Tax Administration Act – Understatement penalty changes

rp_06f02e33e0754fbabf239421abad6b76.jpgCurrent provisions of the Tax Administration Act
The Tax Administration Act No. 28 of 2011 (the TAA) became effective on 1 October 2012 and introduced the understatement penalty regime. In terms of section 222 of the TAA, a taxpayer must pay an understatement penalty in addition to the tax payable for the relevant tax period in the event of an “understatement”.

What constitutes an “understatement”?
An “understatement” is defined as any prejudice to the South African Revenue Service (SARS) or the fiscus 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
  • if no return is required, the failure to pay the correct amount of tax.

How is the understatement penalty calculated?
The understatement penalty is the amount determined by applying the highest applicable understatement penalty percentage in the understatement penalty percentage table (see below) to the difference between the amount of tax properly chargeable for the tax period and the amount of tax that would have been chargeable if the understatement was accepted.

The understatement penalty percentage table, prior to its recent amendment, set out in section 223 of the TAA was as follows:

1
Item

2
Behaviour

3
Standard case

4
If obstructive, or if it is a ‘repeat case’

5
Voluntary disclosure after notification of audit

6
Voluntary disclosure before notification of audit

(i)

‘Substantial understatement’

25%

50%

5%

0%

(ii)

Reasonable care not taken in completing return

50%

75%

25%

0%

(iii)

No reasonable grounds for ‘tax position’ taken

75%

100%

35%

0%

(iv)

Gross negligence

100%

125%

50%

5%

(v)

Intentional tax evasion

150%

200%

75%

10%

When can the penalty be remitted?
A “substantial understatement” (referred to in row (i) of the table above) is a case where the prejudice to SARS or the fiscus exceeds the greater of 5% of the amount of tax properly chargeable or refundable under a tax Act for the relevant tax period or R 1 000 000.

In the event of a “substantial understatement” SARS must remit the understatement penalty imposed in certain circumstances. Firstly, SARS must remit the penalty if SARS is satisfied that the taxpayer made full disclosure of the arrangement that gave rise to the prejudice to SARS or the fiscus by no later than the date that the relevant return was due. Secondly, SARS must remit the penalty if SARS is satisfied that the taxpayer was in possession of an opinion by a registered tax practitioner that was issued by no later than the date that the relevant return was due and was based upon full disclosure of the specific facts and circumstances of the arrangement and confirms that the taxpayer’s position is more likely than not to be upheld if the matter proceeds to court.

Changes contained in the Tax Administration Laws Amendment Act 2013
The Tax Administration Laws Amendment Bill, No 40 of 2013 (“the TALAB”) was introduced in Parliament on 24 October 2013 and enacted on 16 January 2014 as the Tax Administration Laws Amendment Act, No 39 of 2013 (the TALAA).

The TALAA contains an amendment in terms of which an understatement penalty will not be payable where the understatement results from a bona fide inadvertent error. No definition is provided in the TALAA to indicate what will constitute a “bona fide inadvertent error”. However, in the Explanatory Memorandum to the TALAB it is stated that SARS will develop guidance in this regard for the use of taxpayers and SARS officials. This amendment took effect from 1 October 2012.

Furthermore, the TALAA proposes a reduction in the understatement penalty rates for substantial understatements, reasonable care not taken in completing a return or where there are no reasonable grounds for the tax position taken. The penalty rates for gross negligence and intentional tax evasion will remain unchanged.

The new understatement penalty table is as follows:

1
Item

2
Behaviour

3
Standard case

4
If obstructive, or if it is a ‘repeat case’

5
Voluntary disclosure after notification of audit

6
Voluntary disclosure before notification of audit

(i)

‘Substantial understatement’

10%

20%

5%

0%

(ii)

Reasonable care not taken in completing return

25%

50%

15%

0%

(iii)

No reasonable grounds for ‘tax position’ taken

50%

75%

25%

0%

(iv)

Gross negligence

100%

125%

50%

5%

(v)

Intentional tax evasion

150%

200%

75%

10%

In the Explanatory Memorandum to the TALAB it is stated that the reason for these reductions is to align the penalty percentages with comparative tax jurisdictions where largely similar penalty regimes apply. This amendment will only apply with effect from the date of promulgation of the TALAA, which occurred on 16 January 2014, and will therefore not apply retrospectively.

The TALAA also contains an amendment to the circumstances where a taxpayer can seek remittance of a penalty. In the instance where a return was submitted prior to the commencement of the TAA, the taxpayer would not have been aware of the dispensation mentioned above where the taxpayer could obtain an opinion from a registered tax practitioner by the due date for the return and so qualify for remission of the penalty. The amendment will now enable taxpayers that submitted returns prior to the commencement of the TAA to use an opinion obtained after the relevant return was submitted.

Furthermore, the TALAA attempts to clarify that if an understatement penalty cannot be imposed (by reason of the understatement having occurred before the commencement of the TAA) or if additional tax that would have been “capable of being imposed” has not been imposed by the commencement date of the TAA, additional tax may be imposed (as if the repeal of the previous legislation had not been effected). “Capable of being imposed” is defined to mean the verification, audit or investigation necessary to determine the additional tax, penalty or interest had been completed before the commencement date of the TAA.

Final remarks
Apart from a number of proposed tweaks, the understatement penalty regime is essentially here to stay. Accordingly, taxpayers should ensure that they mitigate their exposure to understatement penalties to the extent possible, for example by making voluntary disclosure of understatements before receiving an audit notice from SARS or by obtaining an opinion from a registered tax practitioner in respect of a “substantial understatement”.

ENSAfrica
TAA: Sections 222 and 223

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