Lance Dickson Construction (LDC) v Commissioner for SARS<\/em> [2023] – where SARS’ leniency in issuing a penalty proved to be its undoing.<\/p>\nLDC developed immovable property and sold it in 72 individual portions to a related entity, Kwali Marck Construction CC (KMC).<\/p>\n
However, the contract of the sale said that KMC would only pay the purchase price for each portion when each portion was on-sold to the ultimate purchaser.<\/p>\n
The taxpayer then only accounted for capital gains tax when the portion was on-sold by KMC to the ultimate purchaser.<\/p>\n
SARS did not accept the taxpayer’s position and raised an assessment for the full amount of capital gains tax for all 72 portions for the year they were transferred to KMC.<\/p>\n
SARS also added a 25% understatement penalty on the taxpayer.<\/p>\n
The taxpayer lodged an objection to SARS’ assessment, which was heard in Tax Court and then on appeal at the High Court.<\/p>\n
Section 221, read with section 222, of the TAA allows SARS to issue a penalty on a taxpayer where that taxpayer has understated their tax due to accidental error.<\/p>\n
In this case, it was common cause that the taxpayer understated its capital gains tax, but not due to an accidental error.<\/p>\n
Section 223 of the TAA states the rate at which SARS can issue a penalty.<\/p>\n
SARS can levy a 25% penalty where the understatement is due to the taxpayer not taking reasonable care when completing their tax return.<\/p>\n
SARS can also levy a 50% penalty if it finds that the understatement is due to the taxpayer having no reasonable ground for assuming a particular tax position.<\/p>\n
Arguments in Court <\/strong><\/p>\nSARS said that it had levied a penalty of 25% for LDC as the taxpayer’s understatement was due to it not taking reasonable care in completing its tax return.<\/p>\n
The taxpayer, however, argued that the tax position was due to the tax position it assumed.<\/p>\n
The taxpayer said that SARS could not levy an understatement penalty on the process they had followed – the 25% understatement penalty, but rather SARS had levelled a penalty on the tax position – 50% understatement penalty – at a reduced rate of 25%.<\/p>\n
The Tax Court said that SARS had inferred that the taxpayer had no reasonable basis for assuming its tax position – 50% understatement penalty – but reduced the rate for the penalty.<\/p>\n
The Tax Court upheld SARS\u2019 reduced penalty of 25%.<\/p>\n
On appeal, the High Court said that SARS’s witness – the official that carried out the audit – could not differentiate between the two categories of understatement penalties in question.<\/p>\n
The High Court found that SARS imposed a penalty for a taxpayer having no reasonable grounds for assuming a particular tax position, but at the rate for taxpayers who did not take reasonable care in finishing their tax return.<\/p>\n
The High Court did not uphold SARS’ ability to levy penalties at a reduced rate.<\/p>\n
The High Court found that the Tax Court incorrectly relied on another case – Purlish Holdings (Pty) Ltd v Commissioner for SARS <\/em>[2019] – where the Supreme Court of Appeal said that the Tax Court cannot increase understatement penalties from SARS.<\/p>\nThe Tax Court in the LDC case said that it did not have the power to increase the understatement penalty, but it also could not allow the taxpayer to escape responsibility.<\/p>\n
However, the High Court said that the Tax Court can increase the understatement penalty due to section 129 of the TAA, but only when SARS requests it.<\/p>\n
The High Court in LCD said that the decision in the Purlish case was made as SARS had not asked for an increase in the understatement penalties in its pleadings and not because the Tax Court could not allow for an increase in understatement penalties.<\/p>\n
The Court in the LDC case looked at SARS’s pleading before it and found that SARS’ argument for understatement penalty was solely based on the taxpayer not taking reasonable care in completing their tax return.<\/p>\n
However, SARS even admitted that the understatement penalty was due to the taxpayer having no reasonable grounds for their tax position.<\/p>\n
Thus, the Court ruled that SARS had not made out a case for issuing the understatement penalty and was prevented from levying any understatement penalty whatsoever.<\/p>\n
Importance of the case <\/strong><\/p>\nCarroll said that the decision acts as a reminder of the limitation of SARS’ power<\/p>\n
SARS undermined its own argument by levying the penalty at a reduced rate.<\/p>\n
SARS is bound by the provision of the TAA and the LDC case provides a practical example of how the burden of proof in section 102(2) of the TAA works – stating that SARS must establish the facts in regard to the issuing of an understatement penalty.<\/p>\n
However, the case also offers an escape route for SARS as it can set out the power of the Tax Court to vary understatement penalties.<\/p>\n
Thus, a taxpayer may see the Tax Court increase its understatement policies if SARS plans its argument accordingly.<\/p>\n
\nRead: SARS has a new way to get in contact with taxpayers<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"SARS’ leniency in issuing a penalty proved to be its undoing in a recent High Court case. <\/p>\n","protected":false},"author":95,"featured_media":736439,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11121],"tags":[26],"class_list":["post-674141","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-headline"],"_links":{"self":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/674141","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/users\/95"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/comments?post=674141"}],"version-history":[{"count":8,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/674141\/revisions"}],"predecessor-version":[{"id":736457,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/674141\/revisions\/736457"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media\/736439"}],"wp:attachment":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media?parent=674141"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/categories?post=674141"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/tags?post=674141"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}