Explore how South Africa's tax policy is evolving from rate increases to intensified enforcement, highlighting the importance of documentation and compliance for taxpayers.
Image: Timothy Bernard / Independent Newspapers
Over a year ago, I indicated that South Africa’s next significant development in tax policy would not necessarily be an increase in tax rates, but rather a shift towards enhanced enforcement.
The logic was not complicated. South Africa had a narrow tax base, rising expenditure pressure, weak economic growth, and limited political appetite for increasing VAT. If the government could not raise enough revenue by increasing visible tax rates, Sars would have to collect more from the existing base. That meant more audits, more verification requests, more scrutiny of high-net-worth individuals, professionals, and SMEs, higher penalties, and more difficult tax disputes.
That warning has now become the operating environment.
The earlier post said that, with no VAT increase, Sars would “double down on enforcement” to extract more revenue from existing taxpayers. It also pointed out that, although the number of registered taxpayers had grown materially, a relatively small group of taxpayers continued to bear a substantial share of the revenue burden.
That was not alarmism. It was a reading of fiscal pressure. Sars has since announced that it collected R2.010 trillion in net revenue for the 2025/26 financial year, passing the R2 trillion mark for the first time in South Africa’s democratic history. Sars also reported a seven-year compound annual revenue growth rate of 6.8%, a tax-to-GDP ratio of 25.9%, and tax buoyancy of 1.73.
National Treasury’s 2026 Budget Review confirms the same direction. Gross tax revenue for 2025/26 was revised upwards by R21.3 billion compared with the 2025 Budget. The tax-to-GDP ratio increased from 25.1% in 2024/25 to 25.9% in 2025/26. Treasury also withdrew the R20 billion tax increase that had previously been pencilled in for the 2026 Budget.
South Africa has not avoided fiscal pressure; it has altered the manner in which that pressure is exerted.
The country is transitioning from a focus on tax-rate policy to an emphasis on the intensity of tax administration.
This distinction is significant. Increases in tax rates are transparent and universally understood. In contrast, heightened enforcement is experienced variably and often directly by taxpayers. It may manifest as an audit notification, delayed refund, VAT verification, provisional tax enquiry, trust compliance penalty, lifestyle assessment, PAYE reconciliation, request for supporting documentation, or an assessment necessitating objection and appeal procedures.
For many taxpayers, Sars’ enhanced revenue collection is not perceived as an abstract fiscal achievement, but rather as increased scrutiny at the individual file level.
This increased pressure is now evident throughout the tax advisory sector.
Professionals are increasingly required to justify historic structures implemented in prior years. Trustees are expected to provide comprehensive resolutions, distribution records, loan account histories, and tax filings. Companies must reconcile accounting records with VAT returns, payroll submissions, provisional tax estimates, and income tax positions. Individuals with offshore transactions, foreign assets, or cross-border structures are required to provide clear evidence of their tax residence, the source of their funds, and the commercial rationale for the transactions.
The primary vulnerability is frequently not the substantive tax law, but rather the supporting evidentiary record.
A taxpayer may have held a defensible tax position, but lacked a contemporaneous file. A company may have had a commercial rationale for a management fee, but no supporting agreement or service documentation. A trust may have intended a valid distribution, but the resolutions are either late or incomplete. A corporate restructure may have had a legitimate purpose, but the valuation, share register, accounting entries, and board approvals may not be reconcilable.
Previously, such deficiencies may have been regarded as administrative imperfections. In the current environment, they represent enforcement opportunities.
This is where the legal environment is also becoming less forgiving.
The recent Constitutional Court judgment in Absa Bank Ltd and Another v Commissioner for the South African Revenue Service is significant because it confirms that tax risk in complex arrangements cannot always be confined to a taxpayer’s narrow contractual step. The Court’s summary records that participation in an avoidance arrangement did not require knowledge of every step in the structure. The enquiry was whether, viewed objectively, the taxpayer’s conduct formed part of the chain of transactions constituting the arrangement.
This constitutes a significant governance warning.
This means that taxpayers, financial institutions, funders, directors, and advisers cannot confine their focus to isolated components of a transaction while disregarding the overall structure. Legal form remains relevant, but it is no longer sufficient. The commercial purpose, economic substance, accounting treatment, funding flows, and supporting documentation must all be consistent.
The key lesson is that tax risk is not managed solely at the point of filing the return; it is established at the time the transaction is structured.
Tax risk is exacerbated when documentation is inconsistent. It becomes problematic when accounting records are not aligned with legal form. It results in increased costs when the taxpayer is unable to substantiate the facts. It becomes critical when a structure relies on unrecorded assumptions.
It would be inaccurate to characterise this solely as increased aggressiveness by Sars. A more accurate description is that Sars is adopting a more forensic approach, by not merely processing returns; it is conducting data comparisons, analysing patterns, and assessing whether bank records, invoices, management accounts, tax returns, trust resolutions, company records, and commercial explanations are consistent.
Accordingly, the traditional approach is no longer sufficient. Previously, the relevant question was whether a particular tax position could be argued. The more appropriate question is whether the position can be substantiated with evidence at a future date, when Sars requests the file.
This is the practical standard that has shifted.
A provisional tax estimate must be substantiated by a detailed calculation. Valid invoices, payment records, and evidence of taxable use must support a VAT refund. Resolutions and accounting entries must evidence a trust distribution. A corporate restructure must be supported by valuations, agreements, board approvals, and share registers. A cross-border structure must be substantiated by commercial substance, source-of-funds documentation, banking records, and evidence of tax residence.
In the absence of such documentation, even a technically defensible position may become commercially untenable.
This is why the warning issued over a year ago remains relevant. It was not a prediction regarding a single Budget Speech, but rather an observation about the trajectory of the tax system. When a country is unable to generate additional revenue through visible tax increases, it will seek to do so through enhanced enforcement.
Where the tax base is narrow, enforcement efforts will be directed towards those with the capacity to pay. As the revenue authority becomes increasingly data-driven, inadequate documentation poses a greater risk. When courts endorse objective, substance-over-form analysis, reliance on legal form alone becomes a less effective defence.
South African taxpayers are not entering a period in which tax planning is obsolete. Rather, tax planning must now be more disciplined, thoroughly documented, and commercially coherent.
This is the current reality. For those who have been attentive over the past year, this development should not be unexpected.
* Oberholzer CA(SA), MCom (Tax), is the CEO of Fyncor Advisory Services.
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