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Prejudice to SARS. What is the understatement penalty?

by , 20 February 2015
In order to correctly refer to The understatement penalty ("USP") regime, keep in mind that it was introduced by the South African Revenue Service ("SARS") in terms of the Tax Administration Act, No 28 of 2011 (the "TAA"), which is still in its infancy stages.

This has led to some uncertainty as to when an USP should, veritably, be levied by SARS, writes  Nada Kakaza for ENSafrica.com, adding that an "understatement" is defined in section 221 of the TAA to mean "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
    if no return is required, the failure to pay the correct amount of 'tax'."

Furthermore, you should know that with the enactment of the TAA, it was envisaged by SARS that the USP regime would be a prime means of safeguarding itself with an arsenal of extensive financial sanctions in a bid to punish errant taxpayers whose actions result in any of the four aforementioned misdemeanours.

The previously mentioned sources notes that the levying of an USP, which is predicated on the taxpayer's behaviour, ranges from a mere ten percent to an astronomical two hundred percent, particularly in instances of repeated intentional tax evasion.

Kakaza draws attention upon the fact that the major aspect questions whether the taxpayer's behaviour resulted in a prejudice to SARS or the fiscus.

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More specifically, the term "prejudice" which is the fulcrum of the definition of an understatement has not been defined in the Act leading to the fact that the ordinary dictionary meaning must be espoused in this instance which creates the uncertainty as to whether the levying of the USP by SARS is warranted.

For further explanations, you should also understand the interplay between sections 221, 222(1), 222(2), and 222(3) of the TAA. Kakaza explains that in the event of an understatement by the taxpayer, the taxpayer must pay, in addition to the tax payable for the relevant tax period, the USP determined in terms of section 222(1), unless the understatement results from a bona fide inadvertent error (for the purposes of the example, assume that there was no bona fide inadvertent error prevalent).

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