The Supreme Court of Appeal (“SCA”) delivered judgment in Commissioner for the South African Revenue Service v Capitec Bank Limited (94/2021) [2022] ZASCA 93 (“Capitec-case”) on 21 June 2022. The case, where the South African Revenue Service’s (“SARS”) appeal was upheld, mainly concerned Capitec’s entitlement to claim Value-Added Tax (“VAT”) deductions.
The SCA also dealt with the remittance of the late payment penalty levied in terms of section 213 of the Tax Administration Act No. 28 of 2011 (“TAA”), read with section 39(1) of the VAT Act No. 89 of 1991 (“VAT Act”). A fraction of the judgment deals with the latter aspect, but the SCA’s findings on the remittance of late penalties are of significance to all taxpayers.
Late Payment Penalties
The penalty framework under the TAA broadly makes provision for two types of penalties, namely an administrative non-compliance penalty and an understatement penalty (“USP”). Late payment penalties are subsumed under the former category. The designation of late payment penalties and USPs are self-explanatory –
- late payment penalties are levied where the tax is not paid within the period prescribed by the relevant tax Act (in this case the VAT Act); and
- USPs are imposed where the taxpayer understated their tax liability.
Generally, late payment penalties may be remitted where they are imposed in respect of nominal or first incidence of non-compliance (section 217 of the TAA), or where the non-compliance is as a result of exceptional circumstances (section 218 of the TAA).
In the Capitec-case, it was the company’s first incidence of non-compliance (meaning no administrative non-compliance penalties had been levied in the preceding 36 months). In order to remit the late payment penalty under section 217 of the TAA, Capitec was required to show that ‘reasonable grounds’ exist for the administrative non-compliance i.e. the late payment of the tax.
Reasonable Grounds
The term ‘reasonable grounds’ is not defined under the TAA, although this standard is encountered under several provisions of the statute. For example, where the taxpayer seeks condonation for the late filing of an objection or an appeal, they must advance reasonable grounds for their delay. In this regard, SARS’ Interpretation Note 15 explains that ‘the requirement of reasonable grounds will generally be met if the delay was caused as a result of circumstances beyond the taxpayer’s control…’.
As a delay is inherent to late payment penalties, one would assume that the same measure applies to adjudicate a request for remittance of such penalties. In other words, a late payment penalty may be remitted if the taxpayer can show that circumstances beyond their control prevented them from making timeous payment of the tax.
A different approach, however, was adopted in the Capitec-case. The SCA found that Capitec satisfied the reasonable grounds threshold as it had obtained a favourable tax opinion from senior counsel that the input-VAT deductions could be made. The SCA remitted the penalty on the basis that Capitec, by enlisting expert tax advice and obtaining a tax opinion, acted reasonably in contesting the amount.
It is generally accepted that a taxpayer will be able to have USPs remitted or reduced if they relied on a tax opinion in adopting their tax position. In fact, SARS must remit a USP for a substantial understatement if the taxpayer was in possession of a tax opinion that satisfies the requirements of section 223(3) of the TAA. Remission of the USP in this case is founded on the principle that the taxpayer took reasonable steps in completing their return, to prevent an understatement of their tax liability. But, arguably, the remittance of late payment penalties is subject to a different framework.
Based on the SCA’s approach, the standard of reasonableness should be applied holistically. An assessment of reasonableness under section 217 of the TAA, need not be confined to the factors that delayed the actual payment of the tax, such as a lack of funds, illness or absence of the person responsible for payment or unforeseen administrative difficulties. Seemingly, the penalty may be remitted where the delay is occasioned by the fact that the taxpayer believed (based on the tax opinion) that the amount was not taxable and in fact not payable to SARS, which would inherently result in late payment.
This approach is supported to a degree by the judgment in Peri Formwork Scaffolding Engineering (Pty) Ltd v Commissioner for SARS (A67/2020), where SARS imposed a 10% penalty for the late payment of employees’ tax. In this case, the taxpayer did not have funds to make payment because some of its debtors failed to service their debts as anticipated. The High Court held that reliance on third party payments was unreasonable, but the penalty was nevertheless remitted because of the taxpayer’s efforts to rectify the default immediately. Although the extraneous factors did not constitute reasonable grounds, the taxpayer’s actions (even if they were in vain) were found to satisfy the threshold of ‘reasonable grounds’.
Concluding Remarks
There is an argument to be made that the SCA’s decision conflates the application of section 217 with the USP framework. In the context of USPs, the reliance on expert tax advice and the understatement of the tax liability are directly related. In the case of the late payment of the tax, the reliance on a tax opinion ultimately resulted in the late payment, because the taxpayer never intended to actually pay the tax, based on the belief that it was not due. The lateness emanates from an understatement of a taxable amount, not as a result of other factors that impacted the taxpayer’s ability to make timeous payment of the tax.
Be that as it may, based on the judgment in the Capitec-case, it appears that a taxpayer will be able to remit, in addition to USPs, a late payment penalty even if it results from an understatement of their tax liability, provided their position is supported by a tax opinion. Obtaining a tax opinion to support your tax position is always a prudent approach. And the value of these tax opinions is augmented by the decision in the Capitec-case.