Sars and taxpayers grapple with ‘bona fide inadvertent error’ clause

In terms of the Tax Administration Act, the South African Revenue Service (Sars) must impose a penalty when there is an understatement that prejudices the fiscus – unless the understatement was the result of a “bona fide inadvertent error”.

However, this little string of words remains a headache for taxpayers and the legal profession.

The exact interpretation of the words that allow for the remittance of the understatement penalty, which can run into millions of rands, remains murky.

Case law

Two judgments in the Supreme Court of Appeal (SCA) and one before the Constitutional Court have failed to shed light on the correct interpretation of when an error is considered “bona fide” and “inadvertent”.

Although the SCA found in favour of Sars in the Thistle Trust and Coronation Investment Management SA (Cimsa) cases, it set aside the understatement penalties imposed on the taxpayers. Cimsa successfully appealed the SCA judgment to the Constitutional Court.

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The Thistle Trust has also approached the Constitutional Court to appeal the SCA judgment.

In both cases Sars cross-appealed the SCA’s decision to set aside the understatement penalties.

In the Thistle case the understatement penalty was R1.45 million. The Constitutional Court has not made a finding on its appeal and Sars’s cross-appeal.

Tax opinion

In the Thistle case the trust relied on a tax opinion from a prominent tax attorney relating to the capital gains implications on trust distributions. Sars did not agree with the tax position and raised additional taxes. It also levied an understatement penalty at the level of 50%, claiming Thistle had no reasonable grounds for its tax position.

In papers before the Constitutional Court, Sars argues that the SCA erred in setting aside the understatement penalty. It was done on the basis of a “purported concession” by Sars that it was not entitled to levy the understatement penalty.

“To the contrary, Sars persists with its case … that it was entitled to impose an understatement penalty as there was no inadvertent error that caused the trust to declare the capital gains.”

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Sars submits that the fact that Thistle relied on the opinion of late Advocate Meyerowitz SC meant that it “consciously and deliberately” adopted a tax position. Its conduct did not constitute an inadvertent error or an innocent misstatement.

Reasonable grounds

The Thistle Trust says in its opposing affidavit that Sars failed to advance grounds justifying the allegations that it had had no reasonable ground for the tax position it had taken.

“An opinion of senior counsel quite obviously constitutes reasonable grounds for taking a particular position,” it says.

Thistle argues that acting in accordance with advice from an eminent senior counsel specialising in tax law and a well-known author “is hardly characteristic of unreasonable behaviour”.

Thistle acted in the belief that the capital gains were taxable in the hands of its resident beneficiaries and not in its own hands because of the “conduit-pipe” principle.

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“Its belief was bona fide in that it was based on the written opinion of the late Adv Meyerowitz SC to another trust in the Zenprop group with which Thistle was associated.”

Thistle argues that if the opinion was wrong and Thistle erred, the error was a bona fide inadvertent error, and no understatement penalty should have been imposed by Sars.

Tax dispute specialist Nico Theron, founder of Unicus Tax Specialists SA, says without clarity from the apex court the phrase “bona fide inadvertent error” will always be problematic.

Different interpretations

The SCA decisions basically state that if a taxpayer acted on an opinion or tax advice and the opinion or advice was wrong, there can be no understatement penalty because the error was not in bad faith or deliberate. This is clearly not how Sars interprets the act.

It appears that Sars expects a lot from taxpayers.

In its cross-appeal Sars argues that taxpayers cannot “simply accept” advice without satisfying themselves with the reasonableness of such advice.

To do so is to adopt an unreasonable tax position, it says.

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Theron says sometimes tax experts have to “scratch their heads” to understand the correct interpretation of complex legislation, but Sars expects taxpayers to know what is right and reasonable.

Sars is asking the Constitutional Court to provide guidance on the extent to which a taxpayer can rely on advice in order to “avoid liability” from understatement penalties.

“This will provide guidance to the legal profession at large given the uncertainty which currently prevails in relation to these issues,” Sars states in its papers before the Constitutional Court.

Theron agrees that the “string of words” – bona fide inadvertent error – is confusing, and without clarity, uncertainty will prevail.

This article was republished from Moneyweb. Read the original here