Category: Chapter 16 – Understatement penalty (TAA)

Section 230 (TAA) – Voluntary disclosure agreement

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230.    Voluntary disclosure agreement

 

The approval by a senior SARS official of a voluntary disclosure application and relief granted under section 229, must be evidenced by a written agreement between SARS and the qualifying person who is liable for the outstanding tax debt in the prescribed format and must include details on-

 

(a)     the material facts of the ‘default’ on which the voluntary disclosure relief is based;

 

(b)     the amount payable by the person, which amount must separately reflect the understatement penalty payable;

 

(c)     the arrangements and dates for payment; and

 

(d)     relevant undertakings by the parties.

Section 231 (TAA) – Withdrawal of voluntary disclosure relief

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231.    Withdrawal of voluntary disclosure relief

 

(1)     In the event that, subsequent to the conclusion of a voluntary disclosure agreement under section 230, it is established that the applicant failed to disclose a matter that was material for purposes of making a valid voluntary disclosure under section 227, a senior SARS official may-

 

(a)     withdraw any relief granted under section 229;

 

(b)     regard an amount paid in terms of the voluntary disclosure agreement to constitute part payment of any further outstanding tax debt in respect of the relevant ‘default’; and

 

(c)     pursue criminal prosecution for a tax offence.

 

(2)     Any decision by the senior SARS official under subsection (1) is subject to objection and appeal.

“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]

“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

“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]

Section 222 (TAA) – Understatement penalty

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222.    Understatement penalty

(1)     In the event of an “understatement” by a taxpayer, the taxpayer must pay, in addition to the “tax” payable for the relevant tax period, the understatement penalty determined under subsection (2) unless the ‘understatement’ results from a bona fide inadvertent error.

(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]

Section 223 (TAA) – Understatement penalty percentage table

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223.    Understatement penalty percentage table

(1)     The understatement penalty percentage table is as follows:

1

Item

2

Behaviour

3

Standard Case

4

If obstructive, or if it is a ‘repeat case’

5

Voluntary disclosure after notification of audit or criminal investigation

6

Voluntary disclosure before notification of audit or criminal investigation

(i)

‘Substantial under-statement’

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%

[Subsection (1) substituted by section 76 of Act 39 of 2013 and section 62 of Act 16 of 2016 effective on 19 January 2017]

(2)     An understatement penalty for which provision is made under this Chapter is also chargeable in cases where-

(a)     an assessment based on an estimation under section 95 is made; or

(b)     an assessment agreed upon with the taxpayer under section 95(3) is issued.

(3)     SARS must remit a ‘penalty’ imposed for a ‘substantial understatement’ if SARS is satisfied that the taxpayer-

(a)     made full disclosure to SARS of the arrangement, as defined in section 34, that gave rise to the prejudice to SARS or the fiscus by no later than the date that the relevant return was due; and

[Paragraph (a) substituted by section 42 of Act 33 of 2019]

(b)     was in possession of an opinion by an independent registered tax practitioner that-

(i)      was issued by no later than the date that the relevant return was due;

(ii)     was based upon full disclosure of the specific facts and circumstances of the arrangement and, in the case of any opinion regarding the applicability of the substance over form doctrine or the anti-avoidance provisions of a tax Act, this requirement cannot be met unless the taxpayer is able to demonstrate that all of the steps in or parts of the arrangement were fully disclosed to the tax practitioner, whether or not the taxpayer was a direct party to the steps or parts in question; and

(iii)    confirmed that the taxpayer’s position is more likely than not to be upheld if the matter proceeds to court.

Section 224 (TAA) – Objection and appeal against imposition of understatement penalty

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224.    Objection and appeal against imposition of understatement penalty

 

The imposition of an understatement penalty under section 222 or a decision by SARS not to remit an understatement penalty under section 223(3), is subject to objection and appeal under Chapter 9.