With tax season now officially open for individuals, millions of people around the country will begin filing their returns.
One important point to be aware of is the understatement penalty regime which was introduced to replace the additional tax regime in 2012, says Esther Geldenhuys, senior associate at Werksmans Attorneys.
A tax understatement is defined as any prejudice to the South African Revenue Service (SARS) or the fiscus as a result of:
- A default in rendering a return;
- An omission from a return;
- An incorrect statement in a return; or
- If no return is required, the failure to pay the correct amount of tax.
According to Geldenhuys, an understatement penalty is determined by applying the highest applicable percentage in the understatement penalty table to the amount understated.
This means tax payers could pay a penalty as high as 150% of the amount they understated in an attempt to avoid taxes.
“In terms of the understatement penalty table, the percentage of the understatement penalty depends on the circumstances under which the understatement event occurred as well as the nature of the behaviour resulting in the understatement,” she said.
The listed behaviours include the following (with percentages applying to a standard case):
- Substantial understatement – 10%;
- Reasonable care not taken in completing return – 25%;
- No reasonable grounds for tax position taken – 50%;
- Impermissible avoidance arrangement – 75%;
- Gross negligence – 100%; or
- Intentional tax avoidance – 150%.
What you need to know
Geldenhuys said it is important for taxpayers to understand these listed behaviours – especially where the taxpayer would like to object to the imposition by the South African Revenue Service (SARS).
To assist taxpayers in this regard, SARS issued the Guide to Understatement Penalties earlier this year, she said.
The statements set out in the Guide are discussed briefly below:
- In terms of the Guide, what a reasonable person would have done is compared to what the taxpayer did.
- The further removed from that of a reasonable person, the less reasonable and more culpable the behaviour would be and will fall under either behaviour (ii) ‘reasonable care not taken in completing return’ or behaviour (iii) ‘no reasonable grounds for tax position taken’.
- According to the Guide, the taxpayer will be culpable if a reasonable person in the position of the taxpayer would have foreseen the possibility that the trigger would result in an understatement and had taken steps to prevent it from happening.
- In terms of the Guide, the steps that a reasonable person may take include enlisting the assistance of SARS or employing an accountant or tax practitioner.
- According to the Guide, the difference between behaviour (ii) ‘reasonable care not taken in completing return’ and behaviour (iii) ‘no reasonable grounds for tax position taken’ is that reasonable care might have been taken, i.e. advice may have been received from a professional, but without reasonable grounds, i.e. the content and the merits of the argument are not reasonable.
- In terms of the Guide, the question with regard to behaviour iii) ‘no reasonable grounds for tax position taken’ is simply whether a reasonable person in the circumstances of the taxpayer would have concluded that within their understanding it was likely correct or have assumed a different position.
- As the level of care decreases, culpability increases to fall under behaviour (v) ‘gross negligence’ which, according to the Guide, is an “extreme departure from the standard of a reasonable person, which departure must demonstrate complete obtuseness of mind or total failure to take care”.
- In terms of the Guide, culpability can increase even further when, to reduce tax liability, the behaviour is intentionally contrary to how the reasonable person would have behaved, to fall under behaviour (vi) ‘intentional tax evasion’.
- Unfortunately, no matter how many opinions the taxpayer might have, the 75% penalty for behaviour (iv) ‘impermissible avoidance arrangement’, i.e. where the general anti-avoidance rule has been applied, can never be waived.