Taxpayer W v CSARS (IT 24622)

Facts

The taxpayer employed a firm of professional accountants to prepare and complete its tax return for the 2016 year of assessment. On the advice of the accountants, a decision was made to change the appellant’s property, plant and equipment accounting policy to bring it in line with the wear-and-tear rates of the South African Revenue Service (“SARS”). When the accountants completed the tax computation in preparation for the submission of the appellant’s tax return, they omitted to add back the wear-and-tear adjustment (i.e. wear-and-tear in the tax computation should have been lower) made in line with the change in accounting policy. The failure to add the wear-and-tear adjustments back resulted in it being omitted in the tax return completed by the accountant. Consequently, the assessed loss was overstated.  SARS subsequently conducted an audit of the taxpayer’s affairs for the tax years 2012 to 2016, and during this audit, the discrepancy was noted.  The accountants were informed that the wear-and-tear deduction reflected on the tax return was incorrectly calculated. SARS adjusted the assessed loss accordingly and considered this to constitute an understatement as envisaged in section 221 of the Tax Administration Act No 28 of 2011 (“TA Act”).    In applying the Table SARS categorised the taxpayer’s behavior as falling under item (ii), “Reasonable care not taken in completing return”.  SARS considered the taxpayer’s case to be a standard one, and imposed an understatement penalty percentage of 25 percent, amounting to R890,926.26.  The taxpayer submitted an objection to the imposition of the penalty and contended that there was no prejudice to SARS by reason of its failure to reflect the wear and tear component on the tax return.  The taxpayer also argued that the omission to do so was a bona fide inadvertent error as contemplated in section 222(1) of the TA Act.  SARS disallowed the objection and the taxpayer then lodged an appeal to the Tax Court on the same grounds.

Issues

Issue 1: Whether there has been any prejudice to SARS as a result of the incorrect statement in the appellant’s tax return;

Issue 2: If the taxpayer is found to have been prejudiced, whether the taxpayer should be excused from paying the penalty on the basis that the understatement was a result of the bona fide inadvertent error as contemplated in section 222(1) of the TA Act.

Finding

In terms of section 102(2) of the TA Act, the burden of proving the facts on which the imposition of an understatement penalty is based is upon the SARS. In its argument, the taxpayer submitted that there was no prejudice to SARS as the error was discovered during the audit process; that the error was corrected; and consequently, that it did not have any impact on SARS in its collection of taxes.  SARS, on the other hand, submitted that the prejudice suffered was that if it had allowed the assessed loss, it would have been offset against income that the taxpayer would have received in subsequent years. The prejudice on which SARS relied was prospective or potential, in the sense that it stood to suffer actual financial prejudice in the ensuing years.  SARS was able to prove, on the balance of probabilities, that the “error” might not have been picked up by the taxpayer, or its accountants in subsequent years, and would therefore have remained undetected.  Accordingly, the Court believed that SARS was prejudiced by the taxpayer’s actions. SARS also argued that it was prejudiced by having utilised its resources to conduct an audit in the taxpayer’s affairs. The court dismissed the last mentioned argument.

Regarding the second issue, it should be noted that a bona fide inadvertent error is not defined in the TA Act. The taxpayer submitted that the incorrect statement in the taxpayer’s 2016 tax return was nothing more than an innocent mistake, and accordingly, was an error envisaged in section 222(1) of the TA Act. The Court accepted that the incorrect statement was an honest mistake, but reminded all that the word “inadvertent” was included in section 222(1) of the TA Act for a reason.  The focus is accordingly on the standard of care taken by the taxpayer and the measures adopted by it to avoid errors in the submission of its tax return.  The Court accepted that taxpayers rely heavily on professional advice, such as advice from accountants, when tax returns are submitted, but that the duty to timeously file a correct tax return is that of the taxpayer, and that there can be no exception to this at all. The Court stated that in the normal course of events the taxpayer would have been required to sign off on the tax return prepared by the accountants, and a diligent taxpayer would have noticed that in the previous tax year, it had made a profit of R9million, while the current year recorded an assessed loss of R37million. The inescapable inference, in the absence of any evidence of the contrary, is that the taxpayer failed to scrutinise the tax return before submission, and therefore, the error was not inadvertent.

Find a copy of the court case here.

11/03/2022