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Section 222 (TAA) – Understatement penalty

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222.    Understatement penalty

 

(1)     In the event of an ‘understatement’ by a taxpayer that involves a behaviour listed in the understatement penalty percentage table in section 223, the taxpayer must pay, in addition to the ‘tax’ payable for the relevant tax period, the understatement penalty determined under subsection (2).

[Subsection (1) substituted by section 75(a) of Act 39 of 2013 and by section 20 of Act 4 of 2026]

 

(2)   The understatement penalty is the amount resulting from applying the highest applicable understatement penalty percentage in accordance with the table in section 223 to each shortfall determined under subsections (3) and (4) in relation to each ‘understatement’.

[Subsection (2) substituted by section 75(a) of Act 39 of 2013 and by section 23(a) of Act 22 of 2018.]

 

(3)     The shortfall is the sum of-

 

(a)     the difference between the amount of ‘tax’ properly chargeable for the tax period and the amount of ‘tax’ that would have been chargeable for the tax period if the ‘understatement’ were accepted;

 

(b)     the difference between the amount properly refundable for the tax period and the amount that would have been refundable if the ‘understatement’ were accepted; and

 

(c)     the difference between the amount of an assessed loss or any other benefit to the taxpayer properly carried forward from the tax period to a succeeding tax period and the amount that would have been carried forward if the ‘understatement’ were accepted, multiplied by the tax rate determined under subsection (5).

 

(4)  

 

(a)   If there is a difference under both paragraphs (a) and (b) of subsection (3), the shortfall must be reduced by the amount of any duplication between the paragraphs.

 

(b)   Where the ‘understatement’ is the failure to submit a return, the ‘tax’ that resulted from the ‘understatement’, had the ‘understatement’ been accepted, for purposes of subsection (3), must be regarded as nil.

[Subsection (4) substituted by section 75(c) of Act 39 of 2013 and by section 23(b) of Act 22 of 2018.]

 

(5)     The tax rate applicable to the shortfall determined under subsections (3) and (4) is the maximum tax rate applicable to the taxpayer, ignoring an assessed loss or any other benefit brought forward from a preceding tax period to the tax period.

 

(6)     Any penalty imposed under subsection (2) must be reduced by any penalty imposed under section 4(2) of the Employment Tax Incentive Act, 2013, in respect of the same employment tax incentive amount.

[Subsection (6) added section 27(1) by of Act 16 of 2022 deemed effective on 1 September 2022, and applicable to any return, for purposes of paragraph 14(2) of the Fourth Schedule to the Income Tax Act, submitted or after that date]

“Understatement” definition of section 221 of TAA

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“understatement” means any prejudice to SARS or the fiscus as a result of-

(a)     failure to submit a return required under a tax Act or by the Commissioner;

[Paragraph (a) substituted by section 22 of Act 22 of 2018]


(b)     an omission from a return;

(c)     an incorrect statement in a return;

(d)     if no return is required, the failure to pay the correct amount of “tax”; or

(e)     an “impermissible avoidance arrangement.

[Definition of “understatement” amended by section 74 of Act 39 of 2013 and substituted by section 61 of Act 16 of 2016 effective on 19 January 2017]

“Tax position” definition of section 221 of TAA

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‘tax position’ means an assumption underlying one or more aspects of a tax return, including whether or not-

(a)     an amount, transaction, event or item is taxable;

(b)     an amount or item is deductible or may be set-off;

(c)     a lower rate of tax than the maximum applicable to that class of taxpayer, transaction, event or item applies; or

(d)     an amount qualifies as a reduction of tax payable; and

“Tax” definition of section 221 of TAA

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‘tax’ means a tax as defined in section 1, excluding a penalty and interest, and will for purposes of this Part include an employment tax incentive as referred to in section 2(1) of the Employment Tax Incentive Act, 2013 (Act 26 of 2013);

[Definition of ‘tax’ substituted by section 26(1) of Act 16 of 2022 deemed effective on 1 September 2022, and applicable to any return, for purposes of paragraph 14(2) of the Fourth Schedule to the Income Tax Act, submitted or after that date]