“impermissible avoidance arrangement” means an arrangement in respect of which Part IIA of Chapter III of the Income Tax Act is applied and includes, for purposes of this Chapter, any transaction, operation, scheme or agreement in respect of which section 73 of the Value-Added Tax Act or any other general anti-avoidance provision under a tax Act is applied;
[Definition of “impermissible avoidance arrangement” inserted by section 61 of Act 16 of 2016 effective on 19 January 2017]
Part A
Imposition of understatement penalty
221. Definitions
In this Chapter, unless the context indicates otherwise, the following terms, if in single quotation marks, have the following meanings:
“repeat case” means a second or further case of any of the behaviours listed under items (i) to (vi) of the understatement penalty 15 percentage table reflected in section 223 within five years of the previous case;
[Definition of “repeat case” substituted by section 61 of Act 16 of 2016 effective on 19 January 2017]
‘substantial understatement’ means a case where the prejudice to SARS or the fiscus exceeds the greater of five per cent of the amount of ‘tax’ properly chargeable or refundable under a tax Act for the relevant tax period, or R1 000 000;
‘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’ 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” 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]
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]
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.