Claiming of a catch-up wear and tear allowance and the levying of an USP

A judgment of the Tax Court in Gauteng (Case 24674), dated 25 November 2020, provides insight into the tax implications of claiming a catch-up wear and tear [s11(e)] allowance and the levying of an understatement penalty (USP).

In this case, the taxpayer (appellant), who was in an assessed loss position in the 2015 and 2016 tax years, failed to claim a s11(e) allowance in the 2015 tax year, which the appellant later sought to claim as a “catch-up” allowance in the 2016 tax year.

The Commissioner for the South African Revenue Service (SARS) rejected the deduction and imposed a USP of 50% - i.e. that the appellant had “no reasonable grounds for the tax position taken” - in terms of s222 of the Tax Administration Act No. 28 of 2011 (TAA) on the basis that there was an understatement by the taxpayer. The appellant conceded to the over-claiming of allowances, but appealed against the imposition of the USP. It argued that there was no understatement by it as there was no prejudice to SARS or the fiscus, given that both before and after the disallowance of the deduction, the appellant had an assessed loss. The court disagreed and dismissed the appeal.

The judgment further notes the following points:

• tax is an annual event and an allowance must therefore be claimed in the year of assessment in which it is incurred.
• the correction of an error made in prior years must be corrected by employing the appropriate provisions of the TAA, i.e. by the taxpayer requesting SARS to revise the original assessment, and not by a “catch-up” in a subsequent year, despite the final outcome potentially being the same.
• an assessed loss does not shield a taxpayer from a potential understatement, and therefore from the imposition of a USP.
• there is no bona fide inadvertent error where there is an intentional decision to claim an amount in error.
• the prejudice to the fiscus does not need to be immediate but also includes prospective or potential prejudice (Wavelengths Construction CC v SARS (Case No. 24622)). The court held that if SARS had allowed the catch-up allowance it could have had the effect of reducing the appellant’s future liability to SARS by increasing the assessed loss available in future years.

Taxpayers should take care when they discover errors in their tax returns of previous years, taking into account that trying to “rectify” these in the current year rather than following the procedures, provided for in the legislation, may lead to SARS imposing an understatement penalty. 

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