SARS’ leniency in issuing a penalty proved to be its undoing in a recent High Court case.
Although the South African Revenue Service has enormous power to collect taxes, it is still bound by legislation, such as the Tax Administration Act 28 of 2011 .Lance Dickson Construction v Commissioner for SARSLDC developed immovable property and sold it in 72 individual portions to a related entity, Kwali Marck Construction CC .
SARS did not accept the taxpayer’s position and raised an assessment for the full amount of capital gains tax for all 72 portions for the year they were transferred to KMC.The taxpayer lodged an objection to SARS’ assessment, which was heard in Tax Court and then on appeal at the High Court. SARS can also levy a 50% penalty if it finds that the understatement is due to the taxpayer having no reasonable ground for assuming a particular tax position.SARS said that it had levied a penalty of 25% for LDC as the taxpayer’s understatement was due to it not taking reasonable care in completing its tax return.
The Tax Court in the LDC case said that it did not have the power to increase the understatement penalty, but it also could not allow the taxpayer to escape responsibility. The Court in the LDC case looked at SARS’s pleading before it and found that SARS’ argument for understatement penalty was solely based on the taxpayer not taking reasonable care in completing their tax return.
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