A tax penalty, described in the Tax Administration Act as the ‘understatement penalty’ is imposed in circumstances dependent upon the taxpayer’s behaviour vis-à-vis an understatement. In essence, an understatement is a default, omission or incorrect statement in a return. The understatement penalty percentage is a graded percentage penalty dependent upon the severity of six listed behaviours in the table comprised by s 223.

But, if the taxpayer’s understatement resulted from ‘a bona fide inadvertent error’, no penalty is imposed under s 222(1). To date, since the general commencement of the act, on 1 October 2012, which contains no definitions of the six behaviours nor of ‘a bona fide inadvertent error’, tax practitioners have had to reply upon dictionary definitions, comparative foreign jurisdictions and, more recently, a few domestic tax court cases.

The SARS ‘Guide to understatement penalties’, published on 29 March 2018, provides some welcome insight into SARS’s approach to penalties. Bear in mind that this publication is not an ‘official publication’, and accordingly does not create a practice generally prevailing, nor is it a binding general ruling; thus it has no authoritative effect and is, at best, only of an indicative nature.

Bona fide inadvertent error

No penalty is imposed in the event of such an error. SARS states its position in the Guide, after quoting case law and the English Oxford Dictionary, as follows:

The desire not to punish understatements that result from bona fide inadvertent errors must consequently be understood and the language of the provision given meaning within the context of the regime’s purpose to specifically sanction only the behaviours listed in rows (i) to (vi) of the understatement penalty table….

A taxpayer who acts in good faith, without the intention to deceive, will escape a penalty, not because the trigger is necessarily a bona fide inadvertent error, but because the regime is designed not to punish such taxpayers….

An inadvertent error is one that does not result from deliberate planning, and a bona fide inadvertent error is one that genuinely does not result from deliberate planning. It is simply a real or genuinely accidental mistake, an honest momentary lapse of reason if you will. What constitutes such an error would depend on the circumstances of the taxpayer and the circumstances under which it was made.…

In future newsletters I hope to cover the six listed behaviours attracting understatement penalties, dependent upon the level of blameworthiness of the taxpayer’s behaviour.