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USP's Bona Fide Inadvertent Error, Thistle and Coronation

USP’s, BONA FIDE INADVERTENT ERROR, THISTLE AND CORONATION

The grounds for SARS’ cross-appeal in the Constitutional Court (ConCourt) on Understatement Penalties (USP’s) in the Coronation case deserves a discussion (exactly because the ConCourt did not have to deal with it). The crux of it, at least as I read it, is this:

The words “bona fide inadvertent error” must be seen as consisting of two requirements:

  • Bona fides; and
  • Inadvertence. 

SARS, it seems, argued that absent disclosure of the alleged opinion on which Coronation relied in support of the Foreign Business Establishment exemption in section 9D (“the FBE exemption”), the taxpayer cannot be said to have proved its claim was made in good faith.

But even if Coronation could somehow show it acted in good faith, the very claim of the FBE exemption based on an opinion is not inadvertent. Stated differently, the claim of the exemption was done consciously and deliberately and there is nothing inadvertent about it. Sound familiar?

For some, it may sound familiar because it coincides with what SARS have, for years, stated in their Guide to Understatement Penalties on the meaning of the words “bona fide inadvertent error”  (see previous article where we explore this issue: Tax penalties good news for taxpayers and Tax Penalties more good news for Taxpayers.

For others, it will sound familiar because that is exactly the same argument advanced by SARS in the Thistle Trust case:[1]

SARS initially adopted the position that, in the light of the legal opinion, it should be concluded that the Thistle Trust had consciously and deliberately adopted the position it took when it elected to distribute the amounts of the capital gains as it did.”

Interestingly, though, in the Thistle Trust case, “counsel for SARS conceded, correctly, that the understatement by the Thistle Trust was a bona fide and inadvertent error as it had believed that s 25B was applicable to its case…”[2] (my underlining).

This begs the question: why did SARS pursue exactly the same argument in the Coronation matter that it abandoned in Thistle?

It is difficult to see any differences in the facts (insofar relevant to the USP) between the two cases that would warrant concession in Thistle and a cross appeal to the ConCourt in Coronation. It is true that in the Thistle case, the opinion was part of the court record, and in the Coronation, it was not. But so what, right?

SARS’s argument in Coronation (or at least, my reading thereof), insofar as it relates to the satisfaction of the apparent second requirement (i.e. “inadvertence”), assumes there is an opinion. So then, the actual existence or otherwise thereof cannot in and of itself be the cause for the difference in stance.

In Thistle, the taxpayer took advice that turned out to be wrong, yet in that case, it was conceded to be a bona fide inadvertent error.  In Coronation, the taxpayer, assuming it did take advice, took advice that, at least according to SARS and the SCA, was wrong but it is not a bona fide inadvertent error? So, we ask again: why?

When one looks at section 222 of the Tax Administration Act, 2011(“the TAA”) it states that SARS may not impose an understatement penalty if the understatement “results from a bona fide inadvertent error” (my underlining). The understatement (as defined in section 221 of the TAA) is, for example, an incorrect statement in the return.

The first question in determining whether a USP could not have been imposed under section 222 should be: What caused the incorrect statement in the return (i.e. the understatement)? What resulted in the understatement? The second question should then be: is the cause of the incorrect statement bona fide and inadvertent?

When viewed in this light, the failure to disclose the opinion could be the motivation behind appealing the USP decision in Coronation and conceding the USP issue in Thistle. Why? Because, when reading a tax opinion, it is not that difficult to determine if that opinion is (a) a properly expressed and motivated view of the law and of the issue in question or (b) nonsense or a view on something completely irrelevant to the issue at hand.

In the case of the former, reliance on that opinion can reasonably be expected to be bona fide. But can reliance thereon also be said to be inadvertent? Well, no, but only if you measure the inadvertence with reference to the ‘understatement’ itself – i.e. the incorrect statement in the return. There can be no gainsaying the fact that if you claim an exemption in a tax return because you had advice that said you can, then you made that claim deliberately. Indeed, then, there is nothing inadvertent about the act of claiming the exemption. But it is submitted, that analyses incorrectly places the emphasis on the inadvertence of the incorrect statement in the return (i.e. the understatement) as opposed to the cause of that incorrect statement (i.e. the understatement).

Section 222 does not provide for the USP not to be imposed if the understatement is a bona fide inadvertent error. It states that no USP may be imposed if the understatement results from the bona fide inadvertent error. 

When placing the emphasis on the cause of the understatement, then deliberately claiming the exemption can still be made inadvertently in context. This becomes clearer when looking at some synonyms for the word ‘inadvertent’: ‘accidental’; ‘unintentional’; ‘unplanned’. If a taxpayer relies on an opinion referred to in (a) above, then the cause of the incorrect statement is indeed accidental, ‘unintentional’, etc. 

In the case of an opinion referred to in (b) above, however, reliance on that opinion would probably not be in good faith and inadvertent, circumstances dependent. Questions that may drive answers on the taxpayer’s bona fides and inadvertence may include, for example, ought the taxpayer reasonably to have doubted the opinion’s accuracy and correctness or fullness thereof or indeed the author’s capability and skill?

Enter then the issue of onus of proof. It is trite that, in terms of section 102(2) of the TAA, SARS carries the onus of proving the facts on which they rely for imposing an understatement penalty. Does this mean that SARS must also prove that the understatement does not result from a bona fide inadvertent error, or must the taxpayer prove that the understatement results from a bona fide inadvertent error? I think the onus is on the taxpayer.

Absent disclosure of the opinion in the Coronation case, it may be difficult to see how the taxpayer could have discharged the onus, proving that the cause of the claim for the exemption was bona fide and inadvertent. Perhaps that is why SARS pursued a cross-appeal in Coronation and conceded in Thistle?

But that may be a bit of a stretch also. The reality is that the taxpayer in Coronation had qualified advisors who completed the relevant returns on which the exemption was claimed and had no reason to question their entitlement thereto (turned out, rightly so in the end). When asking, what I submit is the correct question to establishing whether the understatement was caused by a bona fide inadvertent error, you get to the same answer as did the SCA in Coronation – the claim was indeed the result of a bona fide inadvertent error, regardless of the fact that the opinion was not disclosed.

Perhaps SARS’ view was that the evidence in the Coronation case as to the advice received (other than the absent opinion) was a bit thin to discharge the taxpayer’s onus of proof? That could perhaps be the reason.

From my reading of SARS’ grounds though in the cross appeal in the Coronation case, it was not a matter of whether the emphasis should be on the cause of the understatement as opposed to the understatement itself and whether the evidence as to the “other advise” was too thin. The argument was simply that if a taxpayer takes advice that turns out to be wrong then the understatement can never be inadvertent. That appears to be a direct contradiction of the concession in Thistle. 

This makes me wonder: Was the concession in Thistle simply a “slip of the pen”? If that’s the case, it will be extremely ironic. Perhaps it was a strategic decision to concede, but nobody expected the court to condone the concession in its judgment. 

Whatever the reason though for the cross-appeal in Coronation, suffice it to state that the judgment in Thistle on bona fide inadvertent error is arguably the highest authority on the meaning of the words “bona fide inadvertent error” and unlike the judgment in ITC1890 (79 SATC 62), the judgment in Thistle does set a precedent. Will we now see a shift in practice on what seems to be SARS’ interpretation of bona fide inadvertent, or will this “slip of a pen” argument persist?


[1] CSARS v The Thistle Trust (516/2021) [2022] ZASCA 153; 2023 (2) SA 120 (SCA); 85 SATC 347 (7 November 2022) at paragraph 29.

[2] Thistle, at paragraph 29.

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