SEVERITY OF UNDERSTATEMENT PENALTIES ON THE INCREASE
Of late, it is our experience that there is an increase in the severity of understatement penalties imposed by SARS. How can taxpayers safeguard against the imposition of severe penalties?
When is an understatement penalty imposed?
In terms of section 222 of the Tax Administration Act No. 28 (2011) (“the TA Act”), an understatement penalty should be imposed in the event of an understatement by a taxpayer, unless the understatement results from a bona fide inadvertent error. An understatement will arise if there has been any prejudice to SARS or the fiscus resulting from:
- The failure to submit a return;
- An omission from a return;
- An incorrect statement on a return;
- Failure to pay the correct amount of tax where no return is required; or
- An arrangement that constitutes an impermissible tax avoidance arrangement.
What is the amount of the penalty that SARS can impose?
The penalty percentage is determined with reference to the highest applicable percentage in the understatement penalty table contained in section 223 of the TA Act as follows:
| 1 | 2 | 3 | 4 | 5 | 6 |
| Item | Behaviour | Standard case | If obstructive, or if it is a ‘repeat case’ | Voluntary disclosure after notification of audit or criminal investigation | Voluntary disclosure before notification of audit or criminal investigation |
| (i) | ‘Substantial understatement’ | 10% | 20% | 5% | 0% |
| (ii) | Reasonable care not taken in completing return | 25% | 50% | 15% | 0% |
| (iii) | No reasonable grounds for ‘tax position’ taken | 50% | 75% | 25% | 0% |
| (iv) | ‘Impermissible avoidance arrangement’ | 75% | 100% | 35% | 0% |
| (v) | Gross negligence | 100% | 125% | 50% | 5% |
| (vi) | Intentional tax evasion | 150% | 200% | 75% | 10% |
The penalty percentage is dependent on the culpability and circumstances of the taxpayer. In assessing the behaviour of the taxpayer, SARS applies the diligens paterfamilias standard of behaviour. This is achieved by considering what a reasonable person with circumstances similar to that of the taxpayer would have done. The test is intended to be objective, while accounting for the facts and circumstances of each case. Therefore, SARS will scrutinise the reasons for the understatement.
Safeguarding your company against understatement penalties
It may sometimes happen that and error is made in a tax return. If such error results in an understatement of tax payable, the company is at risk of severe penalties being imposed. A taxpayer may object against a penalty if the taxpayer is aggrieved by the penalty and the relevant tax Act allows the taxpayer to object against such decision. Section 24 of the TA Act, allows a taxpayer to object against an understatement penalty. However, section 102 of the TA Act, places the burden of proof on the taxpayer to prove that the decision by SARS to impose such penalty, is incorrect. Therefore, taxpayers must be able to show that they adhered to the requisite standard of behaviour.
This can be achieved by ensuring that tax control procedures are implemented to ensure that every tax return submitted is correct. For example, having management and/or external tax consultant review the tax return and tax calculations before submission and obtaining tax opinions to support tax positions (i.e. whether an amount is taxable or tax deductible) to be taken. It may be beneficial for a taxpayer to review current tax risk management policies and procedures to ensure that they will sufficiently assist the taxpayer in proving that it adhered to the requisite standard of behaviour expected by SARS.
if you need assistance with a tax dispute, tax planning or corporate tax compliance.