Navigating the world of taxes can be tricky, especially if you’re not a tax expert. This is the story of an entrepreneur who found herself in a tough situation with the South African Revenue Service (SARS) over her tax filings from 2011. Let’s explore her journey, the challenges she faced, and why her stance was justified.

Background

Our Taxpayer is an entrepreneur who depends on professional accountants and tax advisors for her tax matters. She doesn’t have a background in taxation and trusts these experts to guide her.

In 2007, she lent R20,000,000 to a company owned by her father. Despite her loan, the company was liquidated and deregistered in 2011. Following her tax advisors’ guidance, she wrote off the loan and claimed a capital loss in her 2011 tax return, with the understanding and assumption that the company would report a corresponding capital gain, supporting her claim.

In 2020, SARS informed her that the company hadn’t reported the capital gain. Re-opening the company’s 2011 tax return was not feasible due to its deregistration and the time passed. SARS then issued additional assessments for her 2012, 2013, 2015, and 2016 tax years, imposing hefty penalties and interest charges. Our Taxpayer therefore engaged with us to start with the dispute process against SARS.

The Dispute

SARS’s additional assessments included understatement penalties totalling around R1,300,000 and interest of around R700,000. SARS argued that her case and behaviour was a “standard case” and that she had no reasonable grounds for her tax position.

The Taxpayer’s Standpoint: Reasonable Grounds

We argued on behalf of the Taxpayer that she had reasonable grounds for claiming the capital loss in 2011. According to the Income Tax Act, a creditor can claim a capital loss when disposing of a debt owed by a connected person if the debtor reports corresponding tax consequences. The company failed to report this capital gain, and it could not have reasonably been expected of the Taxpayer to know this, considering that she relied on her previous tax advisors’ guidance that the company would report the gain.

Here are the key points we made in support of her claim:

1.  She relied on accountants and tax professionals to manage her returns and provide advice.
2.  The advice was accurate, and it was required for the company to report the gain.
3. She isn’t a tax professional.

Burden of Proof

Under the Tax Administration Act 28 of 2011, SARS must prove the penalties imposed were justified. We argued on behalf of the Taxpayer that SARS hasn’t met this burden since the Taxpayer relied on professional advice, which constitutes reasonable grounds.

Outcome

The Taxpayer’s reliance on professional advice and her lack of tax expertise provided reasonable grounds for her tax position. SARS had not sufficiently proven the penalties were warranted. Therefore, SARS agreed to waive the understatement penalties for 2012, 2013, 2015, and 2016.  SARS also agreed to remit the interest for these years, as the Income Tax Act allows for interest remission if underpayment results from circumstances beyond the taxpayer’s control. Given her reliance on professional advice and lack of intent to evade tax, the interest was remitted.

Conclusion

We were able to save the Taxpayer around R2,000,000 through this dispute process. Her story highlights the importance of seeking professional advice on tax matters and the need for fair discretion when tax authorities impose penalties and interest. It’s a reminder that even in complex situations, trusting the right experts can make all the difference.

Article by:

Michelle Tickner; General Practioner (SA) – Head of Department; Legal and Consulting