Abstract

Chapters 15 and 16 of the Tax Administration Act 28 of 2011 (TAA) house the penalties that encourage tax compliance, including understatement penalties. Section 221 of the TAA was amended by s 61(c) of the Tax Administration Laws Amendment Act 16 of 2016, to include impermissible tax avoidance as a form of an understatement. To date, understatement penalties in respect of impermissible tax avoidance have not yet received sufficient academic or judicial scrutiny. Prior to the amendment of the TAA in 2016, the sanctions for impermissible tax avoidance were found only under s 80B of the Income Tax Act 58 of 1962 (ITA). These sanctions promote a corrective form of deterrence, whereas understatement penalties are both punitive and coercive in nature, and represent a harsher form of sanction. The scrutiny of the severity of understatement penalties regarding impermissible tax avoidance has yet to receive sufficient judicial responsiveness, unlike other categories of understatements. This article critically analyses the efficiency of understatement penalties as a sanction for impermissible tax avoidance, considering the existing General Anti-Avoidance Rules (GAAR) under s 80B of the ITA.