FAQ - 29 July 2015
29 July 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
apply for VDP relief for the provisional tax "underestimation” penalty?
client of ours is asking whether they can apply for VDP for an underestimation
on their second provisional tax return. Subsequent to their submission of the
return, certain things were ascertained, having the result of the taxable
income being higher than the estimate at the time of the submission of the
second provisional tax return. Obviously, once the income tax return is
submitted, it will result in underestimation of provisional tax penalties, as
well as understatement penalties.
SARS VDP has
specifically said that they will not accept VDP applications on provisional tax
Our queries in
this regard are therefore:
Does the submission of a provisional tax
return meet the requirements for a valid disclosure in terms of section 227 of
the Tax Administration Act No. 28 of 2011 ("the TAA Act”) for VDP purposes?;
Part of there being a valid disclosure (in
terms of section 227 (d) of the TAA Act) involves there being the potential
imposition of an understatement penalty in respect of the default. In order for
this to be the case, there needs to be an "understatement” as defined in
section 221 of the TAA Act (which obviously requires a provisional tax return
to be a "return” as defined) and the potential for an understatement penalty to
be levied in terms of section 222 of the TAA Act. Our questions are therefore:
provisional tax return a "return” as envisaged by the definition of an
"understatement” in section 221 of the TAA Act?
may not levy understatement penalties on the under-declaration of provisional
tax, is there a potential for its imposition thereon (i.e. is there a
"shortfall” as envisaged by section 222 (3) of the TAA Act)?
may be worth your while to obtain a detailed tax opinion on this issue, since
this is just guidance.
underestimation penalty you refer to is a Chapter 15 TAA percentage-based
penalty (para 20 of the 4th Schedule to the Income Tax Act).
understatement penalty is a Chapter 16 TAA penalty.
gives the requirements for a valid voluntary disclosure. The relevant
requirements for our discussion are that the voluntary disclosure must:
involve a ‘default’ which has not
previously been disclosed by the applicant or a person referred to in section
226 (3); and
involve the potential imposition of an
understatement penalty in respect of the ‘default’
‘default’ for VDP purposes is defined in section 225 as the submission
of inaccurate or incomplete information to SARS, or the failure to submit
information or the adoption of a ‘tax position’, where such submission,
non-submission, or adoption resulted in—
the taxpayer not being assessed for the
correct amount of tax;
the correct amount of tax not being
paid by the taxpayer; or
an incorrect refund being made by SARS.
therefore argue that as a result of inaccurate information being submitted to
SARS (in the IRP6), the correct amount of (provisional) tax wasn’t paid.
question is whether there is the potential imposition of an understatement
penalty as a result of the default.
‘understatement’ is defined in s221 as "any prejudice to SARS or the fiscus as
a result of—an incorrect statement in a return”
correctly noted, the key issue here is whether an IRP6 is a ‘return’ as defined
in the TAA.
A ‘return’ is
defined in section 1 of the TAA as "a form, declaration, document or other
manner of submitting information to SARS that incorporates a self-assessment,
is a basis on which an assessment is to be made by SARS or incorporates
relevant material required under section 25, 26 or 27 or a provision
under a tax Act requiring the submission of a return.”
Our opinion is
that an IRP6 makes it into this definition by virtue of the emboldened and
underlined part above. Para 19(1)(a) of the 4th Schedule to the Income Tax Act
provisional taxpayer…shall…submit to the Commissioner…a return of an
estimate of the total taxable income…”
So we have a
question is whether there was prejudice to the fiscus as a result of the
incorrect statement in the IRP6 (i.e. an understatement).
I would argue
that there is prejudice to the fiscus, because the correct amount of tax was
not paid when it was due, thus (temporarily) prejudicing the fiscus.
understatement puts the taxpayer squarely into s222 of the TAA:
"In the event
of an ‘understatement’ by a taxpayer, the taxpayer must pay, in addition to the
‘tax’ payable for the relevant tax period, the understatement penalty
determined under subsection (2) unless the ‘understatement’ results from a bona
fide inadvertent error.”
So it seems
that the provisional tax penalty could be classified as both a chapter 15 and
This seems to
present an anomaly in the law, which should be clarified.
suggest you approach a VDP specialist regarding this.
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.