The previous article on the topic of understatement penalties (USP) concluded that taxpayers need to carefully consider the quality of and critically assess the soundness of advice obtained if they wish to rely on it as a basis to have reasonable grounds for a tax position taken.

This article follows on from that article by reviewing a specific case where the court was critical of advice obtained by a taxpayer when considering the taxpayer’s dispute of USP imposed by the SARS. It is submitted that the court’s assessment of the advice obtained may provide taxpayers with guidance when assessing advice obtained for purposes of being able to dispute USP in future.

Background facts of the case

The case considered in this article is ABC Trading (Pty) Ltd v C:SARS (Tax Court case 13686). The case involved the eligibility of the taxpayer, whose business is described as that of a contract miner, to claim allowances that are available to persons carrying on mining operations. The purpose of this article is not to discuss the technical arguments advanced by the parties and considered by the courts, but rather to make certain observations on the penalty consequences of the taxpayer’s position. In this regard, it is submitted that the following information is relevant for the discussion in this article:

• The advice obtained indicated that SARS had taken a stand that contract miners could not claim allowances available to persons carrying on mining operations. Any contrary view would, according to the advice, be almost guaranteed of contestation by SARS. In light of this the advice was intended to prepare for this debate, ensure that the taxpayer had all evidential support and make a full disclosure to SARS.
• SARS challenged the position.
• The tax court upheld SARS’ view that the taxpayer did not carry on mining operations.

Relevant legislation

The taxpayer argued that the 25% USP should be fully remitted in terms of section 223(3) of the TAA. This provision requires that SARS remits a USP imposed for substantial understatement if the taxpayer made full disclosure of the arrangement to SARS when the relevant returns were due and obtained a tax opinion that, amongst others, is based upon full disclosure of the 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.

Analysis and practical implications

A number of important observations were made by the court about the advice obtained:

• The advice, at its highest, suggests that the taxpayer would have a strong argument to support the preferred view.
• The court was of the view that the substance of the advice was superficial, did not meaningfully deal with well-known authorities and did not set out a thesis to present in defence of the taxpayer’s case. 
• No case was made that the taxpayer, in terms of this advice, had any reasonable basis to conclude that it was acting in accordance with a well-considered view of the application of the law that could trump the SARS view.

The views of the court would suggest that in assessing the quality of advice obtained, taxpayers should critically consider whether such advice is based on authority and presents a convincing argument in support of a particular position. The mere fact that advice was obtained is, by itself, not sufficient for USP to be remitted.