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A creature of statute: A decision about the Tax Court’s power to increase understatement penalties

Monday, 11 March 2019   (0 Comments)
Posted by: Authors: Louis Botha and Louis Kotze
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Authors: Louis Botha and Louis Kotze (Cliffe Dekker Hofmeyr)

In the recent judgment of Purlish Holdings (Proprietary) Limited v The Commissioner for the South African Revenue Service (76/18) [2019] ZASCA 04, the Supreme Court of Appeal (SCA) had to pronounce on the South African Revenue Service’s (SARS) entitlement to impose understatement penalties on Purlish Holdings (Proprietary) Limited (Taxpayer) and the quantum thereof.


During the 2011 to 2014 years of assessment, the Taxpayer paid provisional tax to SARS, following which it submitted nil tax returns (being tax returns that reflect that a taxpayer had neither received income nor incurred expenditure in the year of assessment), as a result of which a refund became due by SARS. Given the magnitude of the refund claimed by the Taxpayer, SARS initiated an audit into the Taxpayer’s corporate income tax (CIT) and value added tax (VAT) affairs.

During the audit process, it was discovered that the Taxpayer had concluded consultancy agreements in terms of which it had earned substantial income. Furthermore, these agreements stipulated that the fees payable to the Taxpayer were inclusive of VAT. Despite this, the Taxpayer submitted nil returns for CIT purposes for the 2011 to 2014 years of assessment, failed to register for VAT and failed to submit VAT returns for the relevant tax periods.

Following the audits, SARS imposed understatement penalties on the Taxpayer at a rate of 100% in respect of both CIT and VAT. Pursuant to an objection by the Taxpayer, the rates of the understatement penalties were reduced to 25% for CIT and 50% for VAT.

The Taxpayer appealed to the Tax Court, which was asked to determine whether SARS was justified in imposing the understatement penalties. However, the Tax Court went further and in terms of its powers in s129(3) of the TAA, increased the understatement penalties to 100% in respect of both CIT and VAT.

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