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Kieswetter makes no empty promises – No one is above the law!


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Kieswetter makes no empty promises – No one is above the law!

Tax Consulting SA

29th May 2023


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On 24 May 2023, the South African Revenue Service (SARS) released Interpretation Note 129 (IN129), which provides clarity on the interpretation and application of the phrase “maximum tax rate applicable to the taxpayer” in section 222(5) of the Tax Administration Act 28 of 2011 (“TAA”). This is specific to when the applicable tax rate to the shortfall of payment of tax, by a taxpayer, as a result from an understatement of their tax liability is applied under subsections (3) and (4).  

SARS stated in IN129 that the main purpose of the understatement penalty regime, which aims at ensuring consistent and equal treatment of taxpayers in comparable circumstances, is to deter behaviours that result in non-compliant reporting. 


An overview of the applicable law

Section 222(1) of the TAA imposes an understatement penalty determined under subsection (2) in the event of an understatement by a taxpayer, which must be paid in addition to the tax payable for the tax period, unless the understatement is as a result of a bona fide inadvertent error. 


An “understatement” is defined in section 221 and means; any prejudice to SARS or the fiscus as a result of – 

a)      failure to submit a return required under a tax Act or by the Commissioner; 

b)     an omission from a return; 

c)      an incorrect statement in a return; 

d)     if no return is required, the failure to pay the correct amount of “tax”; or

e)     an “impermissible avoidance arrangement”.

In accordance with section 222(2) of the TAA, the understatement penalty is determined by applying the highest applicable understatement penalty percentage to each shortfall determined under subsections (3) and (4). Each “shortfall” is determined under section 222(3) as the sum of paragraphs (a), (b) and (c) depending on the specific facts of the taxpayer, for the respective tax period, to determine the shortfall in tax. 

Section 222(5) of the TAA states that the “maximum tax rate applicable to the taxpayer” must be applied to determine the shortfall in tax, and is determined by ignoring an assessed loss, or any other benefit brought forward from a preceding tax period to the tax period in which the understatement occurred.

Certain taxpayers are taxed either at a flat rate or a progressive rate of tax. The tax rate applicable to taxpayers subject to a flat rate of tax represents the “maximum rate applicable to that taxpayer” for purposes of section 222(5). 

For taxpayers that are taxed at a progressive rate of tax, the maximum tax rate applicable to the shortfall envisaged under section 222(3)(c) is the marginal tax rate applicable to the taxable income or taxable turnover that is established by, ignoring the assessed losses or any other benefit brought forward from a preceding tax period to the tax period in question. 

The facts and circumstances of each taxpayer must be considered to determine what tax rate will apply when determining the “maximum tax rate” for purposes of determining the shortfall in tax under section 222(3)(c).

What this means for taxpayers

Only two weeks ago did we see SARS issue a statement informing the public that they are cracking down on VAT fraud. In March 2023, SARS even took the exceptional and unprecedented step of providing clarity in respect of the tax status of President Cyril Ramaphosa, stating that through staff and advisors, President Cyril Ramaphosa has always cooperated fully with SARS during audits and there has been no interference or resistance from Ramaphosa, his staff, or any other party.

SARS Commissioner Edward Kieswetter, confirmed that: “At no stage was I approached by President Ramaphosa, or anyone on his behalf, with any request related to his personal and/or the business entities in question.”

The Commissioner further stated: “In taking this exceptional step to disclose the tax status of the President, with his written consent, SARS would also encourage other high profile political office bearers and leaders in society to consider taking this proactive step as part of their commitment to transparency. This would go a long way towards building confidence in our country’s institutions.” 

Taxpayers – heed the warning!

It is clear from the above that the Commissioner of SARS certainly does not make empty promises or idle threats, as he has, on numerous occasions, indicated that SARS are going after non-compliant taxpayers. We are now seeing this come to fruition, and regardless of one’s station in society, SARS will audit you and where applicable, penalties will be levied at the applicable rate, of which the maximum is 200% in certain circumstances. 

Prior statements made by Commissioner Kieswetter, and further, clearly evidences that even the State President goes through audits and bears the onus of proving properly declared income. It stands to reason that SARS are now, more than ever, pursuing non-compliant taxpayers regardless of their status, without fear, favour or prejudice.  INR129 further provides clarity on how penalties are to be imposed, with in-depth calculations and examples, as a true indication of SARS’ intention to make non-compliance difficult and costly. 

Light at the end of the tunnel

Should taxpayers have failed to declare any income, SARS may impose penalties up to 200% of the capital tax liability. In order to avoid this, errant taxpayers must, before SARS approaches them, declare previously undeclared income through the ongoing Voluntary Disclosure Programme (“VDP”), which is regulated by the Tax Administration Act. 

A major benefit of relief sought through the VDP, is that it encompasses all tax types (income tax, employees’ taxes such as Pay-as-You-Earn, Unemployment Insurance Fund contributions and the Skills Development Levy, as well as Value-Added-Tax). The only taxes that are not covered are customs and excise duties.

When a taxpayer is granted relief under the VDP, penalties are waived, and the applicant receives amnesty from criminal prosecution from the Commissioner of SARS. The taxpayer will only be liable for the outstanding tax liability as well as the interest levied thereon. It is therefore advised that errant taxpayers should utilise the ongoing VDP in order to become fully tax compliant and thus avoid SARS’ wrath. 

Written by Andre Daniels, Head of Tax Controversy & Dispute Resolution at Tax Consulting SA



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