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FAQ - 29 July 2015

Wednesday, 29 July 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Can you apply for VDP relief for the provisional tax "underestimation” penalty?

Q: A 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 returns.

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:

Is a provisional tax return a "return” as envisaged by the definition of an "understatement” in section 221 of the TAA Act?

Although SARS 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)?

A: It may be worth your while to obtain a detailed tax opinion on this issue, since this is just guidance.

Firstly, the underestimation penalty you refer to is a Chapter 15 TAA percentage-based penalty (para 20 of the 4th Schedule to the Income Tax Act).

However, an understatement penalty is a Chapter 16 TAA penalty.

Section 227 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’

A ‘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.

One could 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. 

The next question is whether there is the potential imposition of an understatement penalty as a result of the default.

An ‘understatement’ is defined in s221 as "any prejudice to SARS or the fiscus as a result of—an incorrect statement in a return”

As you 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 states:

"Every provisional taxpayer…shall…submit to the Commissioner…a return of an estimate of the total taxable income…”

So we have a return.

The next 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.

The 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 15 penalty.

This seems to present an anomaly in the law, which should be clarified.

Again, we 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.



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