Legislative amendment narrows the bona fide ‘inadvertent error’ defence route.
The powers of the South African Revenue Service (Sars) in the Tax Administration Act to raise penalties for non-compliance should not be taken lightly. It has become an important revenue collection tool.
Ways to escape the penalties have also become more limited with the latest change to the act.
The bona fide inadvertent-error defence can no longer get a taxpayer out of the penalty regime from the start.
There are three main categories of penalties:
- Administrative non-compliance
- Percentage-based penalties, and
- Understatement penalties.
Understatement penalties range from 10% to 150% in a standard case and between 20% and 200% if the taxpayer is obstructive or it is a repeat case.
Bona fide error defence
Before the Tax Administration Amendment Act came into force on 1 April, a taxpayer could argue that they made a bona fide inadvertent error on their tax return or in their financial statements that caused the understatement.
Nico Theron, founder of Unicus Tax Specialists, explains the nub of the issue:
If the taxpayer brought the matter within the bona fide inadvertent-error defence, the case fell outside the understatement-penalty regime altogether.
Theron says the listed behaviours – reasonable care not taken, no reasonable grounds for the tax position taken, gross negligence, intentional tax evasion, and even substantial understatement – could become academic.
“That structure explains why the old law could short-circuit the entire penalties enquiry. It also explains why Sars became increasingly dissatisfied with the bona fide inadvertent error location in the statute.”
Sars will now test the ‘listed behaviours’ first
With the amendment from 1 April, Sars first wants to establish whether the understatement resulted from a non-compliant behaviour set out in its table.
If the taxpayer is not guilty of any of the listed behaviours, then it escapes a penalty.
But if the understatement is substantial (the greater of R1 million or 5% of the tax chargeable or refundable), there is no escape.
And only then does the bona fide error defence come in.
That, or a legal opinion from an independent registered tax practitioner based on all the facts, may help to get a taxpayer over the penalty hurdle.
In two recent court matters – the Thistle and Coronation cases – the taxpayers successfully relied on the bona fide inadvertent-error defence and having had a legal opinion for the tax position taken to avoid penalties.
Clarification
Theron says the reason for the tax amendment is found in the official memorandum.
It states that the concept and scope of bona fide inadvertent error had become “contentious” and “adverse to the framework for a clear and effective understatement penalty regime”.
A substantial understatement is better understood as a “residual category”, says Theron.
It only applies if the prejudice to the fiscus is objectively significant and if the taxpayer is not guilty of any of the “blameworthy” behavioural categories.
In cases of not reasonable care given
He gives an example where Sars alleges that a taxpayer did not take reasonable care or that there were no reasonable grounds for the tax position adopted, but the taxpayer is able to prove otherwise.
If the prejudice is below the statutory threshold (the greater of R1 million or 5% of the tax chargeable or refundable), there is no substantial understatement and there is no penalty.
If the prejudice crosses the threshold, however, substantial understatement remains in play as the residual category.
“That is why the amendment makes life harder for the taxpayer, even if it does not necessarily change the final answer,” says Theron.
Before 1 April 2026, the taxpayer could stay outside the regime altogether by invoking the bona fide inadvertent-error defence at the front end.
After 1 April 2026, the taxpayer must first defeat the behavioural allegations and may then still be left facing substantial understatement solely because the prejudice is objectively large.
Disclosure and time constraints
Webber Wentzel tax partner Joon Chong points out that the bona fide inadvertent-error defence has not disappeared – but it has been repositioned and materially narrowed.
The result is a clear asymmetry:
- For behavioural-based penalties (such as reasonable care not taken, no reasonable grounds, or gross negligence), no error-based defence survives; while
- For the quantum-based category of substantial understatement, a narrow, objective error defence remains.
“For all other cases, the only route to remission is the disclosure-and-opinion pathway with its demanding timing and disclosure requirements,” she adds.
Sars must be satisfied that the taxpayer made full disclosure of the arrangement that gave rise to the understatement by no later than the date the relevant return was due.
In addition, the taxpayer must have been in possession of an opinion by an independent registered tax practitioner, also issued by no later than the return due date, confirming that the taxpayer’s position is more likely than not to be upheld if the matter proceeds to court.
The opinion must exist when the return is filed, not when Sars opens an audit.
Chong warns that if a practitioner based their opinion on only part of a multi-step transaction, it may not get the taxpayer over the penalty hurdle.
This article was republished from Moneyweb. Read the original here.