ASSET-FOR-SHARE TRANSACTIONS: TAX FREE RESTRUCTURE
March 17, 2016OFM WATER PROJEK
March 17, 2016
The Tax Administration Act, 28 of 2011, introduced the notion of ‘understatement penalties’ which are levied on a percentage based method. The penalties are levied depending on which behaviour is exhibited by the taxpayer, to be classified in terms of the below table contained in section 223(1):
| 1 | 2 | 3 | 4 | 5 | 6 |
| Item | Behaviour | Standard case | If obstructive, or if it is a ‘repeat case’ | Voluntary disclosure after notification of audit or investigation | Voluntary disclosure before notification of audit or investigation |
| (i) | ‘Substantial understatement’ | 10% | 20% | 5% | 0% |
| (ii) | Reasonable care not taken in completing return | 25% | 50% | 15% | 0% |
| (iii) | No reasonable grounds for ‘tax position’ taken | 50% | 75% | 25% | 0% |
| (iv) | Gross negligence | 100% | 125% | 50% | 5% |
| (v) | Intentional tax evasion | 150% | 200% | 75% | 10% |
It is not clear how a taxpayer’s behaviour is to be classified for purposes of considering at which rate an understatement penalty is to be imposed, or if it is even possible that certain taxpayer behaviour may not even fall within the table to begin with. Suffice it to say that in terms of section 102(2) of the Tax Administration Act, the burden of proving whether the facts on which SARS based the imposition of an understatement penalty is upon SARS.
In terms of section 222, the penalty may only be levied where an ‘understatement’ is present, being any prejudice to SARS or the fiscus as a result of:
- A default in rendering a return;
- An omission from a return;
- An incorrect statement in a return; or
- Where no return was required, the failure to pay the correct amount of tax.
To calculate the penalty levied, the applicable percentage in the above table is applied to the shortfall amount, being the tax effect in question for which the taxpayer is penalised. For example, if an income tax deduction claimed by a taxpayer is disallowed by SARS which seeks to penalise the claiming of the deduction, the applicable penalty percentage is applied to the tax effect that the deduction would have had had it been allowed.
Taxpayers are enabled through section 224 to object against the imposition of an understatement penalty. What is further noteworthy is that, in the event that a penalty is levied for a ‘substantial understatement’, the penalty must be remitted by SARS if the taxpayer was in possession of a positive tax opinion from an independent registered tax practitioner supporting its tax position. It therefore makes sense, if only to mitigate against the levying of penalties, to obtain a tax opinion from a registered tax practitioner prior to entering into a transaction.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
