Most additional assessments raised by SARS following an audit into the affairs of a taxpayer include the imposition of an understatement penalty (USP) in terms of the Tax Administration Act (TAA). The USP is determined as the shortfall amount multiplied by a percentage, which depends on the behaviour listed in s 223 that resulted in the understatement.
A body of case law that provides some guidance on the application of the above behaviours has started to develop over the past few years. SARS has also recently released a guide on USP. This article provides a perspective on some of the cases dealing with the effect of advice obtained on the behaviours of ‘No reasonable grounds for tax position taken’ and ‘Gross negligence’.
IT12951 and VAT855
In cases IT12951 and VAT855 heard in the tax court in Durban (2016), SARS imposed USP on additional assessments on the basis of gross negligence by the taxpayer. The court reduced the USP to 10% (substantial understatement) on the basis that:
‘…the appellant took implicit advice in the preparation of its return and as such no penalty ought to be imposed on the grounds of these being bona fide errors (where there were errors) with no intent to evade or postpone the tax.’
Tax Court case 14055
A CC was unable to discharge the burden of showing its entitlement to a deduction on the grounds recommended by its accountant. Similarly to cases IT 12951 and VAT855, SARS imposed a 100% USP as it viewed the taxpayer as being grossly negligent. The court was required to review the USP.
With reference to MV Stella Tingas: Transnet Limited t/a Portnet v Owners of the MV Stella Tingas and Another (2003) (SCA), the meaning of gross negligence was described as:
‘a departure from the standard of the reasonable person to such an extent that it may properly be categorised as extreme; it must demonstrate, where there is found to be conscious risk-taking, a complete obtuseness of mind or, where there is no conscious risk-taking, a total failure to take care.’
In defining gross negligence Olsen J considered the following observation in Lewis Group v Woollam (2017) (SCA):
‘Establishing so-called “ordinary” negligence, poor business decision-making, or misguided reliance by a director on incorrect professional advice will not be enough.’
The member of the CC described the true nature of the transaction but failed to successfully dispute the assessment on the grounds of the advice from his accountant. The court found that SARS’ view that the taxpayer devised a scheme to deprive it of taxes due was too severe. Instead, it was held that the taxpayer who was misguided by the advice obtained was not grossly negligent. The penalty was reduced to the rate where a taxpayer’s behaviour fell into the category of having no reasonable grounds for a position taken (rather than substantial understatement in the above cases).
Analysis
It appears as if strong grounds would exist in support of the view that a taxpayer who obtained advice does not act in a grossly negligent manner. Case 14055 however suggests that the mere fact that advice has been obtained does not necessarily provide a taxpayer with reasonable grounds for a position taken. This implies that taxpayers should carefully consider the quality of and critically assess the soundness of the advice obtained if they wish to rely on it for showing that reasonable grounds for a position existed.
