Income tax understatement penalties: A different view?

May 1st, 2018
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By Alan Lewis

In the recent matter of  Mr A and XYZ CC v The Commissioner of the South African Revenue Service (KZD) (unreported case no IT13725 and VAT1426, and IT13727 and VAT1096, 8-2-2018) (Olsen J), the KwaZulu-Natal Tax Court was asked to decide, among other matters, whether or not the Commissioner for the South African Revenue Service  (respondent) was entitled to levy an understatement penalty, in terms of s 222 of the Tax Administration Act 28 of 2011 (the Act).

The appellants contended that the respondent had failed to discharge the onus, which he bore, to prove that neither SARS, nor the fiscus, had suffered any prejudice, as a result of their failure to submit their returns, which would entitle the respondent to levy the penalty.

In dismissing this argument, the Chairman of the Tax Court, Olsen J, expressed at para 43 as follows:

‘Turning to the question of proof of prejudice, I take the view that, save in regard to the second appellant’s income tax return for the 2012 tax year, prejudice to SARS [South African Revenue Service] and the fiscus is implicit in the failure of the appellants to render returns, and the consequent failure of the appellants to pay the tax due under those returns at the time when it was supposed to be paid’ (my italics).

The law

In terms of r 34 of the rules, prescribing the procedures to be followed in lodging an objection and appeal against an assessment (rules) – the issues in an appeal to the tax court will be those contained in the respondent’s statement on the grounds of assessment and opposing the appeal – read with the taxpayer’s statement of the grounds of appeal and, if any, the respondent’s reply to the statement of grounds of appeal.

An ‘understatement’, ‘means any prejudice to SARS, or the fiscus as a result of –

(a) a default in rendering a return’ (s 221 of the Act).

In the the event of an understatement by a taxpayer, a taxpayer must pay the understatement penalty, as determined by s 222(2) of the Act.

‘In the case of an appeal against an understatement penalty imposed by SARS under a tax Act, the Tax Court must decide the matter on the basis that the burden of proof is upon SARS’ (s 129(3) of the Act).

In the matter of The Commissioner for the South African Revenue Service v Brummeria Renaissance (Pty) Ltd and Another (2007) 69 SATC 25, the respondents attempted to advance two arguments before that court, on matters, which were not set out in their statement of grounds of appeal.

In terms of the previous r 12 (which has since been replaced by a similar r 34), the court refused to receive such arguments, on the basis that the particular allegations, on which their arguments were based, had not been raised in their statement of grounds of appeal.

Conclusion

I submit that the same reasoning should apply to the present rules, and in particular r 34. Consequently, our Tax Courts, are obliged to consider respondent’s statement of the grounds of assessment and opposing the appeal, read with the taxpayer’s statement of the grounds of appeal, to determine the issues in dispute, and adjudicate them accordingly.

It should follow then, that, where a respondent has not alleged any prejudice, either to SARS, or the fiscus, in his statement of grounds of assessment and opposing the appeal, he should not be allowed to present such evidence at the trial, with the result that he will not be able to discharge the onus, which he bears in this regard. In such a case, the Tax Court should not consider the question of prejudice either.

There is no finding in the judgment of the KwaZulu-Natal Tax Court, that respondent had made the necessary allegations, regarding prejudice, in his statement of grounds of assessment and opposing appeal.

Consequently, I submit that, in the light of r 34, and the approach of the Supreme Court of Appeal, in the Brummeria matter, the court erred to find that prejudice is implicit, in the failure of a taxpayer to render a return, and that therefore, the respondent had proved that the appellants had committed an understatement, which is subject to an understatement penalty.

Instead, the Tax Court should have found that the respondent had failed to make the necessary allegations, in his statement of grounds of assessment and opposing appeal, and also failed to lead the necessary evidence on this point, and that consequently, he had failed to prove that he was entitled to levy an understatement penalty.

Alan Lewis BProc LLB (UFS) LLM (Tax) (UP) is an advocate in Johannesburg.

This article was first published in De Rebus in 2018 (May) DR 15.

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