Conundrum in SA tax law interpretation

The Constitutional Court has decided not to have the final say on the meaning of the crucial string of words - "bona fide inadvertent error" - even though the correct interpretation is of public importance.

It is of public importance because it will affect how the South African Revenue Service (Sars) approaches the imposition of understatement penalties in thousands of future tax cases.

In terms of the Tax Administration Act (TAA), Sars must impose a penalty when there is an understatement that prejudices the fiscus unless the understatement was the result of a "bona fide inadvertent error".

Opposing views

There are now two opposing views on the meaning of the words - Sars's view and that of the Tax Court in the Thistle Trust case - notes Nico Theron, founder of Unicus Tax Specialists.

The main case before the Constitutional Court dealt with Thistle's appeal against the Supreme Court of Appeal (SCA) finding in favour of Sars.

The matter dealt with the so-called conduit principle and which section of the Income Tax Act should apply to the capital gains distributed by the Thistle Trust to its beneficiaries.

The Constitutional Court upheld the SCA's decision but dismissed Sars's cross-appeal against waiving the understatement penalty of R1,45 million.

The Tax Court did not reach the issue of penalties because it upheld Thistle's case on the merits. The SCA did not reach the issue of penalties because Sars did not argue the issue and was understood to have conceded it.

High hopes

Tax experts pinned their hopes on the Constitutional Court to have the final say in the correct interpretation.

However, Judge Matthew Chaskalson said it was "undesirable" for the court to have to determine a legal point of public importance in a matter where it has no reasoned judgment on the issue from the preceding courts.

"If Sars had a strong case in respect of its claim for penalties in this matter, it may nevertheless have been in the interests of justice for this court to entertain that claim, but Sars has no sustainable case for penalties."

Theron says Sars's case on understatement penalties was weak as it had no reasonable prospect of discharging its onus of proving that: "The reason for this was that the taxpayer relied on professional advice and acted in line with the advice received.

That Thistle's reliance on the advice was reasonable is further supported by the fact that the Tax Court upheld the taxpayer's case," says Theron.

He adds that Sars's alternative argument - that Thistle did not take reasonable care in completing its tax return - was premised on the fact that Sars's view differed from the advisor's advice.

Backfiring of tax advice gambit

"According to Sars, a taxpayer who takes reasonable care in completing a return will rather complete the return in line with the views of Sars and ignore those of the advisor," remarks Theron.

Untenable argument

Chaskalson dismissed this line of thinking from Sars.

"This argument is based on the proposition that no taxpayer can act reasonably on advice that differs from Sars's statements of its interpretation of tax legislation.

"The argument would elevate Sars to the status of an authority that can decree the only reasonable interpretations of tax legislation. It is an untenable argument."

Joon Chong, tax partner at Webber Wentzel, agrees with the Constitutional Court's findings.

"The Sars position taken implies that it is the only arbiter of what is reasonable.