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:
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.
Click here to download the full judgment or should you require more information regarding this communication, kindly contact us using the below details: