In Taxpayer MLC v Commissioner for SARS (IT 77272) (the “MLC Case”), Eksteen J dismissed an appeal against a 150% understatement penalty for intentional tax evasion and ordered costs against the taxpayer. The outcome is unsurprising. The Court followed an evidential route, which is the point worth noting.

The decision

The taxpayer, a salaried employee, submitted revised 2020 and 2021 returns that invented farming assets and expenses and inflated IRP5/PAYE credits. SARS paid an undue refund of R1.38 million. The taxpayer accepted that her eFiling credentials were used and that she received the unlawful refund, but alleged that an unidentified SARS official had filed the returns. She produced no bank records or police report, her versions changed, and the third-party fraud allegation appeared only on appeal. The capital and interest were common cause.

SARS bore the section 102(2) of the Tax Administration Act, 28 of 2011 (the “TAA”), onus that the taxpayer’s behaviour could properly be categorised as “intentional tax evasion”. The Court relied on the electronic-communication Rules (GN 644) (“eFiling Rules”), which require users to secure and not share credentials and make the registered user liable for transactions under them, together with section 235(2)’s evidential presumption concerning awareness of a false statement. The Court rejected the taxpayer’s account as a recent fabrication, found that “intentional tax evasion” was proved on a balance of probabilities, upheld the standard-case 150% penalty and awarded costs against the taxpayer.

How it fits in with the authorities

Income Tax Case No 1934 82 SATC 457 similarly shows that, once SARS establishes a prima facie factual case, a taxpayer who supplies no credible answer risks that case becoming sufficient proof, without shifting SARS’s legal onus. The MLC Case applies that practical logic to eFiling attribution.

What is new, and was it correct?

The Court used the eFiling Rules to link the revised returns to the taxpayer’s account and section 235(2) when considering whether she knew that the statements were false. These are, however, separate enquiries. 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 with those credentials. Although the use of the taxpayer’s credentials was strong prima facie evidence of attribution, the decisive evidence included her admissions, receipt and retention of the refund, changing versions and failure to corroborate the alleged fraud.

The result was correct. The SARS Guide to Understatement Penalties (Issue 2) (the “Guide”) describes intentional evasion as knowledge or suspicion that conduct may cause an understatement, followed by a conscious decision to ignore the risk. The Guide’s examples include falsified returns and inflated deductions. The MLC Case’s facts comfortably exceeded that threshold and supported 150% for a standard case.

One aspect of the judgment should, however, be treated with caution. In paragraph 27 of the judgment, the Court stated that its discretion to reduce a penalty, where SARS has correctly categorised the taxpayer’s conduct, is “very limited, if it exists at all”. That may overstate the position. Section 129(3) of the TAA expressly empowers a Court to reduce, confirm or increase an understatement penalty. The SCA in Purlish Holdings (Proprietary) Limited v The Commissioner For The South African Revenue Service (76/2018) [2019] ZASCA 4; 81 SATC 204 (26 February 2019) confirms that this power must be exercised within the issues properly raised in the pleadings; it does not suggest that the power does not exist. In the MLC Case, however, the taxpayer advanced no proper basis for reducing the penalty. The Court’s observation therefore did not affect the outcome.

Conclusion

The bottom line is that the MLC Case is valuable as an evidence case. The Court was right on liability and the 150% understatement penalty, but section 235 of the TAA must not become a shortcut to deeming the intention of a party, and paragraph 27, dealing with the Court’s ability to reduce, confirm or increase an understatement penalty, should be read narrowly.