UNDERSTATEMENT PENALTIES: SARS’ BURDEN OF PROOF IS IRRELEVANT?

UNDERSTATEMENT PENALTIES: SARS’ BURDEN OF PROOF IS IRRELEVANT?

In a recent case[1] the Tax Court had to adjudicate on the imposition by SARS of understatement penalties on a taxpayer in consequence of a taxpayer’s failure to timeously declare a capital gain.

SARS imposed a penalty of 25%, which is a penalty for failure by the taxpayer to take reasonable care when completing a tax return.  During evidence, however, SARS conceded that they should probably have imposed a penalty of 50% on the basis that the taxpayer had no reasonable grounds for the tax position it had adopted. SARS, therefore, conceded that it imposed the penalty incorrectly.

However, since SARS did not argue for an increase in the penalty from 25% to 50% in its pleadings, the court found that it was not allowed to increase the penalty from 25% to 50% (following the precedent set in Purlish Holdings v The Commissioner for the South African Revenue Service (76/18) [2019] ZASCA 04 (26 February 2019)).

That would seem like good news for the taxpayer. But is it really? SARS carries the burden of proof when it comes to understatement penalties. In fact, section 102 of the Tax Administration Act, 28 of 2011 (“the TAA”) states that SARS must prove the facts on which it relied for imposing an understatement penalty. Section 129 of the TAA in turn states in the case of the issue in dispute being understatement penalties, the court must decide the matter on the basis that the burden of proof rests on SARS.

In the matter before the court in the recent case then, SARS had to prove the facts on which it relied to conclude the taxpayer did not take reasonable care in completing a tax return. SARS, by conceding that it should in fact have imposed a penalty for the taxpayer having no reasonable grounds for the tax position adopted, effectively conceded that it cannot prove the facts on which it relied for imposing a penalty on the basis of the taxpayer not taking reasonable care in completing a tax return.  SARS by admitting it imposed the incorrect penalty, effectively admitted that it cannot discharge its onus of proof. The court nevertheless held that the penalty of 25% should remain. Without an explanation of why that result should follow, it beggars belief that SARS can concede it cannot discharge its onus of proof and still succeed with its case.

I can only hope the taxpayer takes this matter on appeal, even if only to clarify why the penalty of 25% should remain. Absent such an explanation, one can only speculate: Is it perhaps because when a taxpayer has no reasonable grounds for a tax position, it also necessarily means that it did not take reasonable care in completing a tax return? That seems unlikely. The taxpayer in question purposefully did not declare the capital gain on the return where it should have been declared. It did not omit the capital gain from the return because of carelessness.

Indeed, the taxpayer should perhaps have been penalised more harshly but the fact is SARS messed up. SARS imposed the incorrect penalty.  Indeed, in an ideological world, SARS’ mistake should not mean the taxpayer escapes a penalty. The tax court, however, is not regulated by ideology. It is regulated by a statute. That statute determines that SARS must prove the facts on which it relied for imposing a penalty for “reasonable care not taken in completing a tax return”. Absent an explanation of why the court upheld the penalty of 25%,  it appears in this case, SARS did not discharge its onus of proof. If this is how it should work, litigation in the tax court is about to get even more complicated.

[1] LDC Taxpayer v CSARS (Case No: IT2488) (18 June 2021)