Warning for taxpayers in South Africa

Taxpayers who submit inaccurate returns, lack substantiating records, or mishandle disputes can face severe penalties and enforcement action from SARS.

This fact was reinforced by the recent case of Ntayiya v SARS, where the Supreme Court of Appeal reaffirmed SARS’ strict stance on understatement penalties.

It also showed the taxman’s harsh view surrounding the use of estimated assessments when taxpayers fail to provide accurate information.

The court dismissed an appeal by a taxpayer who sought repayment of funds attached by SARS and attempted to challenge a 150% understatement penalty linked to six consecutive nil returns.

“The decision sends a strong message,” said Tax Consulting SA’s Head of Tax Controversy and Dispute Resolution, André Daniels, and Senior Tax Attorney, Richan Schwellnus.

“When taxpayers submit incorrect returns, fail to substantiate their positions or abandon critical grounds of dispute, SARS is entitled to impose penalties and proceed with enforcement measures.”

Daniels and Schwellnus explained that the taxpayer in this case was an attorney who submitted nil returns for the tax years 2008 to 2013.

Essentially, this submission is made to inform SARS that a taxpayer had no taxable income, incurred no expenses, and engaged in no financial activity for a specific tax year.

This can occur in cases where, for example, a taxpayer was previously employed and receiving IRP5s, or has since moved overseas and no longer lives within South Africa.

In the Ntayiya case, SARS audited the taxpayer’s bank statements and found taxable income during the same period.

“Assessments were issued along with a 150% understatement penalty for intentional tax evasion,” Daniels and Schwellnus said.

“Although the taxpayer later produced revised financial statements through new accountants, these revisions did not materially change the assessed liability or the penalties.”

During litigation, the taxpayer abandoned the relief aimed at challenging the correctness of the original assessments. In doing so, he effectively left the assessments final under section 100 of the Tax Administration Act.

The cost of procedural missteps

“The Court confirmed that the understatement penalty was justified,” Daniels and Schwellnus said. “SARS had identified income inflows, vehicle purchases and an affidavit in which the taxpayer claimed to have earned no income.”

“In the absence of credible evidence of a bona fide error, the penalty for intentional evasion remained appropriate.”

They explained that the Court also upheld SARS’ use of a 10% private use adjustment on the taxpayer’s motor vehicles.

“The taxpayer provided no logbooks or records to prove a different split, and SARS relied on an estimate proposed by the taxpayer’s own accountants.”

“The SCA further refused the attempt to introduce new evidence about the attachment of the taxpayer’s law firm’s bank account.”

The firm is a separate legal entity and not a party to the appeal, and the evidence would not have changed the outcome. According to Daniels and Schwellnus, the judgment in this case reaffirms that:

• R-Nil returns must be supported by proper records
• A claim of inadvertent error requires real evidence
• Revised financials do not displace final assessments unless the challenge is properly prosecuted
• SARS may make estimated assessments when information is incomplete, and
• Entities cannot be conflated to justify a set off against a personal tax debt.

“For taxpayers, the decision is a reminder that procedural missteps can be as damaging as substantive errors,” they warned. “Once an assessment becomes final, challenging penalties become extremely difficult.”

Daniels and Schwellnus said this case illustrates the risk taxpayers face when disputes are not managed strategically and supported with proper documentation.

“From penalty disputes to ADR, objections and appeals, specialist tax attorneys ensure that arguments are framed correctly, deadlines are met, and the correct remedies are pursued.”

“In the current enforcement climate, professional representation is essential to protect taxpayers against penalties, asset attachments and unnecessary financial exposure.”