Understatement Penalties Through the Cases

by | Apr 27, 2024 | BTCLQ, BTCLQ V15 I1

Understatement Penalties Through the Cases

Author: Annalie Pinch

ISSN: 2219-1585
Affiliations: Senior Consultant, Bowman Gilfillan
Source: Business Tax & Company Law Quarterly, Volume 15 Issue 1, 2024, p. 9 – 19

Abstract

The understatement penalty (‘USP’) provisions were introduced in the Tax Administration Act in 2011 (‘the TAA’) with effect from 1 October 2012. These
provisions stipulate, amongst other things, when the South African Revenue Service (‘SARS’) may impose understatement penalties, when no penalties may be imposed, how the penalty must be calculated and when penalties imposed must be remitted. In particular, the USP rules require there to be an ‘understatement’, as defined in section 221 of the TAA. However, where an understatement arises from a ‘bona fide inadvertent error’, no penalty may be imposed. This term is not defined and has accordingly been the subject of many disputes between taxpayers and SARS, resulting in the term being considered by the tax court, the Supreme Court of Appeal (‘SCA’) and currently the Constitution Court, as discussed in this article. While SARS adopts a narrow view of what constitutes a bona fide inadvertent error, the SCA held in CSARS v The Thistle Trust (Thistle) that SARS was not entitled to levy an understatement penalty because the taxpayer made an error, but did so in good faith and acted unintentionally. In Commissioner for the South African Revenue Service v Coronation Investment Management SA (Pty) Ltd (Coronation), the SCA held that the understatement arose from a bona fide inadvertent error because it resulted from the taxpayer relying on a tax opinion from a tax practitioner.
The TAA also stipulates that the burden of proof is on SARS in respect of the facts on which SARS bases the imposition of an understatement penalty. The onus of proof has similarly been the subject of case law, resulting in a clearer understanding of the requirements that SARS has to meet in imposing understatement penalties. In terms of Purlish Holdings (Pty) Ltd v The Commissioner for the South African Revenue Service (Purlish Holdings) and Enviroserv Waste Management (Pty) Ltd v The Commissioner for the South African Revenue Service (Enviroserv), SARS must show not only that the taxpayer committed the conduct envisaged in the definition of ‘understatement’ (e g, an incorrect statement in a return), but also that such conduct resulted in prejudice suffered by SARS or the fiscus. Furthermore, it was held in Purlish Holdings that ‘prejudice’ is not limited to financial prejudice.

Thistle and Coronation: Can a Taxpayer Place Reliance on a Legal Opinion to Avoid or Reduce Penalties While at the Same Time Withholding Disclosure of the Opinion from SARS?

by | Apr 27, 2024 | BTCLQ, BTCLQ V15 I1

Thistle and Coronation: Can a Taxpayer Place Reliance on a Legal Opinion to Avoid or Reduce Penalties While at the Same Time Withholding Disclosure of the Opinion from SARS?

Author: Matthew Blumberg SC

ISSN: 2219-1585
Affiliations: N/A
Source: Business Tax & Company Law Quarterly, Volume 15 Issue 1, 2024, p. 20 – 27

Abstract

Understatement penalties1 featured in two tax cases recently argued in the Constitutional Court. In both cases, the taxpayer had sought to avoid or reduce liability for understatement penalties on the basis that the taxpayer’s contentious tax position had been based on a favourable legal opinion. In the one case, the opinion was disclosed to SARS. In the other, it was not. In the latter case, SARS contended that the taxpayer ought to have disclosed the opinion and adduced it in evidence. The SCA had disagreed, finding that ‘it was not incumbent on [the taxpayer] to disclose a tax opinion that it had obtained, any more than it would be on any other party which litigates on the basis of a procured legal opinion.’
It is, for various reasons, difficult to predict whether or not the Constitutional Court will engage with this finding. For the reasons explored below, however, taxpayers should proceed with caution before seeking to invoke the SCA-finding as authority for the proposition that they may rely on a legal opinion to avoid or reduce penalties, while at the same time withholding disclosure of the opinion from SARS.

Common-law avoidance

Common-law avoidance

by | Apr 7, 2024 | SALJ, SALJ V141 I2 2024

Common-law avoidance

Author: Leo Boonzaier

ISSN: 1996-2177
Affiliations: Senior Lecturer, Department of Private Law, University of Cape Town
Source: South African Law Journal, Volume 141 Issue 2, p. 213-256
https://doi.org/10.47348/SALJ/v141/i2a1

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Boonzaier, L
Common-law avoidance
South African Law Journal, Volume 141 Issue 2, p. 213-256 https://doi.org/10.47348/SALJ/v141/i2a1

Abstract

This article discusses an important trend in recent judgments of our appellate courts, which I call ‘common-law avoidance’. Rather than applying established sets of common-law principles, the courts have chosen to substitute them with other sets of norms of their own invention, usually sourced in the Constitution. This marks a departure from the status quo ante, in which it was accepted that the impact of the Constitution on private-law disputes was to be felt through the common law, rather than by displacing it. I discuss three cases that evidence this new pattern, spanning the three branches of the law of obligations: AB v Pridwin Preparatory School, which implicated the law of contract; Esorfranki Pipelines (Pty) Ltd v Mopani District Municipality, involving delict; and Greater Tzaneen Municipality v Bravospan 252 CC, which raised an issue in the law of unjustified enrichment. I critically assess the trend exhibited in these cases, arguing that it is the result of (among other factors) the courts’ preference for the Constitution’s more familiar and discretionary standards, and of their increasing difficulties in meeting the demands of the common-law method.

When is discrimination unfair? A relational reconstruction of the Constitutional Court’s dignity-based approach

by | Apr 7, 2024 | SALJ, SALJ V141 I2 2024

When is discrimination unfair? A relational reconstruction of the Constitutional Court’s dignity-based approach

Author: Denise Meyerson

ISSN: 1996-2177
Affiliations: Emeritus Professor of Law, Macquarie University
Source: South African Law Journal, Volume 141 Issue 2, p. 257-292
https://doi.org/10.47348/SALJ/v141/i2a2

Abstract

In this article, I examine the dignity-based test for unfair discrimination developed by the Constitutional Court of South Africa. First, I argue that the point of antidiscrimination rights is to protect equality. They seek to prevent a comparative wrong — wrongful disparities in treatment. Violating dignity appears, however, to be a non-comparative wrong — one that is independent of the treatment extended to others. Tying unfair discrimination to dignity violations therefore seems to miss the comparative concerns that underlie anti-discrimination rights. Adding that everyone is ‘equally’ entitled to be treated with dignity does not solve the problem. I respond to this apparent difficulty with the court’s approach by suggesting that the court is best understood as concerned with a distinctive kind of dignity — status dignity. I also argue that there is an attractive conception of equality — relational equality — that explains why violations of status dignity are violations of equality. This interpretation provides the requisite egalitarian foundation for the court’s approach. Secondly, I address the criticism that a dignity-based understanding of substantive equality is too limited to address systemic inequalities. I suggest that an understanding based in status dignity is suitably robust and requires far-reaching reforms and restructuring of social practices.

The shareholder’s appraisal remedy under the Companies Act: How should the courts gauge ‘fair value’?

by | Apr 7, 2024 | SALJ, SALJ V141 I2 2024

The shareholder’s appraisal remedy under the Companies Act: How should the courts gauge ‘fair value’?

Author: Maleka Femida Cassim

ISSN: 1996-2177
Affiliations: Professor of Law, Mercantile Law Department, University of South Africa
Source: South African Law Journal, Volume 141 Issue 2, p. 293-322
https://doi.org/10.47348/SALJ/v141/i2a3

Abstract

The appraisal remedy is the right of minority shareholders to demand that the company buy out their shares in cash, at a price reflecting their ‘fair value’, when they are aggrieved by certain triggering transactions that the majority shareholders have approved. The appraisal right is an American concept that was introduced into South African law when the Companies Act 71 of 2008 came into force. The most formidable challenge concerning the appraisal right is the meaning and interpretation of the key phrase ‘fair value’ and, coupled with this, the appropriate valuation methodology that the court ought to adopt when valuing the shares of dissenting minority shareholders. Two recent judgments of the High Court have considered these thorny issues for the first time. This article critically analyses the findings of the High Court in BNS Nominees (RF) (Pty) Ltd v Zeder Investments Ltd and BNS Nominees (RF) (Pty) Ltd v Arrowhead Properties Ltd, with a particular focus on the divergent approaches that the two cases adopt in gauging the ‘fair value’ of the dissenters’ shares and the judicial discretion to appoint an appraiser to value the shares. This is followed by a detailed discussion of the proper interpretation of the pivotal phrase ‘fair value’ in appraisal proceedings and of appraisal valuation methodology. This is done with reference to the legal position in comparable foreign jurisdictions such as the United States of America and Canada. Guidelines are also suggested for the South African courts to follow when gauging the ‘fair value’ of shares in appraisal cases.