Tax penalties: Understatement penalties in the Tax Administration Act

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Item Behaviour Standard case If obstructive, or if it is a ‘repeat case’ Voluntary disclosure after notification of audit or investigation Voluntary disclosure before notification of audit or investigation
(i) ‘Substantial understatement’ 10% 20% 5% 0%
(ii) Reasonable care not taken in completing return 25% 50% 15% 0%
(iii) No reasonable grounds for ‘tax position’ taken 50% 75% 25% 0%
(iv) Gross negligence 100% 125% 50% 5%
(v) Intentional tax evasion 150% 200% 75% 10%

It is not clear how a taxpayer’s behaviour is to be classified for purposes of considering at which rate an understatement penalty is to be imposed, or if it is even possible that certain taxpayer behaviour may not even fall within the table to begin with.  Suffice it to say that in terms of section 102(2) of the Tax Administration Act, the burden of proving whether the facts on which SARS based the imposition of an understatement penalty is upon SARS.

In terms of section 222, the penalty may only be levied where an ‘understatement’ is present, being any prejudice to SARS or the fiscus as a result of:

  1. A default in rendering a return;
  2. An omission from a return;
  3. An incorrect statement in a return; or
  4. Where no return was required, the failure to pay the correct amount of tax.

To calculate the penalty levied, the applicable percentage in the above table is applied to the shortfall amount, being the tax effect in question for which the taxpayer is penalised.  For example, if an income tax deduction claimed by a taxpayer is disallowed by SARS which seeks to penalise the claiming of the deduction, the applicable penalty percentage is applied to the tax effect that the deduction would have had had it been allowed.

Taxpayers are enabled through section 224 to object against the imposition of an understatement penalty.  What is further noteworthy is that, in the event that a penalty is levied for a ‘substantial understatement’, the penalty must be remitted by SARS if the taxpayer was in possession of a positive tax opinion from an independent registered tax practitioner supporting its tax position.  It therefore makes sense, if only to mitigate against the levying of penalties, to obtain a tax opinion from a registered tax practitioner prior to entering into a transaction.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Objecting to an assessment

One of the risks of not using a tax professional to attend to one’s tax affairs arises when SARS assesses an individual’s income tax return.  Quite often, a return submitted is assessed incorrectly, or on a basis in terms of which SARS is disputing certain submissions made by the taxpayer in filing his or her (or even a family trust or company’s) income tax return.

It is then important to have an experienced tax professional at your disposal who is aware of the specifically legislated and prescribed dispute resolution rules that are required to be followed in order to object to an assessment with which the taxpayer disagrees.  The benefit of using a tax professional becomes even more pronounced when considering that individuals without tax experience and knowledge very often do not understand correspondence issued by SARS (and which would be informing the taxpayer of an adverse assessment for example being issued), and further that they can check assessments issued to ensure that these have indeed been issued on the basis on which the relevant return has been filed.

Various requirements would exist for a valid objection to be lodged with SARS.  These include that the objection be lodged in the prescribed format and by using the correct form, and that the objection be lodged within 30 business days from the date of the assessment issued.

If a taxpayer is unsure of the basis on which SARS would have issued an assessment, he or she is further entitled to first request reasons from SARS for the assessment issued in order to allow them to consider whether lodging an objection would be necessary or not to dispute the assessment.  These reasons, if requested, must be clear enough to allow the taxpayer to understand why SARS would have issued an adverse assessment and to then be able to lodge an objection against the assessment in question if required.  A request for reasons too (as is the case for an objection) needs to be submitted to SARS within 30 business days from the date of the assessment, whereafter the objection must be lodged within 30 business days of these reasons being provided to the taxpayer (and which SARS is obliged to provide, if requested, within 45 business days from receipt of the request for reasons from the taxpayer).

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Salary sacrifice schemes – Latest judgment by supreme court of appeal

Salary sacrifice schemes are popular in practice.  Typically, they involve employers paying a decreased salary to their employees, with an added fringe benefit to make up for the lost ‘cost to company’ sacrificed by the employee to obtain the benefit.  For example, an employee may prefer to enter into a salary sacrifice with his/her employer in exchange for being allowed to use an employer provided motor vehicle or accommodation.

From both the employer and employee’s perspective, the income tax and PAYE consequences linked thereto are very often unchanged.  The decreased salary paid by the employer is deductible for income tax purposes as well as such expenditure incurred to provide the benefit to the employee, whilst the employee is subject to income tax on both the decreased cash amount received as a salary as well as the fringe benefit provided by the employer.  The employer is also liable to withhold PAYE as calculated on the total remuneration paid to the employee (which would include both the decreased salary amount as well as the fringe benefit provided).  (See the Seventh Schedule to the Income Tax Act, 58 of 1962.)

The salary sacrifice scheme of Anglo Platinum Management Services (Pty) Ltd recently came under scrutiny.  After having lost in the Tax Court, Anglo Platinum appealed to the Supreme Court of Appeal (Anglo Platinum Management Services (Pty) Ltd v CSARS [2015] ZASCA 180 (30/11/2015)).  In essence, the appeal involved a salary sacrifice scheme implemented by Anglo Platinum whereby it would purchase motor vehicles – selected by its employees – for use by its employees, in exchange for the employees agreeing to a salary sacrifice equal to the value of the benefit.  The vehicles would remain the property of Anglo Platinum until enough has been sacrificed by the respective employees to equate to the purchase amount of the vehicles plus interest calculated thereon.

During this period, Anglo Platinum withheld PAYE on both the salaries paid to its employees, as well as the value of the fringe benefit derived by the employees in using Anglo Platinum’s motor vehicles.  This is hardly contentious, and SARS did not dispute this treatment.  What was in dispute however was whether there really was a salary sacrifice, and whether PAYE should not also have been withheld on the sacrificed amount (and the employees therefore taxed on this amount too).  SARS argued that the scheme, although valid, was incorrectly implemented.  In essence, so the argument went, the employees were still receiving their full salaries, and amounts withheld from their salaries were in essence payments made to the employer to facilitate funding for the acquisition of the vehicles.  SARS cited two main indications in support of this, being that the employees were ostensibly responsible for insurance payments on the vehicles, and that notional accounts with payments, interest and related vehicle expenses were kept:  employees would be responsible to pay any shortfall amounts on these accounts, and similarly be entitled to access any credits available on excess amounts withheld.

The Supreme Court of Appeal upheld Anglo Platinum’s appeal, largely based on the evidence of Anglo Platinum’s Mr Broodryk who testified on behalf of the taxpayer and who devised and implemented the scheme.  It is clear that the court placed great emphasis on the implementation of the scheme to objectively consider whether the scheme in implementation reflected a true salary sacrifice by employees.

The legal matters in the case are not contentious.  At issue is the implementation which is what so often goes awry where tax related advice is concerned.  Our clients should take note of this:  it is not good enough to have a positive tax opinion as regards a proposed structure or transaction.  It is necessary, if not essential, to involve your tax experts in implementation too, be it in salary sacrifice matter, or any other transaction.  Had Anglo Platinum not heeded this principle, the judgment by the Supreme Court of Appeal may very well have gone in SARS’ favour.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Requirements in order to complete your 2016 tax return

PERIOD : 1 MARCH 2015 TO 28 FEBRUARY 2016

The 2016 tax filing season opens on 1 July 2016.

Deadline dates for the submission of returns are as follows:

25 November 2016 Manual submissions for non-provisional taxpayers;
25 November 2016 E-filing submissions for non-provisional taxpayers;
27 January 2017 Compliant provisional taxpayers using e-filing.

If there is a possible shortfall on tax payments for the 2016 fiscal year on provisional tax, you will still be able to calculate your top-up payment in order to provide you with the option of settling your income tax liability “interest-free” on or before 30 September 2016.  You therefore need to submit your information as soon as possible to your tax consultant.

Your check list (where applicable):

  DOCUMENTATION DETAILS: YES | NO
1 Income – IRP5 or IT3(a) certificate  
2 Income from investments/Interest on loan accounts – IT3(b) certificate  
3 Local/foreign Capital Gain/Loss – IT3(c) certificate (including sale of property, shares in private companies, etc.  
4 Any other income – please provide details (e.g. inheritance received, etc.)  
5 Business income – full details of income and expenditure  
6 Lump sum income – IRP5 certificate  
7 Rental income – full details of income and expenditure including period let  
8 Medical contributions certificate and expenses – medical aid certificate and proof of “other expenses”  
9 Donations – S18A certificate reflecting proof of donation made  
10 Pension Fund or Retirement Annuity Fund contribution certificates – certificate reflecting proof of contribution paid  
11 Travelling allowance – make/model of motor vehicle, registration number, cost thereof and opening and closing km’s (kindly provide us with your compulsory logbook detailing split between business/ private mileage, destination, reason for travel).  Please detail any change in motor vehicles.  
12 Subsistence allowance – detail number of days spent away from home on business (local and international) and kindly include destination  
13 Changes to Assets and Liabilities including sale and purchase of fixed property.  

SARS requires you to ensure that all your personal details are correct (e.g. physical address, telephone numbers or e-mail address) as well as details of your banking account irrespective of whether you are entitled to a refund or not.

We wish to point out that your tax consultant cannot request documentation on your behalf from third parties (i.e. previous employers, insurance companies, banks, etc.) for confidentiality reasons.  It is therefore of the utmost importance that you provide them with all the necessary documentation and information to enable them to submit your tax return correctly and timeously.

Please note that SARS are confirming investment income information received from Financial Institutions with details recorded in the tax returns submitted.  Please ensure all investment income is supplied to them.

Please do not hesitate to contact us should you require any further information.

Director:  Jessica Southgate
Nwanda Financial Services (Pty) Ltd
tax@nwanda.co.za

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Nwanda Internal News (June 2016)

  1. Did you know this about a CA(SA) qualification :

A recent survey of the top 200 companies on the Johannesburg Stock Exchange (JSE) found that:

  • 74.8% of Chief Financial Officers (CFOs) of the JSE’s top 200 are CAs(SA)
  • 30.3% of Directorships are CAs(SA)
  • 28.1% of CEOs of the JSE top 40 are CAs(SA)
  • 98% of all RAAs (auditors registered with the IRBA) are CAs(SA)
  • JSE top 40 companies with CA(SA) CEOs financially outperform those not headed by CAs(SA)
  1. Awesome Reward goes to:
  • Merusha Yenketsamy – Excellent work performance under pressure
  • Rabia Sarwar – Completion of SAICA articles
  • Justine Li  – Fighting the brave SARS battle and securing a VAT refund for a client
  1. Farewell to staff members:

We bid farewell to the following staff members:

  • Nelisiwe Mahlangu
  • Jamie-Lee Pietens
  • Johan du Plessis
  • Brett Beetge

We wish them success in their future endeavours.