ex­ten­u­at­ing cir­cum­stances as en­vis­aged in sec­tion 270(6D) of the act. The court de­cided the un­der­state­ment penalty should be re­duced to an amount of 10%, tak­ing ac­count of the fact that the tax­payer had re­lied on ad­vice re­ceived from his ac­coun­tant and oth­ers.

The court then con­sid­ered the im­po­si­tion of in­ter­est un­der sec­tion 89quat of the act and by virtue of the fact that the dis­pute re­lated to the 2008 year of as­sess­ment, the ba­sis on which the court had to de­cide whether to re­mit the in­ter­est, was whether the tax­payer had acted on rea­son­able grounds.

The court made the point that when it is re­quired to es­tab­lish the cor­rect­ness of the ex­er­cise of a dis­cre­tionary de­ci­sion, which is sub­ject to ob­jec­tion and ap­peal, the mat­ter must be re­heard by the Tax Court. The court came to the con­clu­sion that the tax­payer’s re­liance on the ad­vice re­ceived was rea­son­able and there­fore di­rected that the Com­mis­sioner should waive the sec­tion 89quat in­ter­est in full.

The dis­cre­tion con­ferred on SARS to waive in­ter­est on the un­der­pay­ment of pro­vi­sional tax has been nar­rowed, such that SARS may only take ac­count of cir­cum­stances be­yond the con­trol of the tax­payer in re­spect of years of as­sess­ment end­ing on or af­ter Novem­ber 1 2010. For in­di­vid­ual tax­pay­ers, the re­stricted dis­cre­tion ap­plies with ef­fect from years of as­sess­ment end­ing on or af­ter Fe­bru­ary 28 2011.

SARS re­lied on an in­ter­nal tem­plate set­ting out the ba­sis on which it determined the un­der­state­ment penalty ap­pli­ca­ble to the tax­payer in this case. SARS led ev­i­dence re­lat­ing to the tem­plate which sets out the process SARS adopted in con­clud­ing that the tax­payer had no rea­son­able grounds for the tax po­si­tion taken by him.

Tax­pay­ers who are sub­jected to un­der­state­ment penal­ties should there­fore re­quest rea­sons from SARS re­gard­ing the im­po­si­tion of the un­der­state­ment penalty. Where the un­der­state­ment penalty is chal­lenged, the onus to sat­isfy the court as to the penalty im­posed lies on SARS in terms of sec­tion 102(2) of the act.

Tax­payer pe­nalised by SARS de­spite seek­ing pro­fes­sional ad­vice re­gard­ing the com­ple­tion of his tax re­turn

Dr Beric Croome is a tax ex­ec­u­tive at ENSafrica.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.