Taxpayers, particularly those who fill in their tax returns themselves, should find comfort in a proposed change to the Tax Administration Act that will ensure they will not be penalised for bona fide mistakes on their returns.
In terms of the Tax Administration Act, if you understate the tax you owe, you are liable for a penalty of up to 200 percent of the difference between the tax you paid and the tax you should have paid. The heavier penalty of 200 percent is reserved for those who intentionally evade tax, but even entering the wrong amount on your return by mistake could result in the lowest penalty of 25 percent of the understated tax.
Erich Bell, a tax technical assistant at the South African Institute of Tax Practitioners (Sait), says the penalty can be waived if you make a voluntary disclosure before the South African Revenue Service (SARS) notices the understatement.
You can also escape a penalty if you can prove to SARS that your understatement of tax was based on an opinion from a tax practitioner who is registered with a recognised controlling body, such as Sait, the South African Institute of Chartered Accountants or the South African Institute of Professional Accountants, Bell says.
A draft bill to amend the Tax Administration Act proposes that if you understate your tax as a result of “bona fide inadvertent error”, this will not result in a penalty.
The draft bill has been presented to Parliament’s standing committee on finance.
The amendment also proposes reducing some of the penalties, although the maximum penalty of 200 percent of the understated tax remains for intentional tax evasion.
In submissions on the bill, tax practitioners asked for the provision relating to bona fide errors to be implemented retrospectively to October 1, 2012, the date on which the Tax Administration Act was implemented. SARS and National Treasury agreed.
Bell says the amendment catering for bona fide errors is welcome, because many taxpayers complete and submit their returns without the assistance of a registered tax practitioner.
Although it is good that SARS has modernised South Africa’s tax system, ensuring that the administrative nightmares of the past have become simple tasks that can be performed by anyone, when taxpayers fill in their returns, “it leaves a lot of room for honest mistakes – mistakes which can cost taxpayers dearly”, he says.
The finance committee has heard submissions on the draft amendment bill that suggest that the term “bona fide inadvertent error” should be defined.
But Franz Tomasek, general manager of legislative policy at SARS, says there is a wide range of errors that you could make, and if the law prescribed criteria for those mistakes, it may unintentionally exclude some deserving cases and include some undeserving ones.
SARS will develop some guidelines on how to interpret “bona fide inadvertent error”, he says.
Bell says the explanatory memorandum to the Tax Administration Laws Amendment Bill outlines the circumstances in which the error will be accepted as genuine and unintended, as well as the other factors that SARS should take into account when determining if an understatement was the result of a “bona fide inadvertent error”.
The memorandum says that, in the case of errors of fact, SARS should take into account:
* Whether the standard of care you took in completing your return is commensurate with your know-ledge, education, experience and skill, and the care a reasonable person would have exercised in the same circumstances;
* The size, nature and frequency of the error;
* Whether you made a similar error in a return you submitted during the preceding years; and
* Where arithmetical errors were made, whether you had procedures in place to detect these errors.
When it comes to errors of legal interpretation, the memorandum says that SARS must take into account the following:
* Whether the relevant provision of a law is regarded as complex;
* Whether you took steps to understand the provision, including following explanatory material and making reasonable enquiries; and
* Whether you relied on information that, although incorrect or misleading, came from reputable sources that the reasonable person in similar circumstances would also have found complex.