Goodbye to tax penalty

JUDGMENT: COSTS AWARDED AGAINST SARS OVER INCORRECT ASSESSMENT

‘Tax Court deprived taxpayer of answering a case it was not called upon to meet.’

In a recent Western Cape High Court in Cape Town full bench judgment, Judge Patrick Gamble upheld a taxpayer’s appeal against a Tax Court judgment, finding that the South African Revenue Service (Sars) had levied the incorrect understatement penalty – and awarded costs against Sars.

The Tax Administration Act prescribes the percentage penalty to be applied on the amount of tax that should have been paid on the understatement of a capital gain depending on the taxpayer’s particular behavioural category.

Sars had levied a 25% understatement penalty on the taxpayer on the basis that it “failed to take reasonable care in completing a return”, in that taxpayer had omitted the capital gain made on the sale of a property.

On reviewing the evidence given by the risk profiler in Sars’ Specialist Audit Division (the witness) in the Tax Court to explain why she made her decision, Gamble observed that she accepted that she had chosen the wrong behavioural category in assessing the understatement penalty.

Gamble noted that the witness conceded to the Tax Court that Sars should have applied a 50% penalty on the basis that the taxpayer had “no reasonable grounds for tax position” taken, and that she had stated “rather opportunistically – ‘Okay, looking at the facts, I must say that Sars lost the opportunity using that 50%’.”

The judge deduced that the witness did not understand the difference between the two different behavioural categories, and noted that “in light of the damaging concession made by Sars’ only witness, the taxpayer astutely closed its case without calling any witnesses”.

Gamble found that the Tax Court had erred in concluding that even though Sars should have imposed a 50% penalty on a different basis, it was okay in settling for the 25% penalty on the incorrect basis.

The judge said that “in finding that Sars was entitled to retain the penalty which it had failed to prove, the Tax Court effectively deprived the taxpayer of answering a case it was not called upon to meet”.

Gamble noted that if Sars wanted to change the basis for its assessment, it was necessary to issue a revised assessment to “fairly afford a taxpayer the opportunity to reconsider its position before embarking on a tax appeal process”.

In response to Sars’ counsel, who argued that “as Sars had established an understatement by the taxpayer, it was entitled to impose a penalty without more”, Gamble disagreed, and said that it was Sars’ “prerogative to impose an understatement penalty is closely circumscribed by the provisions” of the Act.

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