Understatement penalty in terms of the Tax Administration Act - a critical analysis of the interpretation of a bona fide inadvertent error

Résumé 0

The Tax Administration Act stipulates that in the instance of an understatement by the taxpayer, an understatement penalty must be levied by the South African Revenue Service (SARS) for each shortfall in relation to each understatement, unless the understatement is due to a bona fide inadvertent error. The term "bona fide inadvertent error" is only used in the context of an understatement penalty. This term is, however, not defined in the Tax Administration Act, any other tax act, or the Interpretation Act. Initially, when the term was first introduced into the Tax Administration Act in 2013, certain factors that need to be considered in the context of factual errors and in the case of a legal interpretive error were listed in the Draft Memorandum on the Objects of the Tax Administration Laws Amendment Bill of 2013. However, the final version of the Memorandum on the Objects of the Tax Administration Laws Amendment Bill of 2013 did not include examples of what would constitute a bona fide inadvertent error when SARS must consider whether or not to impose an understatement penalty, but it stated that guidance will be developed in this regard. Subsequently, during 2016, judgement was delivered in Income Tax Case (ITC) 1890 and the court held that a bona fide inadvertent error is "an innocent misstatement by a taxpayer on his or her return, resulting in an understatement, while acting in good faith and without the intention to deceive". Thereafter, during 2018, SARS issued guidance in respect of the use of the term "bona fide inadvertent error" in the context of understatement penalties. SARS concluded that "the only errors that may fall within the bona fide inadvertent class are typographical mistakes - but only properly involuntary ones", and further clarified that a lack of reasonable care will also not be excused. There is a conflicting view between the court in ITC 1890 and the guidance provided by SARS. It is, however, important that clear-cut guidance be provided regarding what would constitute a "bona fide inadvertent error", as this would absolve the taxpayer from an understatement penalty.