An analysis of the effectiveness of the understatement penalty

Abstract

With the enactment of the understatement penalty in the Tax Administration Act 28 of 2011, in October 2012, a new era dawned on compliance penalties for the taxpayers of South Africa. It brought about changes to the legislative provisions regulating compliance penalties and introduced behavioural penalties, a foreign concept which was met with fear and scepticism. The subjective imposition of the former penalty regime, the additional taxes, which was scattered all over the different tax Acts, contributed to the perception of the taxpaying public that the understatement penalty would follow suit. The main objective in this study was to determine if the understatement penalty was effectively applied and aligned with its foreign counterparts. To achieve this objective, it was essential to conduct a comparative study of the understatement penalty with the behavioural penalties of Australia and New Zealand. These countries were selected due to the strong English influence in terms of the legal systems and legislative framework applied in each of these countries and the similarities that these countries show in terms of the processes applied by the Revenue Authorities. It was essential to define and explain, on the basis of a literature review, the construct of the understatement penalty and the behavioural penalty regimes of the foreign jurisdictions selected for this study. It was further essential to define and explain the administrative requirements as provided for in the Constitution together with the legislation regulating just administrative action, to ensure that the understatement penalty is effectively applied. Finally the purpose for the analysis of domestic and foreign case law applicable to the imposition of behavioural penalties was to assess the validity of the theoretical constructs underpinning the efficacy of the understatement penalty.