Demystifying bona fide inadvertent errors
Demystifying bona fide inadvertent errors
By Esther van Schalkwyk, Associate Director, BDO
There are very few golden tickets in the Tax Administration Act. The bona fide inadvertent error is one. The existence of such an error allows taxpayers to escape understatement penalties which range between 10% and 200% of the tax properly payable. This article considers some of the meanings ascribed to this crucial term, including two recent taxpayer-friendly pronouncements by the Supreme Court of Appeal (SCA).
Different courts have in the past given different meanings to the term bona fide inadvertent error. The Cape Town Tax Court in ITC 1890 79 SATC 62 (4 November 2016) described it as “an innocent misstatement by a taxpayer on his or her return, resulting in an understatement, while acting in good faith and without the intention to deceive.” This interpretation was deemed “not very helpful” by the Port Elizabeth Tax Court in ITC 1948 84 SATC 110 (11 December 2019) as it failed to give meaning to the word “inadvertent”, this being an essential element of the kind of error apparently singled out by the legislature as excusable.
Since understatement penalties seek to punish blameworthy behaviour (of the kind listed in the understatement penalty percentage table), the latter case described a bona fide inadvertent error as “an honest mistake in the tax return of a taxpayer that occurred notwithstanding the maintenance of procedures reasonably adopted to avoid such errors.” The court reasoned that an error could not be inadvertent (and therefore excusable) if the taxpayer was guilty of any of the blameworthy behaviours listed in the table, such as reasonable care not taken in completing a return, gross negligence or intentional tax evasion. Since the taxpayer did not show that it had taken reasonable steps to detect obvious errors made by its accountant in the completion of the return, the court rejected the taxpayer’s contention that the understatement arose from a bona fide inadvertent error. Arguably, the taxpayer did take reasonable steps by seeking the expert advice of its accountant on the change in accounting policy and also tasking that same accountant with the completion of the relevant return; however, the court took a narrower view.
An even narrower view was proposed by SARS in its Guide to Understatement Penalties (issue 2 dated 18 April 2018) which sought to limit bona fide inadvertent errors to only certain typographical errors, those being so-called “properly involuntary ones”.
The word “inadvertent” was specifically used by the legislature and should add something in its own right to the term bona fide inadvertent error. However, a narrow view of this term (especially to the extent previously suggested by SARS) seems at odds with the purpose of the provision read in the context of the understatement penalty regime, which seeks to punish blameworthy behaviour according to the level of blameworthiness (and surely honest mistakes are generally not blameworthy). Furthermore, the legislature could easily have specified “purely involuntary typographical errors” (which it notably did not do) if this was indeed the only intended target of the provision.
Two recent judgements of the SCA seemed to follow a broad approach to interpreting the term bona fide inadvertent error and found in favour of the taxpayer on that aspect. In CSARS v The Thistle Trust 85 SATC 347 handed down by the SCA towards the end of 2022 (in which the court found in SARS’s favour on the merits), SARS surprisingly conceded (and the SCA agreed) that the taxpayer’s reliance on a tax opinion in adopting a certain tax position was a bona fide inadvertent error. Although the findings of the Court in this case appear to be open to criticism, this concession is somewhat of a breakthrough for taxpayers who have relied on advice that turned out to be incorrect.
More recently, the SCA in CSARS v Coronation Investment Management SA (Pty) Ltd (1269/2021) [2023] ZASCA 10 (07 February 2023) also found in SARS’s favour on the merits and in following Thistle yet again excused the taxpayer from understatement penalties based on a bona fide inadvertent error. The taxpayer in Coronation also alleged to have acted on expert tax advice but opted not to disclose the contents thereof to SARS. SARS wanted the court to infer from this non-disclosure that the tax opinion did not support the tax position adopted by the taxpayer, therefore the error could not have been bona fide or inadvertent. The SCA found this allegation by SARS purely speculative and insufficient to attribute mala fides to the taxpayer.
The outcome in Coronation serves as a reminder that SARS bears the onus of proving the facts on which an understatement penalty is based (unlike most cases in which the taxpayer bears the onus). Therefore, in seeking to impose understatement penalties, it is up to SARS to discharge the onus of proving that the error was not a bona fide inadvertent error rather than the taxpayer having to prove that it was. For this reason, the outcome in Coronation is welcomed although it is unfortunate that the court did not delve into the interpretational difficulties presented by the error having to be inadvertent as well as bona fide.
The view that SARS must establish the absence of a bona fide inadvertent error before imposing an understatement penalty is not shared by all. See, for instance, ITC 1959 85 SATC 35 (9 February 2022) handed down by the Johannesburg Tax Court. Although the Tax Administration Act does not specify what is meant by “the facts on which SARS based the imposition of an understatement penalty” (which SARS bears the burden of proving), it is submitted that these “facts” include the behaviour category relied on by SARS as well as the absence of a bona fide inadvertent error. Once SARS has made a prima facie case for the imposition of an understatement penalty, the taxpayer may face an evidentiary burden to overcome, however, this does not detract from the fact that the overall burden of proof rests with SARS. The outcome in Coronation seems to indicate that the SCA shares this view.
Although certain courts have in the past taken a narrow view of bona fide inadvertent errors, as noted above, two recent judgements handed down by the SCA seem to favour a broader interpretation. This should come as welcome news to taxpayers who may otherwise have faced steep penalties.
This article first appeared in the October 2023 edition of Accountancy SA’s - Integritax Journal
(www.accountancysa.org.za/integritax/)
There are very few golden tickets in the Tax Administration Act. The bona fide inadvertent error is one. The existence of such an error allows taxpayers to escape understatement penalties which range between 10% and 200% of the tax properly payable. This article considers some of the meanings ascribed to this crucial term, including two recent taxpayer-friendly pronouncements by the Supreme Court of Appeal (SCA).
Different courts have in the past given different meanings to the term bona fide inadvertent error. The Cape Town Tax Court in ITC 1890 79 SATC 62 (4 November 2016) described it as “an innocent misstatement by a taxpayer on his or her return, resulting in an understatement, while acting in good faith and without the intention to deceive.” This interpretation was deemed “not very helpful” by the Port Elizabeth Tax Court in ITC 1948 84 SATC 110 (11 December 2019) as it failed to give meaning to the word “inadvertent”, this being an essential element of the kind of error apparently singled out by the legislature as excusable.
Since understatement penalties seek to punish blameworthy behaviour (of the kind listed in the understatement penalty percentage table), the latter case described a bona fide inadvertent error as “an honest mistake in the tax return of a taxpayer that occurred notwithstanding the maintenance of procedures reasonably adopted to avoid such errors.” The court reasoned that an error could not be inadvertent (and therefore excusable) if the taxpayer was guilty of any of the blameworthy behaviours listed in the table, such as reasonable care not taken in completing a return, gross negligence or intentional tax evasion. Since the taxpayer did not show that it had taken reasonable steps to detect obvious errors made by its accountant in the completion of the return, the court rejected the taxpayer’s contention that the understatement arose from a bona fide inadvertent error. Arguably, the taxpayer did take reasonable steps by seeking the expert advice of its accountant on the change in accounting policy and also tasking that same accountant with the completion of the relevant return; however, the court took a narrower view.
An even narrower view was proposed by SARS in its Guide to Understatement Penalties (issue 2 dated 18 April 2018) which sought to limit bona fide inadvertent errors to only certain typographical errors, those being so-called “properly involuntary ones”.
The word “inadvertent” was specifically used by the legislature and should add something in its own right to the term bona fide inadvertent error. However, a narrow view of this term (especially to the extent previously suggested by SARS) seems at odds with the purpose of the provision read in the context of the understatement penalty regime, which seeks to punish blameworthy behaviour according to the level of blameworthiness (and surely honest mistakes are generally not blameworthy). Furthermore, the legislature could easily have specified “purely involuntary typographical errors” (which it notably did not do) if this was indeed the only intended target of the provision.
Two recent judgements of the SCA seemed to follow a broad approach to interpreting the term bona fide inadvertent error and found in favour of the taxpayer on that aspect. In CSARS v The Thistle Trust 85 SATC 347 handed down by the SCA towards the end of 2022 (in which the court found in SARS’s favour on the merits), SARS surprisingly conceded (and the SCA agreed) that the taxpayer’s reliance on a tax opinion in adopting a certain tax position was a bona fide inadvertent error. Although the findings of the Court in this case appear to be open to criticism, this concession is somewhat of a breakthrough for taxpayers who have relied on advice that turned out to be incorrect.
More recently, the SCA in CSARS v Coronation Investment Management SA (Pty) Ltd (1269/2021) [2023] ZASCA 10 (07 February 2023) also found in SARS’s favour on the merits and in following Thistle yet again excused the taxpayer from understatement penalties based on a bona fide inadvertent error. The taxpayer in Coronation also alleged to have acted on expert tax advice but opted not to disclose the contents thereof to SARS. SARS wanted the court to infer from this non-disclosure that the tax opinion did not support the tax position adopted by the taxpayer, therefore the error could not have been bona fide or inadvertent. The SCA found this allegation by SARS purely speculative and insufficient to attribute mala fides to the taxpayer.
The outcome in Coronation serves as a reminder that SARS bears the onus of proving the facts on which an understatement penalty is based (unlike most cases in which the taxpayer bears the onus). Therefore, in seeking to impose understatement penalties, it is up to SARS to discharge the onus of proving that the error was not a bona fide inadvertent error rather than the taxpayer having to prove that it was. For this reason, the outcome in Coronation is welcomed although it is unfortunate that the court did not delve into the interpretational difficulties presented by the error having to be inadvertent as well as bona fide.
The view that SARS must establish the absence of a bona fide inadvertent error before imposing an understatement penalty is not shared by all. See, for instance, ITC 1959 85 SATC 35 (9 February 2022) handed down by the Johannesburg Tax Court. Although the Tax Administration Act does not specify what is meant by “the facts on which SARS based the imposition of an understatement penalty” (which SARS bears the burden of proving), it is submitted that these “facts” include the behaviour category relied on by SARS as well as the absence of a bona fide inadvertent error. Once SARS has made a prima facie case for the imposition of an understatement penalty, the taxpayer may face an evidentiary burden to overcome, however, this does not detract from the fact that the overall burden of proof rests with SARS. The outcome in Coronation seems to indicate that the SCA shares this view.
Although certain courts have in the past taken a narrow view of bona fide inadvertent errors, as noted above, two recent judgements handed down by the SCA seem to favour a broader interpretation. This should come as welcome news to taxpayers who may otherwise have faced steep penalties.