Paul Gering | Tax Partner, PKF Durban

I recently appeared on behalf of a taxpayer in a Tax Board Hearing. The Tax Board is akin to the “small Claims Court” for tax matters wherein it deals with matters where the rand value amount of the tax debt in dispute is less than R1 Million. This Tax Board was heard over 3 days with substantial heads of argument and oral testimony.

The issues revolved around the trading loss of R10 721 758 claimed for “contract for difference” (CFD) trading and the Understatement Penalty (USP) of 100% which was imposed on the taxpayer’s behaviour having constituted “gross negligence”. Upon submission of the objection the penalty was reduced to 25% percent on the concession that “no reasonable care” was taken by the taxpayer however the disallowed deduction remained.

CFD trading is effectively a method of speculating on the underlying price of an asset such as shares, indices, cryptos, commodities, forex instruments etc. This trading is done on an online trading platform which multiple service providers offer.

One of the key issues in this matter revolved around the very poorly drafted objection letter and whether the CFD trading losses were actually disputed by the taxpayer in the objection. 

The objection letter was accompanied by the SARS NOO form where the tax practitioner only ticked boxes and inserted amounts for the USP and the interest in dispute.  No amount was reflected on this NOO form with regards to the loss/deduction that was disallowed.

The objection letter read as follows:

“We hereby object to the 2019 additional assessment raised.

Please note that the taxpayer’s intention was to trade in CFD and the loss for 2019 was included in the 2019 tax return.         

Supporting documents for the loss were provided, unfortunately the broker did not send statements requested.

Based on the above, please note that the penalties levied are excessive and should be remitted to NIL.

We therefore request that the understatement penalty to be waived.”

I set out a good argument during the hearing and the written argument provided, in that the wording of the objection letter, read together with the NOO form, collectively amounted to an objection against the deduction being disallowed and the resultant penalties and interest. However, whilst the taxpayer might have been successful if no witnesses were called, the tax practitioner whose office prepared the objection conceded under cross examination, that the objection which he drafted was only intended to dispute the penalties and interest as those were the only amounts recorded on the NOO form.

Here, I must emphasise the importance of the NOO form as well as a properly drafted objection which CLEARLY sets out which issues are in dispute if the matter progresses to any form of litigation.

Even if the loss was part of the objection, it is still uncertain if the onus of proof would have been met in that the documentation available to the taxpayer was limited.  The risk is indeed high if online trading platforms are used and a proper trail of evidence of acquisition costs and trades is not maintained.

We were successful in respect of USP as the Tax Board found that reasonable care had in fact been taken.  This arose from the evidence of the taxpayer and the tax practitioner who confirmed that advice was taken from a reputable firm (SARS concession) and that any other reasonable taxpayer would have taken the same steps.

The SARS auditor did not give any evidence in the case even though SARS has the onus to show the facts relied upon in determining the USP.

The Tax Board noted the following:

“In my view there is nothing to suggest that the Appellant was not reasonable. I must state that I cannot determine on what basis the Respondent found that there was gross negligence.  I agree with Mr. Gering that the steps taken by the Appellant were reasonable steps that any reasonable person would have taken – to obtain advice from a reputable accounting firm, which is common cause, and a prudent step taken by the Appellant.”

The following takeaways are most important:

1. Ensure that you take formal tax advice in respect of material tax decisions.  In this case the advice was oral advice but was supported by oral evidence of the taxpayer and his tax practitioner.
2. In a tax dispute ensure that you make use of experts to ensure that all the grounds of the objection are clearly set out in both the letter of objection and the related SARS documentation (NOO form).
3. Ensure that you have proper evidence of transactions.  Crypto will be the next major area of tax dispute over documentation and evidence of capital nature of the investment and the trades that have taken place, as this form of investment is primarily on-line trading platforms and one must ensure that each trade is properly documented.
4. A dispute requiring witness testimony is always a risk as this is a highly stressful process which most people struggle with as most taxpayers/practitioner are not trained for the reality of a harsh cross examination from SARS and can end up making concessions or providing inaccurate information especially where matters are long drawn out and one’s memory is not entirely clear as it was at the time the matter arose.

In the end we achieved our mandate which was to ensure that the penalties and interest were reversed, but most importantly all parties learnt a valuable lesson from the experience.