Author: Amanda Visser (BDlive)
Taxpayers can resist the payment of huge understatement penalties levied on tax returns submitted prior to the commencement of the Tax Administration Act (TAA) in October last year, according to tax experts.
The practice by the South African Revenue Service (SARS) to levy these penalties — a percentage-based penalty determined with reference to a taxpayer’s behaviour — under the new act on tax returns that were filed and even assessed prior to the effective date of the act is therefore set to be challenged in the tax courts, and even in the high courts.
Tax experts said last week that there were several grounds, including constitutional ones and the rule of law, under which taxpayers were entitled to resist paying huge understatement penalties if they are levied on tax returns submitted prior to the introduction of the TAA.
Edward Nathan Sonnenbergs tax executive Beric Croome said if a taxpayer (individual or corporate) submitted a return before October 1 2012 and SARS seeks an adjustment in 2013, the imposition of the new understatement penalty regime is a violation of constitutional provisions and the general presumptions against the retrospectivity of law.
He said many taxpayers are in this predicament and the matter has to be settled. “The only way is to take it to court, and it may even end up in the Constitutional Court.”
Dr Croome said that prior to the act, SARS was allowed to levy up to 200% additional tax for evasion, suppression of income or claiming expenses that a taxpayer was not entitled to. This, however, seldom happened and penalties ranged from 0% to 10%.
However, the old section 270(6) was subject to the discretion of the official handling a return, with different outcomes for similar defaults. The new penalty regime under the TAA is supposed to address this. It has a table that objectively sets out certain unacceptable behaviour ranging from substantial understatements to gross negligence to intentional tax evasion, with penalties ranging from 25% to 200%.
The new act provides that SARS must remit the penalty if it is satisfied that the taxpayer made full disclosure of the arrangement that gave rise to the prejudice to SARS by no later than the date the return was due, and the taxpayer had an opinion from a registered tax practitioner that was issued no later than the tax return’s due date.
Dr Croome said it was impossible for a taxpayer, submitting a return in 2007, to have known how to have penalties remitted in accordance with the new provisions.
South African Institute for Chartered Accountants tax director Piet Nel said there had been cases where SARS had been busy with an audit, withdrawn it, and had then reinstated it after the new act became effective.
“The reason was to levy a fine under the act that they could not have done under the old act. The approach taken by SARS will affect every taxpayer whose return had not been assessed by October last year, or who has amendments made to previously submitted returns or assessments,” Mr Nel said.
The Treasury and SARS said in the draft response document to the Tax Administration Laws Amendment Bill that most of the commentators used an analogy to argue that the retrospective application of the understatement penalty under the TAA is wrong.
They say the approach used by SARS is similar to having the speed limit on a road lowered with retroactive effect and for all cars that exceeded that reduced speed limit in the past to be fined.
SARS and Treasury say the analogy is flawed, as it deals with a criminal matter. The TAA has not changed the “offence”, as an “understatement” is still an omission, default or incorrect statement as was the case under “additional tax”, they say.