CZY v CSARS (IT 24988)

The appellant and taxpayer, CZY, engaged in a business of wild game farming. The taxpayer purchased exotic animals for business purposes which cost the taxpayer sought to deduct as an expense incurred in the course of earning income in the 2014 year.

SARS conducted an audit and rejected the taxpayer’s claim for the expense of the wild stock purchased. The taxpayer agreed with SARS but contented that no understatement penalty should be imposed.

SARS issued the finalization letter and a 100% “gross negligence” understatement penalty was imposed.

The taxpayer objected to the imposition of the understatement penalty which was partially allowed which reduced the penalty to only 25% for “reasonable care not taken in completing the return”.

SARS bore the onus of proving the facts upon which the understatement penalty was based.

Analysis of absolution

At the close of the case, the taxpayer applied for absolution from the instance.

Absolution is a particular remedy in which the defendant (i.e. the taxpayer) is absolved because the plaintiff (i.e. SARS) failed to make out a case in which a reasonable court could find in its favour. As such the defendant would be absolved without having to meet the case of the plaintiff. Simply put, there is no case for the defendant to meet and the parties are in the same position as they were before litigation began.

This raised the question whether the relief of absolution can be applied in tax disputes where SARS bore the burden of proving the tax liability albeit as a result of an understatement penalty.

As the tax court does not have the same rules as the high court, there could not be any allowances for absolution.

The taxpayer asked the court to import the relevant high court rule in order to allow absolution to be available where SARS bears the burden of proof.

Should the court grant absolution the taxpayer would still be liable for the understatement penalty of 25% and it was therefore held that absolution would not make sense in this case.

The court held that should the taxpayer wish to take the view that SARS has failed to discharge the burden of proof, it should close its case and argue the court to reduce the understatement penalty to zero.

Merits of appeal

The question before the court was whether to set aside the understatement penalty of 25%.  

Following detailed evidence led by witnesses, the court further reduced the penalty from 25% to 10%. Issues in contention were whether the taxpayer’s error resulted in prejudice to the fiscus; and whether the taxpayer took reasonable care in completing the return.

 The following summarizes the rationale of the court leading to a reduction in the penalty from 25% to 10%:

• The court agreed with SARS that the prejudice need not be financial and that SARS having to use resources to examine the taxpayer’s claim could be considered to be prejudice.
• The court, however, also agreed that in seeking the advice of an accountant, especially where the advice concerned complicated areas of accounting or tax liability, the taxpayer took reasonable care in completing its return. This is in line with an earlier Supreme Court of Appeal (“SCA”) finding that by seeking advice of a tax expert, a taxpayer was found to have acted reasonably even if the advice was incorrect.
• The taxpayer did what many taxpayers in this position would have done and left the matter in the hands of ABC.
• The court found that the taxpayer took reasonable care, however, it did not absolve the taxpayer from paying an understatement penalty.
• The penalty was accordingly reduced from 25% to 10% for “substantial understatement”.

Order

• The application for absolution was dismissed.
• The 25% penalty imposed be set aside.
• The taxpayer to pay 10% penalty.
• The quantification of the penalty to be undertaken by the respondent.
• Each party to pay own costs.

Find a copy of the court case here.

 14/01/2022