The Tax Court has upheld a 150% understatement penalty against a taxpayer whose revised tax returns generated an undue R1.38-million refund, rejecting her claim that officials from the South African Revenue Service had submitted the fraudulent returns.
Shepstone & Wylie lawyers Anton Lockem and Daniel Robb have nevertheless cautioned that two aspects of the judgment should be read narrowly because they could have wider consequences in less clear-cut cases involving the unauthorised use of eFiling credentials.
Lockem, the firm’s joint managing partner, and Robb, a senior associate, argue that the judgment risks conflating two legally distinct enquiries: whether the returns could be attributed to the taxpayer and whether she knew that the statements in them were false.
They also question the court’s suggestion that its power to reduce an understatement penalty may barely exist once SARS has correctly characterised the taxpayer’s conduct.
Fraudulent claims produced R1.38m refund
The taxpayer was a salaried employee with no source of income other than her employment. She filed her original returns in December 2020 and September 2021. In August 2023, revised returns were submitted for the 2020 and 2021 tax years.
The revised returns claimed that she had bought farming assets worth R1.5m in 2020 and R500 000 in 2021. They reflected farming losses of R750 000 and R700 000. The judgment records that the 2020 loss was set off against her employment income.
The revised returns also included IRP5 information purportedly from her employer that did not match the original certificates submitted to SARS. They reflected PAYE credits of R700 000 for 2020 and R800 000 for 2021.
These changes resulted in SARS paying an undue refund of about R1.38m into the taxpayer’s bank account.
When SARS audited the returns and requested invoices or other documentary evidence supporting the farming claims, the taxpayer admitted that she did not conduct a farming operation and had not purchased farming equipment.
SARS adjusted her liability to about R3.62m. According to the judgment, this comprised capital of R1.391m, interest of R141 171, and an understatement penalty of about R2.087m.
The capital and interest were not disputed. The key dispute before the Tax Court was whether SARS had proved the facts necessary to classify the understatement as intentional tax evasion and impose the resulting 150% penalty.
How the taxpayer said SARS obtained her credentials
The taxpayer admitted that her login details had been used to access eFiling and submit the revised returns. She denied submitting the returns herself and alleged that a SARS official had obtained her details and participated in the fraud.
She testified that, while dealing with SARS during 2023 about her tax liability for 2004, she had difficulty uploading documents and called the SARS call centre for assistance. She said she gave her login details and password to the official who assisted her. However, she did not identify the official or provide the telephone number she had called.
The court noted that the rules governing electronic communication with SARS required users to secure their identities and access codes. They prohibited registered users from sharing an access code with anyone, including a SARS official.
The taxpayer’s evidence therefore explained how she alleged that a SARS official had obtained her credentials, although she provided no details identifying the official or corroborating the interaction.
Court rejects claim of fraud by SARS officials
The taxpayer testified that, after receiving an initial payment of R123 000 from SARS, a man claiming to be a SARS official instructed her to transfer R52 000 into a nominated bank account. After receiving a further amount exceeding R1m, she said she was instructed to pay that money into another account.
According to her evidence, she eventually transferred R600 000 in six instalments of R100 000 but retained and used the balance herself. She did not identify the callers, provide their telephone numbers, produce her bank statements, identify the recipient accounts, or report the alleged fraud to the police.
Her version also changed over time. When a SARS auditor initially confronted her with the findings, the taxpayer reportedly said she had submitted the returns herself and accepted that she had to repay the money, although she asked that penalties not be imposed.
At a subsequent meeting, she said she had submitted the 2020 return but had obtained assistance from a SARS official with the 2021 return. Her written objection did not allege a fraudulent scheme involving SARS officials. That allegation arose only during the appeal process.
The court found that her claim to have been an innocent victim was contradicted by her knowledge that the refund was not due, her retention of part of the money, and her failure to provide documentary or other corroborating evidence.
It held that SARS had proved on a balance of probabilities that the fraudulent revised returns were submitted with the intention of obtaining an undue refund and had correctly classified the conduct as intentional tax evasion.
The court also awarded costs against the taxpayer under section 130 of the Tax Administration Act (TAA). It found that her grounds of appeal were unreasonable because the allegation that SARS officials had perpetrated the fraud had not been raised during the audit, objection, or alternative dispute resolution process and was unsupported by evidence.
SARS carries the burden of proof
An understatement arises under section 221 of the TAA when specified conduct, including an incorrect statement in a return, causes prejudice to SARS or the fiscus.
Section 222 generally requires a taxpayer to pay an understatement penalty unless the understatement resulted from a bona fide inadvertent error. The percentage is determined under section 223 according to the behaviour associated with the understatement.
For a standard case, the table prescribes penalties ranging from 10% for a substantial understatement to 150% for intentional tax evasion. SARS bears the onus under section 102(2) of proving the facts on which an understatement penalty is based.
In this case, the court held that the false farming claims and altered IRP5 information caused the required prejudice because they resulted in the undue refund. SARS also bore the onus of proving the facts supporting its classification of the taxpayer’s behaviour as intentional tax evasion.
The question raised by Lockem and Robb is what SARS had to establish before the fraudulent returns could be attributed to the taxpayer.
Attribution and knowledge are separate questions
The eFiling rules provide that a registered user is liable for activities and transactions performed using the user’s identity and access code.
The court held that SARS had established a prima facie case that the taxpayer submitted the false returns. An evidential burden then rested on her to show that there was a reasonable possibility that she had been unaware of the false statements.
The court also relied on section 235(2) of the TAA. Under this provision, a taxpayer who has made a statement of the kind contemplated in section 235(1) is deemed to have known that it was false unless the taxpayer can show a reasonable possibility that she was unaware of the falsity and that her ignorance was not due to negligence.
Lockem and Robb caution that attribution of the returns and knowledge of their falsity are separate enquiries.
They say section 235(2) assists only once it has been established that the taxpayer made, caused, or allowed the false statement. It does not deem the holder of eFiling credentials to be the author of every submission made using those credentials.
The use of the taxpayer’s credentials was strong prima facie evidence that the returns were attributable to her, but, in the lawyers’ view, it did not settle that question on its own.
This distinction did not affect the result in the present case. The taxpayer’s admissions, her conduct after receiving the refund, and her inconsistent and uncorroborated explanations provided additional evidence of both attribution and intention.
Lockem and Robb consequently describe the result as correct. Their concern is that section 235(2) should not be used in a future case as a shortcut to treating the holder of eFiling credentials as responsible for a fraudulent submission before it has been established that the taxpayer made, caused, or permitted it.
The distinction could become important in a future case where a taxpayer produces credible evidence that credentials were stolen or misused by an employee, tax practitioner, or another person with access to the profile.
Responsibility for protecting an eFiling profile, attribution of a particular return, and proof of intentional tax evasion are related but not necessarily identical questions.
Did the court understate its power over the penalty?
Lockem and Robb also question the judgment’s treatment of the Tax Court’s authority to alter an understatement penalty.
After finding that SARS had correctly classified the taxpayer’s conduct as intentional tax evasion, the court said its discretion to reduce the penalty was “very limited, if it exists at all” unless it found that SARS had mischaracterised the taxpayer’s behaviour.
The court added that the taxpayer had advanced no cogent reason for reducing the penalty.
Lockem and Robb say the court’s broader observation may overstate the position because section 129(3) of the TAA expressly empowers the Tax Court to reduce, confirm, or increase an understatement penalty.
They refer to the Supreme Court of Appeal’s decision in Purlish Holdings (Pty) Ltd v Commissioner for the South African Revenue Service. In that matter, the Tax Court increased understatement penalties that SARS had reduced during the objection process.
The SCA set aside the increases because the behavioural classifications supporting them were not issues properly before the Tax Court under the pleadings and pre-trial minute.
The decision therefore constrained the exercise of the Tax Court’s power to the issues properly before it. It did not find that the statutory power to reduce, confirm, or increase an understatement penalty did not exist.
The point did not affect the outcome in the present case because the taxpayer had advanced no cogent basis for reducing the penalty.
The taxpayer’s appeal ultimately failed on evidence that went well beyond the use of her eFiling credentials. Her admissions, conduct after receiving the refund, inconsistent explanations, and lack of corroborating evidence supported the court’s finding of intentional tax evasion.
Lockem and Robb nevertheless caution against allowing the facts of this case to obscure the distinction between attributing a return to a taxpayer and determining whether the taxpayer knew that the statements in it were false. In a future case involving credible evidence of unauthorised access, the use of a taxpayer’s credentials may be powerful evidence, but it would not necessarily settle either question.
Similarly, the absence of grounds for reducing this taxpayer’s penalty does not mean that the Tax Court lacks the statutory power to alter an understatement penalty in a properly pleaded case.
