Some time ago we published an article titled: UNDERSTATEMENT PENALTIES: SARS’ BURDEN OF PROOF IS IRRELEVANT? – Unicus Tax Specialists SA in which we comment on the judgment of the tax court in LDC Taxpayer v CSARS (Case No: IT2488) (18 June 2021) (“the Tax Court Case”).
In that article, we questioned how on earth it is possible that SARS can admit in court that it cannot discharge its onus proof and still succeed with its case.
Let me refresh your memory on the relevant facts and legal issues involved in our questioning of that Tax Court Case in our first article:
- SARS imposed an understatement penalty of 25% on the taxpayer in consequence of a mistake made by the taxpayer with regard to its taxes.
- To have imposed a penalty of 25% means SARS must have been satisfied that the taxpayer’s mistake was caused by the fact that the taxpayer did not take reasonable care in completing its return.
- SARS carries the burden of proving that the taxpayer did not take reasonable care in completing its return in order for the penalty to be upheld by the court.
- Under cross-examination, the SARS employee responsible for imposing the penalty in the first place, a one Ms Marothodi (a risk profiler in SARS’ Specialist Audit Division) admitted that SARS cannot prove its own case.
- The tax court nevertheless upheld the penalty of 25%.
How is that result even remotely possible? If you are also in absolute bemusement you will be as relieved as we were to hear that it is not possible after all, thanks to the judgment of the full bench of the Western Cape High Court[1] who heard the taxpayer’s appeal against the judgment of the Tax Court.
The High Court ruled as follows in setting aside the judgment of the Tax court on the issue of the penalty:
“Once SARS had failed in its bid to discharge the onus of proving the [25%] penalty for which it had contended and which buttressed the case the taxpayer came to meet, that was the end the case”.
There is more to be said about this case. However, before doing so, we must first provide some context for those who did not read our first article:
- SARS imposed a penalty of 25% but admitted during trial it should have imposed a penalty of 50%.
- In doing so, SARS admitted it cannot prove its case on 25%.
- For technical reasons not relevant here (but explained in our first article) SARS could not increase the penalty but it also meant the 25% penalty cannot stand.[2]
Ms Marothodi, after having admitted on behalf of SARS that SARS cannot prove their case, shamelessly, according to the High Court, suggested to counsel for the taxpayer that the taxpayer should be happy that it got a lower penalty.
In this regard, the High Court had the following to say:[3]
“The evidence clearly demonstrates that the witness [Ms Marothodi from SARS’ Specialist Audit Division] manifestly did not understand the difference between the [circumstances under which SARS can impose a 25% penalty and the circumstances under which SARS can impose a 50% penalty].” [My insertion] (my emphasis).
Now one can ask: is it fair towards taxpayers to have a person in SARS who is responsible for the imposition of understatement penalties if, according to the High Court, that person didn’t understand what they were doing?
I’ll leave that question for each person to answer for themselves but to be fair, as one must be, I am sure that people who don’t understand what they are doing is the exception rather than the rule or that it was just this one person in this one isolated case where there was a lack of understanding. That is also possible (I guess).
One might think that this taxpayer got away from the penalty on a technicality or because SARS messed up in their imposition of the penalty, pleadings, testimony etc. That, however, is not the case. The taxpayer in this case also took professional advice in the form of an opinion to support the position it took and therefore, even if SARS were allowed to increase the penalty, the case for an increased penalty would almost certainly also have failed in any event on the basis that the understatement was the result of a bona fide inadvertent error (see our comments in TAX PENALTIES: MORE GOOD NEWS FOR TAXPAYERS – Unicus Tax Specialists SA ).
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[1] Lance Dickson Construction CC v Commissioner for the South African Revenue Service (A211/2021) [2023] ZAWCHC 12 (31 January 2023)
[2] To the legal team who represented the taxpayer in this case, I think “astutely” is good description (I am sure you’ll get the reference).
[3] At paragraph 30
