The Tax Administration Act No. 28 of 2011 (the TAA) which came into effect on 1 October 2012 (bar a few specific sections) introduced two types of penalties, namely administrative non-compliance penalties and understatement penalties.
This article considers whether the Commissioner for the South African Revenue Service (SARS) has any discretion to levy the above mentioned penalties as compared to any discretion provided for in the repealed penalty provisions as contained in the Income Tax Act No. 58 of 1962 (the Act). The taxpayer’s right to have the penalties remitted as per the TAA compared to the taxpayer’s right to remittance in terms of the Act is also considered.
Administrative non-compliance penalties
Non-compliance is defined in section 210 of the TAA as a failure by the taxpayer to comply with an obligation that is imposed by a tax act and is listed in a public notice as issued by the Commissioner. To date, SARS has only issued one notice in terms of section 210(2) of the TAA, Government Notice No. 790, in terms of which an act of non-compliance arises if a natural person fails to submit an income tax return as and when required under the Act, for years of assessment commencing on or after 1 March 2006, where that person has two or more outstanding income tax returns for such year of assessment.
In this regard, if SARS is satisfied that non-compliance exists, SARS ‘must’ impose the appropriate administrative non-compliance penalty. This is in contrast to SARS’ discretionary powers previously envisaged in the regulations promulgated under section 75B of the ITA (regulations). In terms of the regulations, if the Commissioner was satisfied that the factual basis for any non-compliance as described existed, the Commissioner ‘may’ previously have imposed the appropriate penalty.
The administrative non-compliance penalty is determined with reference to the taxpayer’s assessed loss or taxable income in the year of assessment immediately prior to the year of assessment during which the penalty is assessed and can range from a monthly amount of R250 to R16,000. The penalty is essentially a monthly penalty since it is automatically levied on a monthly basis until the non-compliance is remedied, limited to either 35 or 47 months respectively depending on whether SARS is in possession of the current address of the taxpayer or not.
Also included under the broader category of administrative non-compliance penalties are the reportable arrangement penalty and the percentage based penalty, provided for in sections 212 and 213 of the TAA respectively. A reportable arrangement penalty will apply where a participant fails to disclose the information in respect of a reportable arrangement as required. For each month that the failure continues, limited to 12 months, the participant (other than the promoter) will be liable for a penalty in the amount of R50,000 or R100,000 in the case of the promoter. The amount of the penalty is doubled if the amount of the anticipated tax benefit exceeds R5 million or tripled if the benefit exceeds R10 million. The reportable arrangement penalty was previously limited to a maximum of R1 million in terms of the Act.
A percentage based penalty ‘must’ be charged in addition to any other penalty, if SARS is satisfied that an amount of tax was not paid as and when required under a tax Act, equal to the percentage of the amount of unpaid tax as prescribed in the specific tax Act. Again, it appears that SARS does not have any discretion as to whether to levy the percentage based penalty or not. In this regard, for example, the percentage based penalty provided for in paragraph 20 of the Fourth Schedule was previously subject to the Commissioner’s discretion under certain circumstances.
Remittance of administrative non-compliance penalties
Whilst under the regulations issued in respect of section 75B of the Act, SARS had a discretion to remit the whole or a portion of an administrative non-compliance penalty imposed for a first incidence of non-compliance or if the incidence of non-compliance was remedied within seven days, in terms of section 217 of the TAA, SARS may only remit administrative non-compliance penalties up to an amount of R2,000. The remittance is further subject to being imposed in respect of the first instance of non-compliance or that the duration of the non-compliance is less than five business days.
The limited remittance in terms of the TAA as described above is further subject to SARS being satisfied that reasonable grounds for the non-compliance existed and that the non-compliance has been remedied. The limit is increased to R100,000 in respect of a reportable arrangement penalty, however, since the maximum penalty that SARS may impose on the promoter of a reportable arrangement is R3.6 million, this section provides very limited relief.
In respect of percentage based penalties the amount is also limited to R2,000, that is, if SARS is satisfied that the penalty has been imposed in respect of a first incidence or involved an amount of less than R2,000. Provided further that reasonable grounds for the non-compliance exist and the non-compliance in issue has been remedied.
SARS may also remit the administrative non-compliance penalty or a portion thereof if SARS is satisfied that one or more of the listed exceptional circumstances are present and rendered the taxpayer incapable of complying with the relevant obligation under the relevant tax act. This list includes, among others, natural or human-made disaster, a capturing error by SARS or any other circumstance of analogous seriousness. These circumstances are similar to the exceptional circumstances previously included in the regulations promulgated under section 75B of the Act.
It therefore appears that in circumstances where an administrative non-compliance penalty is levied for an instance of non-compliance which is not a first incidence or which did not occur under the listed or analogous exceptional circumstances, the taxpayer will have to follow the objection procedures as provided for in section 104 of the TAA.
For purposes of the understatement penalties provided for in Chapter 16 of the TAA, an “understatement” should be distinguished from a “substantial understatement”, which terms are both defined in section 221 of the TAA. An “understatement” means any prejudice to SARS in respect of a tax period as a result of a default in rendering a return, an omission from a return, an incorrect statement in a return, or a failure to pay the correct amount of tax where no return is required. On the other hand, a “substantial understatement” means any case where the prejudice to SARS exceeds the greater of 5% of the amount of tax properly chargeable or refundable under a tax act, or R1 million.
Section 222 provides that where there is an understatement, the taxpayer ‘must’ pay the understatement penalty as determined, that is, SARS has no discretion but to impose the penalty if the requirements are met. This is in contrast to SARS’ discretion to impose additional tax of up to 200%, subject to a reduction, having regard to the surrounding circumstances of the case, as provided for in the repealed section 76 of the Act.
Remittance of understatement penalties
As noted above, previously, under section 76 of the Act, the Commissioner had a discretion to remit the additional tax levied provided he was satisfied that the taxpayer did not have any intention to evade taxation which led to the act or omission resulting in the incorrect taxable income being disclosed in the taxpayer’s return.
In terms of section 223(3) SARS must remit an understatement penalty in certain specific circumstances. These circumstances are very limited and also only apply in respect of substantial understatements. In particular, the taxpayer must have made full disclosure of the arrangement giving rise to the prejudice by no later than the date the relevant return was due and secondly, the taxpayer must have been in possession of an opinion by a registered tax practitioner, which opinion was issued no later than the relevant return date, and which took account of the specific facts and circumstances of the arrangement and confirmed that the taxpayer’s position is more likely than not to be upheld if the matter proceeds to court.
It appears that the taxpayer will have to make use of the formal objection procedures in the TAA in instances where for example, an error is made by the taxpayer in completing his tax return (other than an undisputed error as envisaged in section 93 dealing with reduced assessments) and SARS alleges that reasonable care was not taken by the taxpayer in completing his return. Also, in circumstances where a taxpayer makes an error where the quantum of the error results in it being a “substantial understatement”, the taxpayer may also not be able to have the understatement penalty remitted in terms of section 223(3), since the taxpayer will not be in possession of the required tax opinion. However, in the 2013 Budget Review, it was indicated that the law dealing with the understatement penalty needs to be refined for bona fide errors made by a taxpayer in a return.
Section 104 of the TAA provides that a taxpayer may object to an assessment that aggrieves the taxpayer. In this regard an assessment is defined in section 1 of the TAA as, inter alia, the determination of the amount of a tax liability. However, for purposes of the understatement penalty provisions, the definition of tax specifically excludes any penalty and interest.
Section 102(2) of the TAA provides that SARS has the burden of proving the facts on which it based the imposition of the understatement penalty. The discretion which SARS had under section 76 of the Act has, therefore, been removed and a taxpayer would have to allege that SARS was wrong in relying on the facts it used to determine the understatement penalty.
It must be noted that section 224 of the TAA provides that a taxpayer may object against a decision made by SARS not to remit an understatement penalty in terms of section 223(3) of the TAA.
It is clear from the above that there are still many aspects in relation to the practical application of the TAA that require further clarification from SARS.
Edward Nathan Sonnenbergs
ITA: Sections 75B, 76 and paragraph 20 of the Fourth schedule
Tax Administration Act: Sections 1 (definition of assessment), 93, 102(2), 104, 210, 212, 213, 217, 221, 222, 223(3) and 224