Section 222 (1) of the Tax Administration Act (the “TTA”) provides that where there has been an understatement, the taxpayer must pay the understatement penalty determined unless the understatement resulted from a bona fide inadvertent error. In terms of Section 221, an ‘understatement’ means any prejudice to SARS in respect of a tax period as a result of a default in rendering a return, an omission from a return, an incorrect statement in a return, or a failure to pay the correct amount of tax where no return is required.
The term “bona fide inadvertent error” is however not defined in the legislation. SARS has yet to provide any guidance on what a bona fide inadvertent error is and as such it has been left to the Tax Court to make a determination. In the case of ABC Holdings (Pty) Ltd v The Commissioner for the South African Revenue Service, Case number ITI13772, the court, inter alia, had to consider whether the South African Revenue Service (SARS) was correct to levy an understatement penalty in the circumstances.
Briefly, the facts of this matter are that ABC Holdings claimed an amount of R 9 354 458.00 as a deductible allowance in its 2011 year of assessment in terms of Section 24C of the Income Tax Act . SARS conducted an audit during January 2014 and notified ABC Holdings that the Section 24C allowance was incorrectly claimed by the taxpayer. As a result of the disallowance by SARS, the taxpayer was held liable for the income tax payable in the amount of R 2 619 248.00 as well as an understatement penalty in the amount of R 261,924.80 in terms of Section 222 of the TAA.