Understatement
Penalties
in terms of the
Tax
Administration
Act
The enactment of the Tax Administration Act (‘the Act’) has changed
the old rules in terms of which the South African Revenue Service
was entitled to levy up to 200% additional tax where the taxpayer
made a default or omission in rendering his return.
Under the new rules, the Commissioner is required to reach a
conclusion as to the behaviour of the taxpayer and at the same time
determine whether the taxpayer should be treated as a standard case
or whether the taxpayer is a repeat offender, in which case the
penalty will be higher. Section 223 of the Act sets out a table which
prescribes the quantum of understatement penalties.
Standard
case
If obstructive,
or if it is a
‘repeat case’
Voluntary
disclosure
after
notification
of audit
Voluntary
disclosure
before
notification
of audit
Item
Behaviour
(i)
Substantial understatement
25%
50%
5%
0%
(ii)
Reasonable care not taken in completing return
50%
75%
25%
0%
(iii)
No reasonable grounds for tax position taken
75%
100%
35%
0%
(iv)
Gross negligence
100%
125%
50%
5%
(v)
Intentional tax evasion
150%
200%
75%
10%
Where taxpayers fail to make full and proper disclosure in their tax returns, they would in all likelihood, be regarded
as negligent. An understatement penalty will also be levied where SARS conducts an audit on a taxpayer’s affairs
and decides that certain deductions claimed do not qualify as such. The penalty will depend on the taxpayer’s
behaviour.
It is important to note that previously, the Commissioner had a discretion to remit additional tax where he was of the
opinion that there were grounds for the understatement. As a result of the introduction of the penalty table, which
makes penalties more onerous than in the past, the Commissioner no longer has a discretion in any circumstances
to remit the additional tax. It is therefore critical that taxpayers exercise reasonable care in completing their returns.
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Registered Auditors
T: +27 (0)11 994 4000
[email protected]
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