We recently published an article titled: “Tax Penalties: Good News for Taxpayers”
that centered around the judgment in CSARS v The Thistle Trust (516/2021) [2022] ZASCA 153 (7 November 2022) (“the Thistle Trust case”). In the Thistle Trust case, the court held that the taxpayer’s reliance on a professional opinion exempted, by manner of speaking, the taxpayer from a particular type of tax penalty called an Understatement Penalty. A subsequent judgment handed down by the SCA three months later in what is now already fairly well known as “the Coronation Case”[1] brings more good news for taxpayers insofar as these penalties are concerned.
The Coronation Case
The Coronation Case centered around whether the taxpayer could rely on a certain exemption to an ant-avoidance mechanism. At its basic principal level, this mechanism seeks to prevent taxpayers from using offshore companies to get around the worldwide basis of taxation for SA tax residents. The court ultimately held that the taxpayer was not entitled to rely on the exemption.
The court having found the taxpayer acted incorrectly by relying on the exemption, proceeded to the next issue to be decided: whether the understatement penalty has been correctly imposed by SARS.
The court confirms in the judgment that all the jurisdictional requirements for the imposition of the particular type of understatement penalty have been satisfied[2]. Technically then, SARS discharged its onus of proving the facts on which it relied for the imposition of the penalty as is required in terms of section 102(2) of the Tax Administration Act, 2011. At that point, the onus shifted to the taxpayer to prove either one of two things if it wished to get around the penalty:
- That their incorrect reliance on the exemption was the result of a bona fide inadvertent error (hereinafter referred to as “USP exception one”); or
- That is incorrect reliance on the exemption was based on a professional opinion from a registered tax practitioner that was issued before the return was due and which confirms the taxpayer’s position is more likely than not to be upheld by a court (hereinafter referred to as “USP exception two)”.
The taxpayer argued that it relied on a professional opinion but did not make the content of the opinion available to SARS. The opinion was referred to during the testimony of an individual during trial.
It is submitted that absent disclosure of the content of the opinion, the taxpayer cannot be said to have discharged the onus of proving USP exception two applies. That exception necessitates the disclosure of the opinion – how else would you know if the thing concludes in favor of the taxpayer as it is supposed to in order for that exception to apply?[3]
So then, given the court did ultimately rule in favor of the taxpayer insofar as the understatement penalty is concerned, it follows that the taxpayer successfully relied on USP exception one.
The meaning of the word bona fide inadvertent error is not quite clear. As stated in our previous article though, the judgment in the Thistle Trust case suggested a meaning of these words that is very similar to the meaning ascribed to them by the tax court in ITC1890[4], i.e:
“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 previously strongly denied[5] that this is the meaning of the words “bona fide inadvertent error”. Their concession in the Thistle Trust case though may indicate a complete departure from that stance. In the Thistle Trust case, it seems SARS was satisfied that, because the taxpayer relied on an opinion supporting their position, the mistake, in that case, was indeed a “bona fide inadvertent error.”
It seems a similar approach to the interpretation of the term bona fide inadvertent was followed by SARS in their arguments in the Coronation Case (granted, they would really have little other choice).
This time though, SARS argued effectively (or at least so it seems to me) that without having had sight of the opinion, it cannot be concluded that the opinion actually supported the taxpayer’s disclosures in its tax returns. For all they know, the opinion could in fact contradict the position taken in the tax return. If indeed the opinion does not support the taxpayer’s claim that it was entitled to the anti-avoidance exemption, then claiming the exemption in the return would actually be in bad faith, let alone be a bona fide inadvertent error. This is exactly what SARS asked the court to do – to infer, from the taxpayer’s refusal to make the opinion available, that the taxpayer acted in bad faith and therefore cannot rely on USP exception one.
In SARS’ defense, that does seem reasonable given it is the taxpayer, and not SARS, who carries the burden of proving that it made a bona fide inadvertent error. But, it turned out that this tactic by SARS was not strong enough to make it improbable that the taxpayer acted in good faith. Probably because, as the court held in the Coronation Case, that, in addition to relying on an opinion, the taxpayer also relied on professional advice for the completion of their tax returns, had external auditors and there was some form of testimony on the opinion.
So then, taxpayers now have two judgments from the SCA that suggest that:
- the term bona fide inadvertent error means something much closer to “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” than to what SARS elsewhere purports those words to mean; and
- Making use of tax professionals to assist in completing returns and to seek professional tax advice may be all taxpayers need to avoid an understatement penalty (regardless of the type of understatement penalty).
[1] Commissioner for the South African Revenue Service v Coronation Investment Management SA (Pty) Ltd (1269/2021) [2023] ZASCA 10 (07 February 2023).
[2] At paragraph 57 of the judgment
[3] Unless off course that was the testimony of the one individual during trial.
[4] 79 SATC 62, at par 45.
[5] As per their Guide to Understatement Penalties where they state with reference 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.” And as also originally argued by SARS in the Thistle Trust case before they conceded it was a bona fide inadvertent error.
