The power of SARS to remit the understatement penalties is very limited. SARS is only able to remit penalties where the understatement is a ‘substantial understatement’ - the most basic if the behaviours - and requires that the taxpayer has made full disclosure to SARS and that the taxpayer obtained a tax opinion from a registered tax practitioner prior to submission of the tax return. This opinion must be based upon full disclosure of the facts and circumstances of the arrangement and in the opinion the tax practitioner must have stated that the taxpayer’s position is more likely than not to prevail if the matter were to be considered by the courts.
The current wording of the understatement penalty provisions have given rise to two key challenges which the draft Tax Administrative Laws Amendment Bill seeks to address. The first relates to instances where a return contains an understatement as a result of a bona fide error on the part of the taxpayer. The draft bill proposes to exclude understatements resulting from a “bona fide inadvertent error” from the scope of the penalty regime. In the explanatory memorandum issued with the draft bill, bone fide errors are categorised as factual or legal interpretative errors, which will be determined by SARS having regard to the particular circumstances in which the error was made. Factually based factors taken into consideration could include the particular knowledge and level of skill of the taxpayer, the quantum of the error and whether a similar error was made in the prior year returns. Factors impacting on legal interpretation could include the level of complexity of the taxing sections involved and the steps taken by the taxpayer to understand the legislation.
The second significant challenge in relation to the understatement penalties relates to the imposition of understatement penalties in relation to returns submitted prior to the effective date of the Tax Administration Act. SARS is of the view that the transitional provisions in the legislation permit the imposition of these penalties to returns submitted prior to 1 October 2012. However, as the tax dispensation prior to this date did not require taxpayers to obtain a tax opinion from a registered tax practitioner in order to qualify for the remittance of penalties, taxpayers are unable to meet the requirements for the remittance of the understatement penalties. The draft bill proposes to amend the requirement in relation to the date by which a taxpayer, who submitted a return prior to 1 October 2012, is required to obtain a tax opinion. These taxpayers will be able to obtain a tax opinion from a registered tax practitioner now, even after submission of the return, for purposes of remitting the understatement penalty.
On a final point, the draft bill requires that tax opinions be obtained from an ‘independent’ registered tax practitioner. Opinions issued by in-house tax teams will therefore not suffice for purposes of remitting understatement penalties.