Authors: Joon Chong (Partner) and Arlia Abdul Alli (Candidate Attorney), Webber Wentzel
In the case of Mr A and XYZ CC v The Commissioner of the South African Revenue Service the Tax Court had to determine whether the conduct of the appellants was properly classified by SARS as 'grossly negligent' for purposes of imposing understatement penalties.
The first appellant failed to submit income tax returns for the 2007 to 2010 tax years and value-added tax (VAT) returns for the 4/2006 to period 2/2010 VAT periods. The second appellant failed to submit income tax returns for the 2011 and 2012 tax years and VAT returns for the 9/2010 to 1/2013 VAT periods. These circumstances led to audits in the tax affairs of both taxpayers. The assessments which resulted from the audit included substantial penalties which were challenged in the appeal.
During the course of the appeal, the Commissioner as the respondent abandoned the contention that the appeal concerned any “repeat cases”, and argued for penalties of 100% for gross negligence under the “standard case” column of the table in section 223 of the Tax Administration Act 28 of 2011, which the court agreed to be the correct approach.
The court dealt with both taxpayers' arguments under four main headings.
Did the Commissioner prove that there was gross negligence?
The appellants argued that the administrative capacity of XYZ was not up to standard; as a result of which XYZ could not render returns, being uncertain as to whether they would be correct (or accurate). Therefore, their administrative incapacity justified a lesser form of blameworthiness as their conduct did not constitute 'gross negligence' but rather a failure to take reasonable care, which in terms of section 223 results in a penalty of 25%.
The court rejected this argument stating that it must be found as a fact that no shortfall in their administrative capacity caused or justified the failures of the two appellants to submit income tax or VAT returns as no evidence was led to counter the Commissioner's prima facie case that the returns were intentionally withheld. The court also held that no shortfall in administrative capacity caused or justified the failures to submit income tax or VAT returns.
The court also referred to paragraph 7 of the judgment of Scott JA in MV Stella Tingas: Transnet Limited t/a Portnet v Owners of the MV Stella Tingas and Another 2003 (2) SA 473 (SCA) where the learned judge discussed the concept of gross negligence, stating that although falling short of dolus eventualis, it must involve a departure from the standard of the reasonable person to such an extent that it may properly be categorised as extreme. The court then referred to a previous application made by the first appellant for a tax amnesty in the 2006 year of assessment as proof that he undoubtedly knew what his obligations were with regard to the submission of VAT and income tax returns and therefore concluded that the failures of the two appellants to render their returns was properly classified as grossly negligent.
What does "a default in rendering a return" mean?
The term "understatement" is defined in section 221 as any prejudice to SARS or the fiscus as a result of -
(a) a default in rendering a return;
(b) an omission from a return;
(c) an incorrect statement in a return; or
(d) if no return is required, the failure to pay the correct amount of tax.
The appellants argued that the failure to render a return when it is required by law to be done is not “default in rendering a return”. Accordingly, no understatement penalties could be charged.
The court saw no merit in this proposition stating that the language of, and the intention behind, the definition of "understatement" is clear. If you omit something from the return (paragraph (b)), or make a false statement in it (paragraph (c)), there is no doubt that you have made an “understatement” (assuming that the requirement of prejudice is satisfied). No other default with respect to a return appears to be possible except that embodied in the failure to submit the return at all. A default in rendering a return (paragraph (a)) must be a failure to render one when it is due.
The court further considered the language of, and the intention behind, the definition of “default in rendering a return" with reference to section 223(2)(a) read with section 95 of the TAA and concluded that there is no room to misinterpret the term as not covering a failure to submit a return which is due. Section 95(1) of the TAA empowers SARS to make assessments based in whole or in part on an estimate, not only when a taxpayer has submitted a return or information that is incorrect or inadequate, but when the taxpayer “fails to submit a return as required”.
Is there a "shortfall" when a return is withheld?
The next argument raised by the appellants was that SARS never “accepts” a failure to submit a return, and for that reason there cannot be a shortfall as defined, with the result that no understatement penalty need be paid for a default in rendering a return. The court held that the appellants have identified apparent anomalies in the wording employed in both subsections (2) and (3) of section 222 of the TAA.
The proper approach to interpretation when anomalies are apparent is set out as follows in Panamo Properties (Pty) Limited and Another v Nel and Others NNO 2015 (5) SA 63 (SCA) at paragraph 27 where the court said that a court must consider whether there is a sensible interpretation that can be given to the relevant provisions that will avoid anomalies.
The apparent anomaly arising from section 222(2) is solved if one reads the word “in”, where it appears in the phrase “in a return”, to denote an understatement “in or in connection with” a return. In the court's view, a reading of the whole of Part A of Chapter 16 justifies the resolution of the apparent anomaly in that fashion. The court therefore held that SARS has proceeded upon a correct understanding of the legislation.
Prejudice to SARS or the fiscus and administrative penalties
Finally, the appellants questioned whether SARS had discharged the onus of establishing that prejudice to SARS or the fiscus had occurred. The court rejected this argument stating that prejudice to SARS and the fiscus is implicit in the failure of the appellants to render returns, and the consequent failure to pay the tax due, because although SARS was in possession of the funds, it could not use the funds to fund government activities in the manner set out above. The court also pointed out that, although not debated in argument, the application of resources to audits of the affairs of taxpayers like the appellants is in itself prejudice to SARS. In terms of section 221, ‘understatement’ means any prejudice to SARS or the fiscus. The word “any” is “a word of wide and unqualified generality. It may be restricted by the subject-matter or the context, but prima facie it is unlimited (Per Innes CJ in R v Hugo 1926 AD 268 at 271). The insertion of "any" in section 221 indicates that the broadest range of prejudice must be taken into account when considering whether any of the stated defaults have resulted in prejudice to SARS or the fiscus.
The appellants also contended that the application of administrative penalties under Chapter 15 of the TAA, coupled with the charging of interest, extinguishes any prejudice which might otherwise be caused by failing to submit a return. This contention was also rejected and found to be 'without merit' as a penalty is by definition a punishment; which may also be compensatory in effect, but that is not why it exists.
The court concluded that SARS had established a prima facie case from which the only inference that could be drawn was that the tax returns were withheld intentionally throughout and without any discernible excuse. The contentions raised by the Appellants were thus found to be insufficient to counter SARS’s prima facie case, and the court decided that the burden of proof placed upon SARS had been satisfied. The appellants were ordered to pay an understatement penalty of 100% (being what SARS sought for "gross negligence" standard case) for each VAT assessment and income tax assessment.