The Tax Administration Act (TAA) requires SARS to impose an understatement penalty (USP) in the event of an understatement. A recent tax court case (IT14247) dealt with the question whether SARS was entitled to impose such penalties in circumstances where a taxpayer had already made payment and the appropriate rate at which the USP had to be imposed.
Background facts
The following relevant facts appear from the judgment. The taxpayer carried on an advisory business from which it earned fees. It submitted nil income tax returns for a number of years of assessment during which it had earned fees. In addition, it charged VAT on the fees without being registered as a VAT vendor or rendering any VAT returns. The taxpayer did however make provisional tax payments amounting to approximately R13,7 million to SARS in respect of its 2011 to 2013 years of assessment.
SARS raised assessments in respect of the income that the taxpayer did not declare and the returns not submitted. It imposed a 100% USP in respect of the tax. This was subsequently reduced to 25% in respect of income tax and 50% in respect of VAT.
The taxpayer disputed the imposition of the USP on the basis that there was no prejudice to the SARS or the fiscus as it had made to above provisional tax payments, which presumably covered the tax due.
Principles and judgment
When an understatement occurs SARS is required to impose an USP on the shortfall at the highest applicable percentage in terms of the table in s 223(1) of the TAA. The first issue considered by the court was whether an understatement occurred.
An understatement is defined as “any prejudice to SARS or the fiscus as a result of…a default in rendering a return…[or] an omission from a return”. Nkosi-Thomas AJ held the view that despite the fact that the taxpayer had made payments to SARS, these funds were not at the disposal of the fiscus for purposes of funding government expenditure as it was still credited to the taxpayer. The fiscus was prejudiced and an understatement existed.
The court confirmed that the USP would be imposed on the shortfall that existed between the tax properly chargeable and the tax that would have been chargeable had the understatement been accepted. As nil returns and/or no returns were submitted, the tax chargeable if the understatements were accepted would arguably be nil. The full amount of the tax properly chargeable would therefore constitute the shortfall. This would be the case despite the fact that the taxpayer had made provisional tax payments.
Lastly, the court was required to consider the appropriateness of the rates at which the USP were imposed. In this regard, SARS argued that the USP imposed were quite lenient and requested the court to revise the amounts. Section 129(3) of the TAA allows the tax court to reduce, confirm or increase the USP amount. In this case, the judge held the view that the taxpayer’s actions of submitting nil returns or no returns departed so radically from what a reasonable person would do that it amounted to gross negligence. In light of this, the USP amounts were increased to 100%. Taxpayers should take note of s 129(3) and be aware of the fact that disputing USP may in some cases result in an increased amount of USP. This is a consideration to be borne in mind when deciding whether to dispute USP or not.
