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bona fide inadvertent error - GOOD NEWS FOR TAXPAYERS

TAX PENALTIES: GOOD NEWS FOR TAXPAYERS

 

The Tax Administration Act, 28 of 2011 (“the TAA”) imposes an obligation on SARS to impose a penalty called an “understatement penalty” in the event that a taxpayer makes an understatement (for example by making an incorrect statement in a tax return).  However, when, for example, an incorrect statement in a return is caused by something called a “bona fide inadvertent error” then the TAA provides that SARS may not impose the understatement penalty. The exact meaning of the term “bona fide inadvertent error” is not entirely clear but a recent judgment from the SCA[1] does seem to provide some guidance.

 

 

The facts of the case, insofar relevant here, is that the taxpayer, a trust, had obtained a legal opinion on the tax treatment of certain receipts and accruals it received as the beneficiary of another trust whose opinion hinged on section 25B of the Income Tax Act, 58 of 1962. The views expressed in the tax opinion were ultimately not upheld by the SCA resulting in the taxpayer having made an understatement. The next issue that had to be determined by the court was whether the understatement penalty SARS imposed was correctly imposed.

 

 

Initially, SARS defended its imposition of the penalty on the basis that the understatement made by the taxpayer in the return was made deliberately and that therefore the understatement could not have been caused by a bona fide inadvertent error. This approach to the meaning of the term bona fide inadvertent error seems to be in line with the view expressed by SARS in their Guide to Understatement Penalties. The crux of this view, as we understand it, is as follows:

 

 

    •  An error in the true sense of the word cannot be made in good or bad faith. Therefore, the words “bona fide” must be interpreted with reference to the inadvertent nature of the error, and not with reference to the error itself.

 

 

The taxpayer in the SCA case deliberately made an incorrect statement in a return because the taxpayer took advice and planned or intended to make disclosures in line with the views as expressed in the legal opinion, or so the argument for SARS went initially. There was nothing inadvertent about the disclosure. Whilst indeed such deliberate understatement would have been made in good faith (in light of the legal opinion received), this should, on our understanding of SARS’ interpretation of the term “bona fide inadvertent error”, be irrelevant to establishing whether understatement indeed results from a bona fide inadvertent error.

 

 

Counsel for SARS in the SCA case though conceded (correctly, according to the SCA) that the penalty could not have been imposed because the understatement was in fact the result of a bona fide inadvertent error. The reason for this, according to the SCA is “… that the understatement by … [the taxpayer]  was a bona fide and inadvertent error as it had believed that s 25B was applicable to its case. Though the … [the taxpayer] erred, it did so in good faith and acted unintentionally.[My insertion].

 

 

This meaning of the term “bona fide inadvertent error” seems to align with what the tax court in ITC1890 [2] held the meaning of these words to be, to wit:

 

 

    • an innocent misstatement by a taxpayer on his or her return, resulting in an understatement, while acting in good faith and without the intention to deceive

 

 

SARS, however, in their USP guide, at footnote 70, state the following with regards to the judgment in ITC1890:

 

 

“SARS disagrees with and will not follow the application of the law in this judgement which it is entitled to do as tax court judgements, although often instructive, have no binding effect.”

 

 

Has SARS then, by conceding in the SCA,  made a complete U-turn from what their previous position was, not only in this case but as also stated in the USP guide? Perhaps and maybe SARS will update their guide to make clear what their position actually is. Perhaps they have not made a complete U-turn. Perhaps their position remains the same but in this case, the legal opinion obtained (which is the result of the incorrect statement in the return) was inadvertently incorrect in the sense that the opinion did not intentionally incorrectly set out the law and that therefore the understatement was indeed the result of a bona fide inadvertent error. Perhaps SARS’ concession was not actually that the understatement was caused by a bona fide inadvertent error but rather because the taxpayer, having obtained professional advice, was not guilty of any of the behaviours in the understatement penalty percentage table.[3]

 

 

Whatever the reason for the concession might have been and whether SARS has changed its mind or not remains to be seen. The good news for taxpayers though is that the SCA has at least provided some guidance which strongly suggests that a  bona fide inadvertent error is in fact an error made in good faith and made unintentionally and that taxpayers can possibly avoid these penalties if professional advice is obtained.

 

 

 

[1] CSARS v The Thistle Trust (516/2021) [2022] ZASCA 153 (7 November 2022)

 

 

[2] 79 SATC 62, at par 45.

 

 

[3] And in the event, it was a “substantial understatement” it would fall to be remitted in terms of section 223(3) of the TAA. That is not, however, how the judgment from the SCA reads.

 

Every effort was made to ensure accurate reflection of the law and the tax principles discussed in our articles or as set out on our website at the time of publishing on the website. Tax law develops all the time and it is therefore recommended that views expressed in the past be vented by users for current applicability and accuracy.  Comments made and views expressed in our articles and on our website does not constitute advice to any person or company. Unicus Tax Specialists SA will not be liable for any loss or damage of whatever nature or form caused due to reliance on this article.

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