South African Revenue Services (SARS) may raise understatement penalties if prejudice has been caused to them or the fiscus. Penalties can be imposed at 25% or 50% in the case of a ‘substantial understatement’. There are however circumstances when, notwithstanding that the taxpayer has erred, SARS will remit the penalty if the taxpayer is in possession of an opinion by a registered tax practitioner.

An understatement will arise when prejudice is caused to SARS as a result of –

• a default in rendering a return;
• an omission from a return;
• an incorrect statement in a return; or
• if no return is required, the failure to pay the correct amount of tax.

If there has been an understatement, the taxpayer will in addition to the tax payable for the relevant tax period, pay an understatement penalty on the tax shortfall.

When there has been a ‘substantial understatement’ the penalty will be 25% in a standard case and 50% if the taxpayer has been obstructive or it is a repeat case. A ‘substantial understatement’ occurs when the prejudice to SARS for the relevant tax period exceeds 5% of the amount of tax properly chargeable or refundable, or R1 million.

SARS must however remit the penalty for a ‘substantial understatement’ if the taxpayer makes a full disclosure of the arrangement by no later than the date that the relevant return was due, and if the taxpayer is in possession of an opinion by a registered tax practitioner. The opinion from the tax practitioner must –

• be issued by no later than the date that the relevant return was due;
• be based upon the full disclosure of the specific facts and circumstances of the arrangement; and
• Confirm that the taxpayer’s position is more likely than not to be upheld if the matter proceeds to court.

For example, a taxpayer fails to include a R5 million receipt in his income based upon an opinion issued by a tax practitioner stating that the receipt was not revenue in nature but capital. SARS carries out an audit on the taxpayer and disputes the exclusion and issues an assessment for the income. Ordinarily the taxpayer would receive at least a 25% penalty, but because he had an opinion from a registered tax practitioner before the date of the return confirming that the receipt was capital in nature, the penalty must be remitted.

Written by Graeme Palmer, Senior Associate in the Commercial Department at Garlicke & Bousfield Inc.

NOTE: This information should not be regarded as legal advice and is merely provided for information purposes on various aspects of tax law.