Discover the significant changes to South Africa's understatement penalty regime and what taxpayers must understand to navigate the new landscape effectively.
Image: Timothy Bernard / Independent Newspapers
The understatement penalty regime in South Africa has officially changed, and taxpayers and tax advisors should ensure they understand the new landscape.
On April 1, 2026, the Tax Administration Laws Amendment Act, 2026 (2026 Amendment Act) was published, with significant implications for the ‘bona fide inadvertent error’ understatement penalty exclusion.
These changes are important; the South African Revenue Service (Sars) is no longer prohibited from imposing understatement penalties where the ‘understatement’ results from a bona fide inadvertent error.
Instead, the understatement penalty exclusion for ‘bona fide inadvertent error’ has been moved to section 223 of the Tax Administration Act 28 of 2011 (TAA), as a basis for the remission of a 10% ‘substantial understatement’ penalty – provided the taxpayer disputes the penalty timeously.
Background to the bona fide inadvertent error exclusion
The bona fide inadvertent error exclusion enables the correct functioning of the understatement penalty regime by excluding innocent, genuinely unavoidable mistakes from the penalty framework.
The purpose of understatement penalties is to deter noncompliance and promote voluntary tax compliance by penalising culpable conduct, with the severity of the penalty escalating in direct proportion to the severity of the conduct, or ‘behaviour’ (from 25% to 200%).
The term ‘bona fide inadvertent error’ is not defined in the TAA. However, a policy rationale of excluding errors that do not arise from culpable (negligent, reckless or intentional) conduct is contained in at least two official documents: the Draft Memorandum on the Objects of the Tax Administration Laws Amendment Bill (2013) and the SARS Guide to Understatement Penalties, first published in March 2018.
According to published guidance, Sars officials will generally consider various factors, including the circumstances of the error and whether the taxpayer relied on information that, although incorrect, came from reputable sources.
In practice, Sars has interpreted and applied the bona fide inadvertent error exclusion very narrowly, causing much frustration for taxpayers and advisors alike until clarification was provided in two tax disputes where judgment was handed down in 2024.
In the Coronation case, the Supreme Court of Appeal (SCA) clarified that an incorrect tax position honestly adopted with reference to advice obtained from a reputable, independent advisor constitutes a ‘bona fide inadvertent error’. In these circumstances, Sars was prohibited from levying understatement penalties, despite the court ultimately finding the taxpayer’s tax position to be incorrect.
In Thistle Trust, Sars’ counsel argued that an error resulting from a tax position intentionally adopted based on legal advice that contradicted Sars’ interpretation of the law was neither ‘bona fide’ nor ‘inadvertent’. The Constitutional Court rejected this argument, finding that Sars cannot unilaterally decree the reasonable interpretation of tax legislation, and reaffirming the SCA’s interpretation of the exclusion in Coronation (albeit in an obiter statement).
This interpretation of ‘bona fide inadvertent error’ aligns with the purpose of the understatement penalty regime. Consulting a reputable, independent advisor on the correctness of a tax position before the submission of a tax return clearly constitutes reasonable conduct. There is little more taxpayers can do to ensure that their disclosures are correct, particularly given the limited avenues available to approach Sars for rulings and pre-filing opinions.
The new position after the latest amendments
The changes effected by the 2026 Amendment Act are significant.
Sars is no longer prohibited from raising an understatement penalty where the ‘understatement’ is the result of a bona fide inadvertent error. Instead, the ‘bona fide inadvertent error’ exclusion now exists as a basis for Sars to remit a penalty imposed in respect of the 10% ‘substantial understatement’ penalty category.
A ‘substantial understatement’ is the lowest understatement penalty percentage. It does not involve culpable conduct, but rather, arises whenever there is ‘prejudice’ to Sars or the fiscus exceeding the greater of 5% of the amount of tax properly chargeable or refundable under a tax Act for the relevant tax period, or R1 000 000.
According to Sars, the ‘substantial understatement’ category is intended to capture errors that, while not being attributable to any blameworthy conduct on the taxpayer’s part, nevertheless cause sufficiently severe prejudice to Sars to warrant punishment. The aim is to encourage taxpayers to take particular care with significant and material transactions and tax positions.
Limitations of the new regime and taxpayer concerns
Sars and the National Treasury’s rationale for the amendment is that the exclusion of the penalty categories for culpable behaviour where the taxpayer has taken advice is already ‘well established’. The ‘bona fide inadvertent error’ exclusion is thus only required for the remission of the 10% ‘substantial understatement’ penalty, which is determined without reference to culpability.
While this stance makes sense in theory, the practical effects are likely to be less palatable for taxpayers and tax administration in general.
The Standing Committee on Finance (SCoF) acknowledged the concerns of various stakeholders in its report on the draft amendment, the 2025 Tax Administration Laws Amendment Bill dated 3 December 2025.
While observing that Treasury had already addressed a number of the concerns raised in public comments, such as the removal of the highly controversial proposal that SARS must be ‘satisfied’ that a bona fide error exists, the ScoF noted the contentiousness of the proposed amendments, stating that ‘… [S]takeholders remain concerned about proportionality, legal certainty, and the treatment of errors where large amounts are involved’.
SCoF recommends that National Treasury and Sars monitor the application of the revised understatement penalty framework, collect data on penalty assessments and remissions, and ‘refine in future where adjustments are warranted to balance deterrence, fairness and certainty’.
The amendment also ignores the impact of the exclusion in the context of other interpretations that have been afforded to the concept of ‘bona fide inadvertent error’ by our courts, outside of the procurement of tax advice regarding tax return disclosures.
Downsides for taxpayers and the tax system
The downsides of the latest amendment are far-reaching, effectively nullifying two important purposes served by the previous iteration of section 222 of the TAA.
Firstly, the exclusion of understatement penalties altogether where an ‘understatement’ resulted from a ‘bona fide inadvertent error’ meant that taxpayers who had already voluntarily optimised their compliance by obtaining advice (and those who otherwise made a genuine and reasonable mistake) could avoid a costly and protracted penalty remittance dispute with Sars.
Secondly, this prohibition (together with the section 102(2) onus on Sars to establish the jurisdictional facts supporting the imposition of understatement penalties) encouraged proper administrative decision-making and efficiency within Sars, discouraging poorly considered ‘blanket’ or ’default’ exercises of public power, in line with section 195 of the Constitution.
In its current iteration, Sars is required to impose penalties if an ‘understatement’ exists, and leave it to the taxpayer to raise the bona fide inadvertent error exclusion in remittance – something that not all taxpayers have the resources to do. This arguably encourages a ‘guilty until proven innocent’ approach that sharply contradicts the purpose of section 102(2) onus.
Is it fair or reasonable to place this additional burden on taxpayers in an already administratively onerous and economically strained environment? Even if the answer is yes, is it prudent to encourage the further proliferation of tax disputes when Sars’ capacity is already strained? And, taking a long-term view, is it desirable to remove the checks and balances that encourage considered decision-making by the Sars officials wielding these considerable statutory powers?
Time will tell. In the meantime, taxpayers with contentious or complicated tax positions should be doubly cautious and ensure that they obtain written advice, either from a legal advisor or from their auditors, that clearly discloses that the tax positions reflected in each annual return were properly reviewed and are considered by the advisor to be correct.
* Choate is a partner, and Erasmus is an associate designate at Bowmans.
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