Render unto Caesar – Harsh Tax Penalties Reviewed

JOHANNESBURG – Taxpayers who accidentally reduce their tax liability due to a reasonable mistake without any intent to defraud the Taxman, won’t be subjected to harsh understatement penalties in future.

The Tax Administration Laws Amendment Bill was introduced in the National Assembly last week and revises regulations to such an extent that the South African Revenue Service (Sars) won’t impose penalties in cases where the understatement by the taxpayer “results from a bona fide inadvertent error”.

This follows criticism from tax practitioners and taxpayers on the harsh penalties previously imposed even where taxpayers had no intention of deceiving Sars.

The new penalty regime was introduced through the Tax Administration Act that became effective on October 1 last year but immediately drew widespread criticism due to the punitive nature thereof.

Finance Minister Pravin Gordhan, already indicated in the 2013 Budget Review that the penalties will be refined to allow for bona fide mistakes.

Piet Nel, project director for tax at the South African Institute of Chartered Accountants (Saica), explains that the bill does not define what a “bona fide inadvertent error” is, but Sars will provide guidance on the meaning going forward.

In explanatory documentation issued alongside the bill, the revenue authority notes that proposals to define the term, have the potential to accidentally “exclude deserving cases and include undeserving cases”.

The intent of the amendment is to provide relief to those taxpayers that completed their tax returns with reasonable care, didn’t intentionally aim to mislead Sars and could prove extenuating circumstances.

The proposed amendment will apply with effect from October 1, 2012, but will also pertain to understatements made in a return before that date. However, the expectation is not that Sars will reimburse taxpayers for penalties that have already been levied.

Nel says the changes to the penalty regime also allows for an understatement penalty percentage to be levied to each tax misstatement individually. In the past, the highest percentage applied to all understatements, even if some should have attracted a lower penalty percentage.

The amendments also introduce much lower penalties for a number of categories (see table). The lower percentages are in line with similar tax jurisdiction around the world.

Source: Tax Administration Laws Amendment Bill, p23 (Numbers in square brackets are the higher penalty percentages that previously applied.)

Moreover, prior to the amendments Sars had to remit a penalty imposed for a substantial understatement if the taxpayer relied on a tax opinion. In future, this will only apply if an independent tax practitioner provided the opinion.

Opinion by in-house tax practitioners will not qualify since they have a vested interest in the outcome of the matter.

Nel says the amendments also clarify that a taxpayer may object and appeal against the levying of any understatement penalty and not only against the decision not to remit a substantial understatement penalty.

Nel expects the bill to be signed into law late in November or December.