When understatement is the order of the day
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.