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Proposed changes – Understatement penalties (USPs) · Tax Break: South African tax for professionals

• 0:11
  Welcome and thank you for joining me for Tax Break.
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  This is a podcast about South African tax, full South African
• 0:16
  tax professionals and practitioners.
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  My name is Peter Flanagan and in each episode I share my thoughts
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  with you on a topic or a recent development in South African
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  tax. And I try to keep the episode
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  short enough that you can listen to them whenever you've got a
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  few minutes to spare during your day.
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  As the as we did last week, we asked the looking at some of the
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  draft proposals in in or the proposals in the draft bills
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  that the National Treasury issued.
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  So just a quick recap again, these bills were issued for
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  comment on the 16th of August. They are open for comment until
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  the 12th of September. And that would then be followed
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  by consultation considering the comments.
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  And from that the National Treasury would, would then
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  publish the final amendments for the year.
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  So everything that we are talking about today as far as
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  the the changes are concerned are only still changes.
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  They are. It's, it's not to say that this
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  is definitely the way it will play out.
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  All right. So today we are talking about a
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  proposed change in the Tax Administration's laws amendment
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  bill and it relates to understatement penalties.
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  Now I think as a starting point with these understatement
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  penalties, it it makes sense to do to to consider their purpose.
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  So they are they to deter unwanted behaviour from
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  taxpayers. So they must basically penalise
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  taxpayers who are involved in or conduct themselves in an
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  unacceptable manner as far as the legislature is concerned.
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  OK, so how does it do that? There's a if, if you, if you, if
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  there's an understatement. So there's a, a definition for
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  that. There's a shortfall as a result
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  of the understatement. Then there is a penalty right
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  table in Section 223 of the Tax Administration Act and that rate
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  table, the way it works, it lists a number of behaviours at
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  the, the the last row is the most unacceptable behaviour.
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  So that's the that's intentional tax evasion.
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  And then as we go up, the behaviour becomes, let's call it
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  less unacceptable. So it if ohh, so if we go from
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  tax evasion, the next level is is gross negligence, then it's
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  impermissible tax avoidance rangement's then it's you've
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  taken a tax position without reasonable grounds for that.
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  Their next one is you. You didn't take reasonable care
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  in completing your tax return. And then we get to the last
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  category that is actually it doesn't have much to do with
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  behavior. It's based on the quantum of the
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  understatement or the the the tax effect of that.
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  So that last category 4 substantial understatement, this
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  as the law stands at the moment, Section 2 to 3 sub Section 3 has
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  got a an exception date to say that if the tax payer, if an
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  understatement penalty is imposed for an under substantial
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  understatement, the tax payer had an independent tax opinion
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  or a tax opinion from an independent tax practitioner
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  that was issued before the return was submitted based on
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  all of the facts. And that states that the in the
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  practitioner's opinion, the position is more likely than not
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  the insurance must remit the penalty.
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  So that's maybe just in a nutshell how the system operates
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  at the moment. But if we look at the current
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  wedding of Section 222, Subsection 1, so 222 one, there
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  is another factor that also comes into play and that's a
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  bona fide inadvertent error. So what Section 2221 currently
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  says is that in the event of an understatement by taxpayers, the
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  tax payer must pay in addition to the tax payable, the
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  understatement penalty determined under subsection 2.
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  So that's the one I just explained how that penalty is
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  calculated unless the understatement results from a
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  bona fide inadvertent error. Now as it stands at the moment
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  then for any understatement penalty, as long as you can show
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  that it was that that the course of that penalty is a bona fide
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  inadvertent error depend the the understatement penalty cannot be
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  imposed. So it's basically a blanket
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  requirement that applies to the understatement penalty
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  irrespective of the course. But there is some sort of a link
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  between certain of these behaviours are never going to be
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  an Indian bona fide inadvertent error.
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  So if we take it to the extreme, if someone is guilty of tax
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  evasion, I don't think that is reconcilable with the the, the,
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  the cause being a bona fide inadvertent era.
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  Now if we look at Sasha's interpretation of what is a bona
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  fide inadvertent era versus the views of the courts in some
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  recent case law, I think we'll see that there's a there's quite
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  a big difference. So in Zach's guide on
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  understatement penalties, they they analyse a few cases and
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  they then get to the conclusion to say that their view is that
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  these cases that they've looked at would suggest that bona fide
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  inadvertent errors are only errors that fall into the class
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  of typographical errors, but only properly involuntary
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  typographical errors. And they then go on to say that
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  even if you've got a typographical error that, and it
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  arose because someone didn't exercise due care.
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  So in other words, because there's something a return
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  should have been reviewed, it wasn't reviewed and therefore
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  the error wasn't picked up. Even an error like that,
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  although it's a typographical error, is still not a bona fide
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  inadvertent error in Zach's interpretation.
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  If we then compare that to the views of, of the codes, I think
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  we'll realise, you'll see that there's the SAGE view is, is
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  quite narrow to compare to what the the courts said.
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  So I think they, they, there's two cases that's relevant here.
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  1 is the coronation case and the other is the Thistle case.
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  So in the coronation case, in the in the appeal court, the
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  court ruled against the tax payer.
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  So it was necessary to consider whether such was entitled to
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  impose an understatement penalty.
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  So they the court said that the tax payer relied on a tax
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  opinion from a leading tax expert in South Africa, although
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  the tax payer did undisclosed there.
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  The opinion to SASH and the court was of the view that when
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  the tax payer prepared and filed their tax returns, they did so
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  with a bona fide belief that they were eligible for the
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  exemption that they applied, irrespective of the fact that
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  Sarge didn't agree with this and the court ruled against the tax
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  payer. So that didn't affect the fact
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  that they had the bona fide belief that they that they were
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  entitled to do their do the exemption.
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  They the code then also referred to the Thistle case, the the
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  appeal court case where such argued that if you've taken a
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  conscious and deliberate position, that can never be a
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  bona fide inadvertent era. But the court held that Sash
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  correctly conceded that the understatement in that case was
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  as a result of a bona fide error.
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  So on the same basis then in the in the Supreme Court of Appeal
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  in the coronation case, the court ruled that Sash was not
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  entitled to impose an understatement penalty because
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  the tax payer took advice. The position it took was a or
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  any. Any mistake in that position
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  when the court ruled against it was as a result of a bona fide
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  inadvertent era. If we then look at the Thistle
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  case, that went from the Supreme Court of Appeal to the
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  Constitutional Court and in the Constitutional Court, Sarge
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  denied that it made the concession in the Supreme Court
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  of Appeal and again on the saying, on the basis that if you
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  intentionally take a position that cannot be considered an
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  error. So the Code then had to consider
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  whether it was something that they had to deal with as to
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  whether there was a bona fide inadvertent error or not.
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  And they pointed out that the onus to prove that the tax payer
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  was was guilty of a behaviour listed in Section 223 was on
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  such and such would have relied if the if the the Constitutional
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  Court entertained the Sasha's appeal would have relied on the
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  behaviours in items three or two.
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  So 3 deals with you, the tax payer didn't have a a reasonable
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  didn't have reasonable grounds for the position taken.
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  So in this regard, the court said that because the tax payer
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  took legal advice and that advice was so reasonable that
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  even the Tax Court upheld it. It's they they were the court
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  wouldn't be able to conclude that the tax payer didn't have
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  reasonable grounds for the position taken.
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  Item 2 deals with taking reasonable gain completing your
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  return. Now there's artists argument was
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  that the tax payer took advice, but this advice was different
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  from Sasha's stated position in a guide and when the tax payer
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  failed they turned. It must have known that it's
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  acting contrary to Sasha's position in the guide and
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  therefore it didn't take reasonable care.
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  The court then pointed out that Zach's position is just in its
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  interpretation, it's not law. So whatever position such as in
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  the guide would, it is not low. So the fact that you took a
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  different position from that does not mean that you didn't
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  take reasonable K. And because the Code then
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  concluded that Sash would have failed on both of these
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  behaviours, it wasn't necessary for the Constitutional Court to
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  consider what whether this would have constituted the bona fide
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  inadvertent error or not. I think what we can take from
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  Satan's guide versus the case law is that the they, they
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  definitely very different interpretations as to what the
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  bona fide inadvertent era would would mean and what, what it
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  would be. Now.
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  The change that's being proposed is to say the, the, the bona
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  fide inadvertent error exception will be moved out of Section 2
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  to 2 into Section 2 to 2 three. So the suggestion is that it's
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  no longer something that applies to, to, to any understatement
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  penalty. It moves to Section 2 to 2
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  three, which says that if the tax payer if if an
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  understatement penalty is imposed as a result of a
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  substantial understatement. So in other words, only the last
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  category and it results from a bona fide inadvertent era, Then
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  such must remit the understatement penalty.
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  So what this practically means is that as a tax payer you would
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  have to improve that or what stage would have to prove that
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  the tax payer is guilty of one of the first behaviours up to
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  the the the substance or before the substantial understatement
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  behaviour. So if one of those other ones
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  are present with its bona fide inadvertent error or not
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  wouldn't wouldn't matter. It's only when you get to the
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  last category, the substantial understatement, where if it's
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  Dana bona fide inadvertent era, Dane Zach must remit the, the
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  penalty. So, um, what the proposal really
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  is, is to say that instead of this being a blanket exception
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  to the rule for all understatement penalties, it's
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  an exception that would apply only in the case of the last,
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  the last behaviour which is based on quantum, not behaviour
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  really. Now, I think as demonstrated by
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  the Constitutional Court's reasoning in the Thistle case,
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  if you take proper advice, then it may well be that you've got
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  good grounds to argue that you did take reasonable care and
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  that you had reasonable grounds for the position taken.
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  But I do think where it could possibly have a OHH, the all
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  their, their the the more nuanced interpretation of this
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  is that just the fact that you've taken advice isn't enough
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  to say that we don't even need to go to the to the penalty
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  table. You still need to go to the
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  penalty table. Go through well, work through
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  all of those first viewpoints. And if you are then in the last
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  category, the substantial understatement penalty, then
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  then it's a bona fide era or not comes into play.
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  So I think what this does practically mean is if you take
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  advice or as a tax practitioner give advice, you need to make
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  sure that that advice is thorough enough that it takes
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  all the facts into account. Otherwise, you may not get past
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  the point of saying, but you had reasonable grounds for the
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  position taken and something that is often quite difficult
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  for taxpayers, but it is something that you need to
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  consider and take some responsibility for us to say.
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  But does this advice make sense? Do you understand how the person
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  got there? Um, do do in your own mind
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  disease whether you, you, you believe you've got reasonable
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  grounds. So there is, there's quite a bit
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  of, of authority to say that ultimately it's still your
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  responsibility to make sure that you comply with your tax
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  obligations. You can't just leave it all to a
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  tax practitioner to decide on your behalf.
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  So in summary, the the proposed change is that the bona fide
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  inadvertent error would not, would no longer be an exception
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  to an overall exception for understatement penalties.
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  It's something that would only come into play when you are
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  looking at a substantial understatement being the
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  behaviour that's causing the penalty.
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  So, so it's a lot. It only comes into play much
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  later in the assessment and, and you it, it would mean that you
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  need to, to, to look at the other behaviours or think about
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  the other behaviours, but more critically than and you may have
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  been able to with some of the recent case law.
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  That's that for today's episode. If you've got any questions,
• 15:58
  comments, please send me an e-mail.
• 16:00
  It's always nice to get emails from people listening to the
• 16:04
  podcast. I want to ask you if you enjoy
• 16:08
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• 16:12
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• 16:15
  Subscribe on your favourite podcast platform and tell all
• 16:18
  your friends and colleagues about it.
• 16:20
  As always, just a quick reminder that nothing in this podcast is
• 16:23
  intended to be tax advice or replacement for tax advice.
• 16:27
  It's for information purposes only.
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  Until next time, goodbye.