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The Problem With SARS’ New Behavioural Penalties

20 December 2012   (0 Comments)
Posted by: Author: Somaya Khaki
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The Problem With SARS’ New Behavioural Penalties

Taxpayers could be in for a shock

Much has been written about the new provisions relating to penalties in the Tax Administration Act (TAA), which became effective to all types of taxpayers on October 1 2012. In essence, penalties are now split into three categories:
•The administrative noncompliance penalty, which targets administrative noncompliance;
•The understatement penalty, which targets serious non compliance and tax evasion; and
•Criminal offences, which targets general offences across taxes.

However, it is with the understatement penalty where the South African Institute of Chartered Accountants (SAICA) foresees major problems. It replaces the discretionary 200% additional tax which previously applied. The new penalty is being charged in terms of a table (see Page 4), but is dependent on a taxpayer's behaviour and what SARS refers to as "other objective criteria”.

SARS has set five different types of behaviour in the new penalty regime. These include:
•substantial understatement;
•reasonable care not taken in completing the return;
•no reasonable grounds for the tax position taken;
•gross negligence; and
•intentional tax evasion.

The problem with the understatement penalty is that only the term ‘substantial understatement’ has been defined in the TAA, and that is quite specific.

For example, if there has been an under payment of tax by R1million or more, then that would qualify as a ‘substantial understatement’ and then the penalties would depend on other criteria such as, if it is a standard case it would be 25%; if it is an obstructive or repeat case the penalty would be 50%.

If the substantial understatement came to SARS’ attention because of a voluntary disclosure by the taxpayer, then the penalties are significantly reduced. Taxpayers would be able to identify quite clearly whether something is substantially understated or not—and so would SARS— but the other behaviours have not been defined. There is some guidance in SARS’ Short Guide to the Tax Administration Act, but those types of behaviour or penalties raised in respect of those behaviours are still very subjective.

It depends on the person who is assessing the return. If they decide reasonable care was not taken and they raise a penalty assessment on that basis, the SARS official who has raised the assessment on that basis will then have to prove or justify their reasons for categorising the taxpayer in terms of that behaviour. Since this is something new for SARS and taxpayers, there is still a lot of room for interpretation and understanding what each behaviour means.

As the behaviour moves away from substantial understatement, which is defined, the penalty goes up from 25% to 150% for intentional tax evasion, for example.

Furthermore, the TAA has specific remittance rules in respect of substantial understatement, but doesn't have those rules for the other behaviours. It is left to be seen what Sections or remedies will be available to taxpayers if they are charged a penalty in terms of any behaviour other than substantial understatement, and there doesn't seem to be any clarity or guidance at the moment in respect of those other behaviours. This would give raise to quite a lot of problems as it is still left open to interpretation.

The one source of relief may be that the onus is on SARS to prove their basis of putting a taxpayer into a specific behaviour category, and if a taxpayer finds themselves in the position where they have been told they haven't taken reasonable care, for example, they will then be able to request reasons from SARS as to why they have been categorised as such.

Hopefully SARS provides more clarity soon.

Source: By Somaya Khaki (Taxbreaks)



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