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[2023] ZAWCHC 12
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Lance Dickson Construction CC v Commissioner for the South African Revenue Service (A211/2021) [2023] ZAWCHC 12; 84 SATC 209 (31 January 2023)

S
AFLII
Note:
Certain
personal/private details of parties or witnesses have been
redacted from this document in compliance with the law
and
SAFLII
Policy
FLYNOTES:
CAPITAL GAINS TAX AND UNDERSTATEMENT
TAX –
Capital Gains Tax – Understatement – Penalty –
Reasonable care not taken in completing return
– Property
sold but payments to be made later as units developed and sold –
SARS erred in imposing penalty on
that item of behaviour –
Tax Administration Act 28 of 2011
,
s 223(1).
IN
THE HIGH COURT OF SOUTH AFRICA
WESTERN
CAPE DIVISION, CAPE TOWN
REPORTABLE
CASE
NO: A 211/2021
In
the matter between:
LANCE
DICKSON CONSTRUCTION CC
Appellant
and
THE
COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE
SERVICE
Respondent
Coram:

P.L. Goliath AJP, P.A.L. Gamble and D.S. Kusevitsky, JJ.
Date
of Hearing:       16 January 2023
Date
of Judgment:   31 January 2023
This
judgment was handed down electronically by circulation to the
parties' representatives via email and release to SAFLII. The
date
and time for hand-down is deemed to be 10H00 on Tuesday 31 January
2023.
JUDGMENT
DELIVERED ON TUESDAY 31 JANUARY 2023
GAMBLE,
J:
INTRODUCTION
1.
The appellant,
Lance Dickson Construction CC (“the taxpayer”), seeks to
appeal the judgment of the Tax Court (Cloete,
J and two assessors)
handed down on 18 June 2021, in which the determination by the
respondent (“SARS”) that the taxpayer
was liable to pay a
25% penalty for the understatement of its liability for capital gains
tax (“CGT”) in its 2017 tax
return, was confirmed.
2.
The appeal
served before this Court pursuant to the provisions of s133 (2) of
the Tax Administration Act, 28 of 2011 (“the
TAA”). The
taxpayer was represented in this Court by Adv. P-S. Bothma and SARS
by Advs. O. Mogatle and T. Tsoai. All
of these counsel appeared
before the Tax Court. In addition, Mr. Bothma was lead in that court
by Dr. A. Marais, a Cape Town based
specialist tax practitioner.
RELEVANT
FACTUAL BACKGROUND
3.
The
taxpayer is a corporate entity which previously owned immovable
property (Erf [....], Brackenfell) over which certain development

rights had been procured. It concluded a written agreement of sale in
September 2016 with a related entity, Kwali Mark Construction
CC
(“KMC”)
[1]
in terms
whereof the latter purchased the property for the sum or R25, 2m. The
said sum of R25, 2m was calculated on the basis
that the property,
once sub-divided, would comprise 72 individual erven each valued at
R350 000, 00.
4.
Included in
the terms of the agreement of sale was a provision whereby KMC would
pay to the taxpayer the sum of R350 000, 00
when each erf in the
development (which had been fully developed with a residential
dwelling thereon) was on-sold to the ultimate
purchaser. The
agreement of sale provided further that CGT on the entire transaction
would be paid by the taxpayer on an ad hoc
basis, as and when each
individual erf was so on-sold by KMC and the relevant amount had been
received by the taxpayer.
5.
The property
was transferred to KMC in October 2016 but when the taxpayer rendered
its 2017 tax return none of the individual erven
had been on-sold by
KMC and, for that reason, said the taxpayer, it did not disclose the
sale thereof. SARS picked up this omission
when it reviewed the 2017
tax return in conjunction with earlier tax assessments and also with
the taxpayer’s Value Added
Tax (“VAT”) returns.
SARS was also alerted to a significant drop in turn-over for the 2017
tax year.
6.
In response to
a query by SARS, the taxpayer’s auditors provided the following
explanation on 16 May 2018. I cite the letter
in full (in the form in
which it was written) as it sets out the taxpayer’s stance
throughout this matter.
“
We
are not in agreement with the decision made by SARS and also obtained
a legal opinion in this matter.
According
to paragraph 39A of the Eight Schedule to the Income Tax act this
capital gains should have been ring-fenced and the loss
carried over
to the subsequent tax year.
The
reason for this is that none of the 72 erven that were transferred to
Kwali Mark Construction CC was sold. Paragraph 6 of the
deeds of
sales clearly states that all conditions for the transfer must be met
before the capital gains can be realised.
As
these erven were not sold, this is not the case and the capital gains
has to be ring fenced until the erven are disposed of.
No
proceeds on disposal had been declared as no monies have been
received for this transaction and this is also one of the conditions

for the sale of the property. Only when the final transfer of the
erven takes place to an unrelated 3
rd
party will capital
gains come into effect.
We,
therefore, request that the income tax on the capital gains of R
14 224 568 be ring fenced until the erven are sold and
cash flow
have taken place.”
7.
SARS did not
accept the position adopted by the taxpayer and took the view that it
was liable to pay the full amount of CGT (R11 405 319,
40)
to SARS during the 2017 tax year, when the taxpayer transferred the
asset to the purchaser. In light of the taxpayer’s

understatement of its liability for CGT, SARS imposed an
understatement penalty of 25% (R798 371, 36) pursuant to the
provisions
of s222 of the TAA.
8.
Dissatisfied
with SARS’ determination, the taxpayer lodged an objection
under s104 of the TAA, which objection eventually
found its way via
the Tax Board to the Tax Court. After hearing evidence adduced on
behalf of SARS and argument on behalf of the
parties, the Tax Court
upheld the determination.
THE
RELEVANT PROVISIONS OF THE TAA
9.
The issue of
the entitlement of SARS to impose a penalty for the understatement by
a taxpayer in its tax return is governed by Chapter
16 of the TAA.
S221 makes provision for internal definitions of words and phrases in
that Chapter. Of relevance to this case is
the definition of
understatement:
“
understatement”
means any prejudice to SARS or the
fiscus
as
a result of –
(a)
a default in rendering a return;
(b)
an omission from a return;
(c)
an incorrect statement in a return;
(d)
if no return is required, the failure to pay the correct amount of
‘tax’; or
(e)
an ‘impermissible avoidance agreement’.”
10.
There was some
debate before the Tax Court as to whether there had been an
understatement (as defined) by the taxpayer in the 2017
tax return.
However, on appeal, Mr. Bothma made plain that the taxpayer accepted
that there had been an understatement as defined,
and in particular
as categorized in subparagraph (b) of the definition thereof.
11.
Once an
understatement has been established by SARS, the provisions of s222
of the TAA come into effect.
“
222.
Understatement penalty
(1)
In the event of an ‘understatement’
[2]
by a taxpayer, the taxpayer must pay, in addition to the ‘tax’
payable for the relevant tax period, the understatement
penalty
determined under subsection (2) unless the ‘understatement’
results from a
bona
fide
inadvertent error.”
S
222(2) and (3) set out the formulae for the calculation of the
understatement penalty which need not be repeated herein.
12.
S223(1)
contains the following table in which the relevant penalty payable by
the taxpayer is calculated with reference to the specific
category of
alleged non-compliant tax behaviour on its part.
1
2
3
4
5
6
Item
Behaviour
Standard
Case
If
obstructive, or it is a ‘repeat case’
Voluntary
disclosure after notification of audit or criminal investigation
Voluntary
disclosure after notification of audit or criminal investigation
(i)
‘
Substantial
understatement’
10%
20%
5%
0%
(ii)
Reasonable
care not taken in completing return
25%
50%
15%
0%
(iii)
No
reasonable grounds for ‘tax position’ taken
50%
75%
25%
0%
(iv)
‘
Impermissible
avoidance arrangement’
75%
100%
35%
0%
(v)
Gross
negligence
100%
125%
50%
5%
(vi)
Intentional
tax evasion
150%
200%
75%
10%
13.
It follows
that in circumstances where an alleged understatement of tax has
occurred, a three phase process is contemplated by the
Legislature.
Firstly, SARS must consider whether the understatement constitutes an
“understatement” as defined in s221
of the TAA. If it
does, SARS must then consider whether the understatement results from
a “
bona
fide
inadvertent error”. If such an error is established, that is
the end of the inquiry, and no understatement penalty may be
levied.
However, where there is no such error, SARS is then required to
identify the appropriate behavioral category under which
the
taxpayer’s conduct allegedly resorts in terms of the table set
out in section 223 before it can impose a penalty.
14.
In the instant
case, SARS elected to levy a penalty of 25% under Item (ii) of the
table because it held the view that the taxpayer’s

understatement resulted from it not having taken reasonable care in
the completion of its 2017 tax return. I shall deal with the

proceedings in the Tax Court shortly, but it is apposite to note at
this stage that in terms of s102 (2) of the TAA, SARS attracted
the
onus to justify its imposition of the relevant penalty i.e. 25% under
item (ii) in the table.
“
102(2)
The burden of proving whether an estimate under section 95 is
reasonable or
the facts on which SARS
based the imposition of understatement penalty
under Chapter 16, is upon SARS.” (Emphasis added)
PROCEEDINGS
BEFORE THE TAX COURT
15.
Proceedings
before the Tax Court are conducted in accordance with the rules
promulgated under s103 of the TAA. Accordingly, prior
to a hearing
before the Tax Court, SARS is obliged to file a document under Rule
31 entitled “Statement of grounds of assessment
and opposing
appeal”. Thereafter the taxpayer must file its “Statement
of grounds of appeal” under Rule 32. SARS
is entitled (but not
obliged) to file a “Reply to statement of grounds of appeal”
under Rule 33. It was common cause
that these documents constitute
the parties’ respective pleadings before the Tax Court and are
to be treated as such as if
they were litigating in the High
Court.
[3]
16.
In the event
that a party wishes to amend its respective statement under Rules 31
– 33, it may do so under Rule 35 (1) with
the agreement of the
opposing party. If there is no such agreement, the party seeking to
amend may invoke the provisions of Rule
52 and apply to the Tax Court
for leave to amend.
17.
In
formulating their pleadings, the parties are bound by the factual and
legal bases upon which the disputed assessment was initially
made and
challenged. A change of tack requires a revised assessment.
[4]
18.
In this
matter, SARS filed its Rule 31 Statement and the taxpayer replied
thereto through its Statement under Rule 32. SARS did
not file a
reply under Rule 33. Neither party sought to amend its pleadings at
any stage.
SARS’
RULE 31 STATEMENT
19.
The relevant
allegations in SARS’s founding statement filed under Rule 32
are to the following effect. For the avoidance of
confusion the
parties are referred to personally.
“
Capital
5.1
[The taxpayer] disposed of
Erf [....] Brackenfell
in the 2017
year of assessment and did not declare the proceeds of
R22 105 263
(VAT excl.) from such disposal for capital gains tax purposes in
its 2017 income tax return;
5.2
[SARS] has included the taxable capital gain from the disposal of the
asset into [the taxpayer’s] taxable income for the
2017 year of
assessment in terms of section 26A of the [Income Tax Act, 58 of
1962].
Understatement
Penalty
5.3
The omission of the proceeds of
R 22 105 263
(VAT
excl) from the disposal of an asset in the [taxpayer’s] income
tax return for the 2017 year of assessment for capital
gains
purposes, resulted in a loss to the prejudice of the
fiscus,
rendering [the taxpayer] liable for the payment of an understatement
penalty at the rate of 25% for a behaviour category of ‘reasonable

care not taken in completing a return’ on a standard case
imposed in terms of section 222 read with section 223 of the TAA.
Understatement
penalty
88.
Understatement is defined in section 221 of the TAA to mean any
prejudice to SARS or the
fiscus
as a result of
inter alia:
-
·
an omission
from a return…
99.
SARS applied the understatement penalty table in section 223 of the
TAA and imposed an understatement penalty of 25% as per
item (ii) –
‘standard case’ of reasonable care not taken in
completing a return during the 2017 year of assessment.
100.
In applying its mind to the facts and circumstances of the case, SARS
determined that the taxpayer’s actions of not declaring
the
proceeds of R22 105 263 (VAT excl) for capital gains tax
purposes constitute a behaviour that amounts to ‘no reasonable

care taken in completing a return’ on a standard case and
warranted the imposition of understatement penalties at 25%.
Reasonable
care
101.
Reasonable care requires the taxpayer to take the same care in
fulfilling his tax obligations that could be expected of a reasonable

ordinary person in the same position.
102.
The [taxpayer] did not declare the proceeds from the sale of the
property for capital gains tax purposes in the income tax
return for
the 2017 year of assessment yet the net and calculated profit of
R14 420 024
in the VAT reconciliation in respect of
the disposal of
Erf [....] Brackenfell
was declared by the
[taxpayer] in the income tax reconciliation schedule for IT15SD
purposes.
103.
The [taxpayer] further declared total gross sales of
R25 176 200
in the VAT reconciliation schedule for IT14SD purposes. The gross
sales are inclusive of the proceeds from the disposal of
Erf
[....] Brackenfell
. The [taxpayer] has thus acknowledged the sale
of
Erf [....]
(sic)
Brackenfell
.
104.
In the VAT 201 for the 10/2016 VAT period, the [taxpayer] also
declared standard rated supplies of
R25 316 449
thereby
acknowledging the proceeds of
R25 200 000
(VAT incl)
from the disposal of
Erf [....]
(sic)
Brackenfell.
105.
Reasonableness required the [taxpayer] to have known that the sale of
the property on 26 September 2016 and the subsequent
registration on
27 October 2016 is a disposal event that triggers proceeds which
accrued to the [taxpayer] during the 2017 year
of assessment.
106.
The [taxpayer’s] failures to make such declarations are actions
that fall below the standard of a reasonable person in
similar
circumstances.
107.
SARS submits that the understatement penalties were correctly imposed
at 25%.”
THE
TAXPAYER’S RULE 32 STATEMENT
20.
After setting
out the facts and conclusions of law upon which it relied, the
taxpayer alleged that no understatement existed. Given
that this is
no longer an issue between the parties, it is not necessary to
discuss the question further.
21.
The nub of the
taxpayer’s case for the purposes of this appeal appears from
the following allegations it its Rule 32 Statement.
“
Reasonableness
of the [taxpayer’s] actions
12.
For those reasons set out in paragraphs 16 to 20 below, the
[taxpayer] contends that it had not acted unreasonably in adopting

the tax position it had; a contention with which [SARS] appears to
agree.
[5]
Understatement
not connected with return completion process
13.
The above notwithstanding, it is the [taxpayer’s] contention
that any ‘understatement’ did not arise from
its return
completion process and therefore that the imposition of an
understatement penalty on the basis of ‘reasonable
care not
taken in completing return’ is inappropriate. Rather if an
‘understatement’ is present, it arose from
the tax
position taken by the [taxpayer].
14.
An understatement in the present matter cannot be said to be causally
connected to the process followed by the taxpayer when
completing its
income tax return. [SARS] therefore identified the incorrect
behaviour against which it applied the understatement
penalty.”
22.
After
setting out its allegations of fact and legal conclusions which it
contended justified the “tax position”
[6]
it had adopted, the taxpayer concluded as follows –
“
17…
The taxpayer’s calculation of its tax liability cannot be
described as being unreasonable solely due thereto that
it had
interpreted the time of disposal and time of accrual rules in a
manner different to [SARS].
18.
The reasonableness of the [taxpayer’s] provisional tax
calculation is further borne out by the fact that [SARS] elected
not
to penalize the [taxpayer] for any ‘understatement’ on
the basis of ‘no reasonable grounds for ‘tax
position’
taken. Had [SARS] truly considered the [taxpayer] to have no
reasonable grounds for the ’tax position’
adopted, it
would have been obliged to levy a 50% penalty as opposed to a 25%
penalty. It is for this reason that the table in
section 223 of the
[TAA] provides for behaviour of ‘No reasonable grounds for ‘tax
position’ taken’, and
which behaviour attracts penalties
in a ‘standard case’ at 50%.
19.
The failure to levy an understatement penalty at rates higher than
25% confirms that [SARS] was in fact satisfied that the
underestimation of the 2017 provisional tax liability was not
negligently or deliberately underestimated. Rather [SARS’]
actions betray [its] views that the ‘tax position’ of the
taxpayer in the current matter was not unreasonable, but that

reasonable grounds for that position had existed.
20.
Finally, it is notable that the [taxpayer’s] position has been
confirmed by independent expert opinion, further support
therefor
that it’s ‘tax position’ adopted was in fact
reasonable.”
23.
As
already observed, SARS did not file a Rule 33 reply to the taxpayer’s
allegations, particularly those made in para’s
12 and 18 to 20
of its Rule 32 statement. In accordance with the practice in the High
Court, the failure by a party to reply to
an allegation in a plea is
deemed to be a denial of such allegations by the other side.
[7]
This approach appears to be incorporated in the Tax Court Rules.
“
34
Issues in appeal
The
issues in an appeal to the tax court will be those contained in the
statement of the grounds of assessment and opposing the
appeal read
with the statement of the grounds of appeal and, if any, the reply to
the grounds of appeal.”
PRE-TRIAL
CONFERENCE
24.
On 29 January
2021 the parties held a virtual pre-trial meeting as contemplated in
Rule 38 of the tax court rules. In the minute
of that meeting the
parties recorded, inter alia, that –
“
1.2
The following facts are in dispute:
1.2.1
Whether the understatement arose from:
1.2.1.1
behaviour on the part of the taxpayer which may appropriately be
described as ’reasonable care not being taken in
completing a
return’;
1.2.1.2
unreasonable actions on the part of the taxpayer; and
1.2.1.3
a
bona fide
and inadvertent error on the part of the taxpayer;
and
1.2.2
Paragraphs 63 to 65 of [SARS’] Rule 31 Statement.”
25.
The fact that
SARS made no issue in the pre-trial procedures of any allegation
regarding the alleged unreasonableness of the tax
position adopted by
the taxpayer serves to confirm that it was only interested in
establishing conduct by the taxpayer in conflict
with item (ii) as
justification of the penalty imposed. Notwithstanding the fact that
the taxpayer had pointed out to SARS in its
Rule 32 Statement that,
at best for SARS, its conduct resorted under item (iii), SARS
exhibited no apparent interest in advancing
a case for a penalty
under that item.
EVIDENCE
ADDUCED BEFORE THE TAX COURT
26.
In the Tax
Court SARS relied on the
viva
voce
evidence of Ms. Marothodi, a risk profiler in its Specialist Audit
Division, who was tasked with investigating the taxpayer’s
2017
tax return after it was referred to her by an operational manager at
SARS.
27.
In her
evidence-in-chief Ms. Marothodi was asked by counsel to explain her
decision in assessing the understatement penalty.
“
Ms.
Tsoai
:
Now
can you please explain to the Court how did you choose - or how did
you come to the conclusion that reasonable care was not
taken in
completing a return was the most appropriate behavior or category
that should be imposed on the taxpayer or the appellant?”
Her
reply was as follows.
“
When
raising the assessment I went to the TAA for the imposition of USP,
since there was an understatement. The taxpayer omitted
some amounts,
as explained. So in choosing the behaviour I selected the reasonable
care not being taken in completing a return
because firstly the
taxpayer declared output for the same transaction… And the
sale agreement was concluded, as well as
the transfer was done. The
system issued a letter after the case was picked up for verification,
affording the taxpayer to submit
(sic) if there is an error on the
return. It was not done. I started with the audit and issued the
letter again for the taxpayer
to explain.”
28.
When pressed
under cross-examination by Dr. Marais, the witness fell about but
eventually accepted that she had chosen the wrong
behavioural
category in assessing the understatement penalty. She vacillated
between contending that the behaviour of the taxpayer
was
unreasonable in failing to include the CGT figure in the 2017 tax
return to unreasonable in relation to the basis for the tax
position
it claimed to have taken.
29.
Eventually,
Ms. Marothodi conceded that SARS had erred in imposing a 25% penalty
on the basis of the item (ii) behaviour it had
relied on and accepted
that the position contended for by the taxpayer (a reasonable
assumption in relation to the tax position
it had taken) was viable,
eventually stating rather opportunistically –
“
Okay,
looking at the facts, I must say that SARS lost the opportunity using
that 50%.”
30.
The witness
then rather brazenly went on to suggest to counsel for the taxpayer
that his client should be happy with the lesser
penalty because its
conduct had been unreasonable either way. The evidence clearly
demonstrates that the witness manifestly did
not understand the
difference between the behaviour categorised in items (ii) and (iii).
In light of the damaging concession made
by SARS’ only witness,
the taxpayer astutely closed its case without calling any witnesses.
THE
FINDINGS OF THE TAX COURT
31.
The Tax Court
accepted that SARS had unequivocally sought to levy the penalty on
the basis of the taxpayer’s failure to take
reasonable care in
the completion of its tax return and that it was bound by that
determination.
“
[45]
The question which then arises is whether SARS correctly categorized
the understatement as being the result of ‘
reasonable
care not taken in completing a return’.
Although during argument SARS advanced various reasons why it was
correctly categorized as such, it is bound by the concession
of its
own witness Ms. Marothodi that this was, in hindsight, incorrect and
that the penalty should rather have been based on ‘
no
reasonable grounds “for tax position” taken’
which
would have attracted a penalty of 50%.
[46]
Put differently, SARS pinned its colors firmly to the mast of failing
to take reasonable care in the tax return completion
process as
pleaded in its rule 31 statement, which is the case the appellant was
called upon to meet. However the evidence established
that the cause
of understatement was, in SARS’ view, a tax position based on
unreasonable grounds, although we refrain from
making any finding
thereon since we were not required to adjudicate upon this. However
we are nonetheless bound to conclude, in
the circumstances, that on
its own version SARS erred in imposing the understatement penalty in
item (ii) as opposed to item (iii)
of 50% in the understatement
penalty percentage table contained in s 223(1) of the TAA.”
32.
After
the conclusion of argument, the Tax Court had invited the parties to
make written submissions on the question as to whether
it was
entitled to increase the penalty to 50 %. Relying on the decision of
the Supreme Court of Appeal (“SCA”) in
Purlish
[8]
,
the Tax Court held that it was precluded from making such an
increase. However, said the Tax Court, the very passage relied upon

entitled it to hold the taxpayer to the imposed penalty.
“
[49]
On our interpretation of the above quoted passage this does not mean
that the appellant then escapes liability for the penalty
imposed by
SARS, but simply that it nonetheless remains liable for the reduced
to 25% penalty.”
The
issue before this Court is therefore whether this conclusion arrived
at by the Tax Court was correct. It requires, firstly,
consideration
of paragraph 25 of
Purlish
.
33.
The facts in
Purlish
were that the taxpayer had paid provisional income tax and applied
for a refund in excess of R13m, alleging that the company had
not yet
commenced trading. After conducting an audit, SARS established that
the taxpayer was indeed trading, had accrued substantial
income and
had, furthermore, charged VAT for its services rendered to clients
without rendering VAT returns to SARS. Its tax returns
thus contained
allegations which were tantamount to fraud. After determining the
income tax payable by the taxpayer, SARS proceeded
to impose
understatement penalties at the rate of 100% on the basis of item
(iv) – “Gross negligence”
34.
The taxpayer
then successfully objected to the imposition of the understatement
penalties and SARS reduced these to 25% in respect
of income tax and
50% in respect of VAT. The matter eventually proceeded to the Tax
Court where it was found that the taxpayer
had been grossly negligent
and that the imposition of the 100% penalties on both taxes was
warranted. The Tax Court then proceeded
to increase the penalties.
35.
The matter
served before the SCA with the leave of the Tax Court where the SCA
held as follows:
“
[25]
The next question is whether the Tax Court was entitled to increase
the understatement penalties levied by SARS. Section 129(3)
of the
TAA empowers the Tax Court to increase an understatement penalty.
But, that only arises if the issue has
been properly raised for adjudication before that court.
This is determined by Rule 34, which provides:
‘
The
issues in an appeal to the tax court will be those contained in the
statement of the grounds of assessment and opposing the
appeal read
with the statement of the grounds of appeal and, if any, the reply to
the grounds of appeal
.'
It
was fairly conceded by counsel for SARS, that SARS had never raised
the issue of the increase of the reduced penalties for adjudication

before the Tax Court. In its Rule 31 statement, SARS only sought to
justify the reduced penalties. It follows that it was incompetent
for
the Tax Court to have increased the reduced penalties. To that extent
the appeal against the decision of the Tax Court must
succeed. It
follows that the understatement penalties of 100 per cent imposed by
the Tax Court in respect of both income tax and
VAT for the relevant
periods must be set aside and SARS’ understatement penalty of
25 per cent in respect of income tax and
50 per cent in respect of
VAT reinstated. Accordingly paragraphs 2 to 5 of the order of the Tax
Court falls to be set aside.”
(Emphasis added)
36.
In my
respectful view the Tax Court misread
Purlish
.
There is no debate that the Tax Court has the power to increase an
understatement penalty – s129 (3) of the TAA expressly
provides
so.
“
129.
Decision by tax court
(3)
In the case of an appeal against an understatement penalty imposed by
SARS under a tax Act, the tax
court must decide the matter on the
basis that the burden of proof is upon SARS and may reduce, confirm
or increase the understatement
penalty.”
37.
But that power
to increase is contingent upon, firstly, SARS having made the
allegation in its Rule 31 Statement, and, secondly,
having discharged
the burden of proof. That is the basis upon which the SCA decided
Purlish
as the highlighted passage above makes clear.
38.
The
position under the TAA and the tax court rules is in accordance with
the accepted purpose of pleading. The position was summarized
thus in
Trope
[9]
-
“
It
is, of course, a basic principle that particulars of claim should be
so phrased that a defendant may reasonably and fairly be
required to
plead thereto. This must be seen against the background requirement
that the object of pleadings is to enable each
side to come to trial
prepared to meet the case of the other and not be taken by surprise.”
39.
In
Molusi
[10]
the Constitutional Court summarized the position further as follows.
“
[28]
The purpose of pleadings is to define the issues for the other party
and the court. And it is for the court to adjudicate upon
the
disputes and those disputes alone. Of course there are instances
where the court may of its own accord (mero motu) raise a
question of
law that emerges from the evidence and is necessary for the decision
of the case as long as its consideration on appeal
involved no
unfairness to the other party against whom it is directed. In
Slabbert
[11]
the Supreme Court of
Appeal held:
‘
A
party has a duty to allege in the pleadings the material facts upon
which it relies. It is impermissible for a plaintiff to plead
a
particular case and seek to establish a different case at the trial.
It is equally not permissible for the trial court to have
recourse to
issues falling outside the pleadings when deciding the case.’”
(Internal
references otherwise omitted)
.
40.
In a matter
such as this, SARS is further restricted by the provisions of Rule
31(3) to which reference has already been made. Having
opted in its
tax assessment to impose an understatement penalty under item (ii),
it was not open to SARS to seek to advance a different
factual basis
for its assessment in its Rule 31 Statement, e.g. under item (iii),
without issuing a revised assessment. The reason
for this is
obviously to fairly afford a taxpayer the opportunity to reconsider
its position before embarking on a tax appeal process.
41.
As I have
demonstrated above, the case SARS sought to advance throughout was
that the imposition of the understatement on the taxpayer
was
justified because of the taxpayer’s alleged behaviour under
item (ii) - that it had not taken reasonable care in completing
its
tax return. It never deviated from that approach and did not seek to
amend its case (in circumstances where that may have been

permissible) at any stage until its witness changed tack under
cross-examination.
42.
As the SCA
directed in
Purlish
,
the issues in this case were determined by the provisions of Rule 34
of the tax court rules. And, as demonstrated above, the parties

confirmed in para 1.2.1.1 of their pre-trial minute that the issue
was the behaviour categorized in item (ii) – no more,
no less.
43.
Accordingly,
if SARS elected to impose a 25% understatement penalty under item
(ii), it was required to prove the factual basis
therefor when its
determination was challenged by the taxpayer in the Tax Court. It is
common cause that SARS did not do so, and
in the circumstances there
is no basis, either in fact or law, for it to recover that penalty
from the taxpayer. It follows that
the Tax Court was wrong in
confirming the understatement penalty of 25%.
44.
Before us, Mr.
Mokgatle argued that, as SARS had established an understatement by
the taxpayer, it was entitled to impose a penalty
without more. The
argument almost seems to suggest a measure of strict liability. I do
not agree. SARS’ prerogative to impose
an understatement
penalty is closely circumscribed by the provisions of s222 and 223 of
the TAA. Importantly, it must be borne
in mind that that prerogative
only comes into consideration if it has been established by SARS that
the understatement was not
occasioned by a bona fide error on the
part of the taxpayer.
45.
The
non-applicability of the bona fide error proviso in s222 (1) of the
TAA was not in dispute in this case. But that did not entitle
SARS to
then impose any penalty it considered applicable. S222 (2) carefully
circumscribes the powers of SARS.
“
222(2)
The understatement penalty is the amount resulting from applying the
highest applicable understatement penalty percentage
in accordance
with the table in section 223 to each shortfall determined under
subsections (3) and (4)
[12]
in
relation to each understatement in a return.”
It
follows that if, for example, SARS finds that there has been an
understatement based on the taxpayer’s failure to take

reasonable care in completing its return, it must impose the 25%
penalty: it does not have any discretion to lower the percentage.

Similarly, if the behaviour category relied on by SARS is the absence
of reasonable grounds for the tax position taken, it must
impose a
50% penalty. There is thus no statutory basis to impose a 25% penalty
in respect of behaviour falling within the ambit
of item (iii).
46.
What happened
in this matter is that the Tax Court
found
that SARS was bound
by the concession made by its witness under cross-examination and
that it had thus failed to establish the factual
basis for imposing
the item (ii) penalty of 25%. The Tax Court went further and found
that there was no basis for it to consider
whether the item (iii)
penalty of 50% had been established because this was not the case
pleaded by SARS.
“
(W)
e refrain from making any finding thereon since we were not required
to adjudicate upon this.”
That
notwithstanding, it sustained the claim by SARS for a 25% penalty.
47.
In my
respectful view, there is no statutory basis for such a finding. Once
SARS had failed in its bid to discharge the onus of
proving the item
(ii) penalty for which it had contended and which buttressed the case
the taxpayer came to meet, that was the
end the case. SARS was not
entitled to ask for “the money and the box”, as it were.
In finding that SARS was entitled
to retain the penalty which it had
failed to prove, the Tax Court effectively deprived the taxpayer of
answering a case it was
not called upon to meet. Aside from the
manifest unfairness of such an approach, the Tax Court (a creature of
statute bound by
the limits of its jurisdiction) was not permitted to
make such an order under s129(3) where the confirmation of an
understatement
penalty is dependent on SARS discharging its burden of
proof.
48.
In the result,
I propose that it must be concluded that the Tax Court erred in
confirming the understatement penalty and that the
taxpayer’s
appeal to this Court should be upheld.
COSTS
49.
Counsel were
ad idem that in the event of the appeal succeeding, the costs on
appeal should follow the result. Mr. Mokgatle also
agreed with the
terms of the order that Mr. Bothma proposed save for the issue of
costs in the Tax Court, where Mr. Mokgatle suggested
that it be
ordered that each party pay its own costs.
50.
The question
of costs before a tax court is governed by s130 of the TAA and Mr.
Bothma submitted that s130 (1)(a) was applicable.
“
130.Order
for costs by tax court
(1)
The tax court may, in dealing with an appeal under this Chapter and
on application by an aggrieved party, grant an order for
costs in
favour of the party, if –
(a)
the SARS grounds of assessments or ‘decision’ are held to
be unreasonable.”
51.
In my view,
the approach adopted by SARS in assessing the understatement penalty
was indeed unreasonable in the circumstances. Throughout
the taxpayer
played open cards with SARS and as early as 16 May 2018, set out its
case in seeking to justify the adoption of its
tax position. That
stance was repeated in detail in its Rule 32 Statement. SARS did not
seek to adequately engage with the taxpayer
as to the reasonableness
of the tax position adopted, nor consider revising its assessment to
levy a 50% penalty thereon. Rather,
it steadfastly persisted with its
claim that the taxpayer had not taken reasonable care in submitting
the 2017 tax return.
52.
To meet SARS’
case, which it now readily admits was based on the wrong statutory
provision, the taxpayer was required to spend
time and valuable
resources, including legal expenses and procuring expert advice from
a tax practitioner. Those resources were
wasted when SARS abandoned
its initial position half way through the proceedings and
opportunistically attempted to justify something
which was manifestly
legally untenable.
53.
In the
circumstances I am satisfied that the taxpayer has established that
SARS’ decision to fix and impose an understatement
penalty of
25% under item (ii) was unreasonable in the circumstances and that it
would be just and equitable to order it to pay
the taxpayer’s
costs in the Tax Court. In terms of s130 (2), such costs are taxable
on the High Court scale.
54.
In the
circumstances I would propose the following order:
A.
The appeal is upheld with costs.
B.
The order of the Tax Court dated 18 June 2021 is set aside and
replaced with the following –
1.
The appeal is upheld.
2.
The respondent is directed to alter the 2017 additional assessment
issued for the appellant to exclude the understatement penalty

imposed.
3.
The respondent is ordered to pay the appellant’s costs of suit,
such costs to be taxed on the High Court scale.
GAMBLE,
J
I
agree and it is so ordered.
GOLIATH,
AJP
I
agree.
KUSEVITSKY,
J
Appearances:
For
the appellant:    Mr. P-S Bothma
Instructed
by            Marais
Pacitti Attorneys
Cape
Town.
For
the respondent: Mr O Mogatle (with him Ms T Tsoai)
Instructed
by            The
Commissioner for the South African Revenue Service
Pretoria.
[1]
The
membership of the corporations was identical
[2]
The use of inverted commas in the text is intended to refer to
internal definitions in the TAA.
[3]
In terms of Rule 42 of the Tax Court Rules, if such rules “
do
not provide for a procedure in the tax court, then the most
appropriate rule under the…High Court [Rules]… may
be
utilized by a party or the tax court.”
[4]
Rule 31(3) provides that “
SARS
may not include in the [Rule 31] statement a ground that constitutes
a novation of the whole of the factual or legal basis
of the
disputed assessment or which requires the issue of a revised
assessment.
”
Rule
32(3) similarly provides that the taxpayer “
may not include
in the [Rule 32] statement a ground of appeal that constitutes a new
ground of objection against a part or amount
of the disputed
assessment not objected to under rule 7.
”
[5]
The taxpayer references the contents of paragraphs 18 and 19 of its
Rule 32 Statement by way of a footnote.
[6]
In s221 of the TAA, ‘
tax
position
’
is defined as ‘
an
assumption underlying one or more aspects of a tax return, including
whether or not –
(a) an amount,
transaction, event or item is taxable;
(b) an amount or item
is deductible or may be set-off;
(c)
a lower rate of tax than the maximum applicable to that class of
taxpayer, transaction, event or item applies; or
(d) an amount
qualifies as a reduction of tax payable…”
[7]
See Rule 25(2);
Moghambaram
v Travagaimmal
1963 (3) SA 61
(D&CLD) at 62F
[8]
Purlish
Holdings (Pty) Ltd v The Commissioner for the South African Revenue
Service
[2019] ZASCA 04
(26 February 2019) at [25]
[9]
Trope
v South African Reserve Bank and another
1992 (3) SA 208
(T) at 210G-H
[10]
Molusi
v Voges
2016 (3) SA 370
(CC) at
[11]
Minister
of Safety and Security v Slabbert
[2010] 2 All SA 474
(SCA) at [11]
[12]
These subsections provide the method of calculation of the shortfall
in a taxpayer’s return to which the understatement
is to be
applied.