There are many reasons why a taxpayer may want to get a tax opinion. For example, a taxpayer may want confirmation that their understanding of a tax matter is correct. Then again, the taxpayer may require an opinion from an attorney that is protected by legal privilege, or perhaps they are involved in a tax dispute with SARS and want clarity on their tax position. An advantage that is often overlooked is found in section 223(3) of the Tax Administration Act, 2011.
Section 223(3) states that the South African Revenue Service (SARS) must remit a penalty imposed for a ‘substantial understatement’ if SARS is satisfied that the taxpayer was in possession of an opinion by an independent registered tax practitioner. Such penalties are usually paid by a taxpayer in addition to the tax payable where there has been an understatement. An understatement includes a failure to submit a return, or an omission or incorrect statement in a return. A ‘substantial understatement’ is where the prejudice to SARS or the fiscus exceeds the greater of 5% of the amount of tax for the relevant tax period, or R1 million.
Before SARS remits a penalty, they must be satisfied that the taxpayer has made a full disclosure of the arrangement that gave rise to the prejudice to SARS by no later than the date that the relevant return was due. The opinion itself must also be based upon a full disclosure of the specific facts and circumstances of the arrangement. Furthermore, the opinion must have been issued by no later than the date that the relevant return was due. In other words, the taxpayer should seek the opinion before the tax return and in parallel with the event or arrangement that gives rise to the understatement. Finally, the opinion must confirm that the taxpayer’s position is more likely than not to be upheld if the matter proceeds to court.
By way of example, a taxpayer excludes a R1 million receipt in his income based upon an opinion issued by a tax practitioner stating that the receipt was not revenue in nature but capital. Following an audit on the taxpayer, SARS disputes the exclusion and issues an assessment for the income. Ordinarily the taxpayer would receive at least a 25% penalty, but because he had an opinion from a registered tax practitioner before the date of the return confirming that the receipt was capital in nature, the penalty must be remitted even if it transpires that a subsequent judgement by a court is in favour of the SARS interpretation and not in agreement with the tax practitioner’s opinion.