Although the South African Revenue Service (SARS) has tremendous power to collect taxes, it is still bound by legislation, such as the Tax Administration Act 28 of 2011 (TAA).
Nicholas Caroll by Cliffe Dekker Hofmyer reviewed a recent case – Lance Dickson Construction (LDC) v Commissioner for SARS (2023) – in which SARS’ leniency in imposing a fine proved to be its downfall.
LDC developed real estate and sold it in 72 separate parts to a related entity, Kwali Marck Construction CC (KMC).
However, the sales contract stated that KMC would only pay the purchase price for each part when each part was resold to the final buyer.
The taxpayer was then only liable for capital gains tax when the portion was resold by KMC to the final purchaser.
SARS did not accept the taxpayer’s position and issued an assessment for the full amount of capital gains tax for all 72 portions for the year they were transferred to KMC.
SARS also added a 25% penalty to the taxpayer.
The taxpayer lodged an objection against the SARS assessment, which was heard by the Tax and Customs Administration and subsequently appealed to the Supreme Court.
Section 221, read with section 222, of the TAA allows SARS to impose a fine on a taxpayer when that taxpayer has understated its tax due to an unintentional error.
In this case, it was a common cause that the taxpayer had understated its capital gains tax, but not through accidental error.
Section 223 of the TAA lists the speed at which SARS can impose a fine.
SARS may impose a 25% penalty where the under-declaration is due to the taxpayer not taking reasonable care when completing their tax returns.
SARS can also impose a 50% penalty if it finds that the understatement is due to the taxpayer not having reasonable grounds for assuming a particular tax position.
Arguments in court
SARS said it imposed a 25% fine on LDC, alleging the taxpayer under-declared because it failed to exercise reasonable care in completing its tax returns.
However, the taxpayer argued that the tax position resulted from the tax position it held.
The taxpayer said that SARS could not impose an underdeclaration penalty on the process they followed – the 25% underdeclaration penalty, but that SARS had previously imposed a penalty on the tax position – a 50% penalty for under-declaration – at a reduced rate of 25%.
The tax court said SARS had concluded that the taxpayer had no reasonable basis on which to assume its tax position – 50% understatement penalty – but lowered the rate for the penalty.
The tax court upheld SARS’ reduced fine of 25%.
On appeal, the Supreme Court said SARS’s witness — the official who conducted the audit — was unable to distinguish between the two categories of underdeclaration fines at issue.
The Supreme Court ruled that SARS fined a taxpayer who had no reasonable grounds for taking a particular tax position, but at the rate for taxpayers who failed to take reasonable care in completing their tax returns.
The Supreme Court has not upheld SARS’s ability to impose fines at a reduced rate.
The Supreme Court ruled that the tax court erred in considering another case – Purlish Holdings (Pty) Ltd v Commissioner for SARS (2019) – in which the Supreme Court of Appeal said the tax court cannot increase fines for under-declaration of SARS.
The tax court in the LDC case said it did not have the authority to increase the under-declaration penalty, but it also could not allow the taxpayer to escape responsibility.
However, the Supreme Court said the tax court can increase the underdeclaration fine under section 129 of the TAA, but only if SARS requests it.
The Supreme Court in LCD said the decision in the Purlish case was made because SARS failed to ask for an increase in under-declaration fines in its pleadings and not because the tax court could not allow an increase in under-declaration fines. allow.
The court in the LDC case reviewed SARS’s plea for it and ruled that SARS’s argument for an understatement penalty was based solely on the taxpayer’s failure to exercise reasonable care in completing its tax returns.
However, SARS even admitted that the fine was due to the taxpayer not having reasonable grounds for its tax position.
The Court thus ruled that SARS had not argued for the imposition of the understatement fine and should not impose any understatement fine.
Importance of the case
Carroll said the decision serves as a reminder of SARS’ power limitation
SARS undermined its own argument by levying the fine at a reduced rate.
SARS is bound by the provision of the TAA and the LDC case is a practical example of how the burden of proof works in section 102(2) of the TAA – which states that SARS must establish the facts in relation to imposing a fine for too low a task.
However, the case also provides an escape route for SARS as it could demonstrate the jurisdiction of the tax court to vary fines for underpayments.
Thus, a taxpayer can see the tax court increase its understatement policy if SARS plans its argument accordingly.
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