Introduction
Once the South African Revenue Services (‘SARS’) issues your business with a penalty relating to your Value Added Tax (‘VAT’) or Corporate Income Tax Returns (‘CIT’), would the Tax Court be able to increase such penalties if they are of the opinion that SARS were too lenient?
The recently decided case of Purlish Holdings v The Commissioner for the South African Revenue Service clarifies the position.
Case Summary
Having made several provisional income tax payments to SARS, Purlish Holdings (Pty) Ltd (‘Purlish’) claimed a refund of the total amounts paid, totalling around R14 million. The basis for their refund request was that the business had not, in fact, commenced trading when these payments were previously made. Considering the magnitude of the amount claimed and the nature under which it was to be refunded, SARS then audited the business. Upon completion of these audits, SARS later issued ‘understatement penalties’ for failing to disclose income relating to several consultancy agreements between 2011 and 2014.
An essential testimonial by an operational specialist from the SARS audit department explained that if a return reflects that a business or taxpayer has received no income and has had no expenses for the year, it is referred to as ‘nil returns’. The results of the audits, however, showed that Purlish had received just under R40 million; a figure that would carry a VAT liability of just under R5 million.
Tax Administration Act
Chapter 16 of the Tax Administration Act 28 of 2011 (‘the Act’) deals with defining an ‘understatement’ and the penalties thereof. As per S221 of the Act, an ‘understatement’ refers to any ‘prejudice against SARS… as a result of a default in rendering a return, an omission from a return, an incorrect statement in a return or if no return is required, the failure to pay the correct amount of tax’.
The behaviours that are ascribed to each understatement penalty percentage are tabulated in accordance with S223 of the Act. Depending on the nature and repetitiveness of the offence, different levels of accountability exist. By way of example, if the behaviour is termed to be a standard case of ‘substantial understatement’ the penalty would be, in addition to the actual payment of the tax owing, 25% of such amount. If the behaviour is deemed to be a repeat offence of ‘gross negligence’, then the penalty would be the actual tax owing and 125% of this amount.
In this matter, Purlish was initially charged with a 100% penalty relating to the VAT and CIT, but this decision was later amended. The behaviour was reduced from a standard ‘gross negligence’ penalty for both, to penalties for ‘reasonable care not taken’ and ‘no reasonable grounds for tax position taken’, reducing the penalty percentages to 25% and 50% respectively.
The Tax Court, however, differed in opinion from SARS. It effected S129(3) of the Act allowing a Tax Court to ‘reduce, confirm or increase the understated penalty so imposed.’ The penalties were, therefore, both increased to 100% again in the order made by the Court.
Conclusion
In conclusion, the Tax Court does have the authority to increase or even reduce a penalty imposed by SARS.
It is crucial to bear in mind that this matter continued on appeal and was heard by the Supreme Court of Appeal, which later set aside the severity of this order. It was replaced with the original penalty percentages on the basis that SARS had only made statements justifying the initial penalties and not those as at a rate of 100% for each offence. It was said to be ‘incompetent’ for the Tax Court to have gone beyond this justification.
The Tax Court may therefore only alter the penalty imposed by SARS if cause for such is argued in their statements and replies as per Rule 34.
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