South Africa’s 2026 amendment to the understatement penalty regime has significantly limited taxpayers’ ability to rely on the “bona fide inadvertent error” or “honest mistake” defence. The change shifts the focus from taxpayer intent to taxpayer behaviour, requiring stronger evidence of reasonable care, proper governance and contemporaneous documentation. Tax experts warn that companies, trusts and individuals must now take a more disciplined approach to tax compliance to avoid costly SARS penalties.
Image: Ziphozonke Lushaba / Independent Newspapers
Certain tax amendments receive significant public attention, while others effect substantive changes to the balance of power between SARS and taxpayers without widespread notice.
The 2026 amendment to South Africa's understatement penalty regime is an example of the latter.
For years, taxpayers and advisers have debated the meaning of a phrase that sounds simple but carries serious legal consequences: “bona fide inadvertent error”. In ordinary language, it means an honest, unintended mistake. In tax law, it has often been the dividing line between a taxpayer who made an error and a taxpayer who could face an understatement penalty.
This position has now been altered.
The amendment does not provide that every tax error will automatically result in a penalty, nor does it permit Sars to impose penalties without establishing the statutory basis. Rather, taxpayers can no longer rely on the 'honest mistake' argument as a general defence to understatement penalties.
The legal framework has shifted accordingly.
What the amendment does
The Tax Administration Act imposes understatement penalties where a taxpayer understates tax and the understatement falls within one of the statutory penalty categories.
These categories include substantial understatement, reasonable care not taken in completing a return, no reasonable grounds for a tax position, gross negligence and intentional tax evasion. The penalty percentage depends on the behaviour involved and the circumstances of the case.
Previously, section 222 contained a general exclusion: a taxpayer was not liable for an understatement penalty if the understatement resulted from a bona fide inadvertent error.
That wording has now been removed from section 222.
Section 222 has instead been amended so that an understatement penalty arises where the understatement involves behaviour listed in the penalty table in section 223. The starting point is therefore no longer merely whether there was an understatement, followed by a general innocent-error defence. The starting point is whether SARS can identify the relevant statutory behaviour.
The bona fide inadvertent error concept has not disappeared entirely. It has been repositioned into section 223(3), which deals with the remission of penalties imposed for a substantial understatement. SARS must remit a penalty imposed for a substantial understatement if the understatement resulted from a bona fide inadvertent error, or if the taxpayer meets the statutory requirements relating to full disclosure and an independent registered tax practitioner’s opinion.
This amendment constitutes a technical adjustment with significant practical implications.
The significance of this distinction
It is a common misconception that the tax system draws a clear distinction between honest and dishonest taxpayers. In practice, the position is more nuanced.
A taxpayer may act honestly and still be wrong. A taxpayer may rely on professional advice and still lose the technical argument. A taxpayer may adopt a tax position in good faith and still face a penalty if Sars proves that the statutory behaviour threshold has been met.
The amendment refines the nature of this enquiry.
Where Sars alleges that reasonable care was not taken, the taxpayer’s answer should not simply be: “It was an honest mistake.” The taxpayer must show what care was actually taken. That means demonstrating the return preparation process, the records considered, the advice obtained, the review steps performed and the reasonableness of the conduct at the time.
Where Sars alleges that there were no reasonable grounds for the tax position adopted, the taxpayer must show the legal and factual foundation for that position. A vague assertion that the taxpayer believed the treatment to be correct will seldom be enough.
Where Sars alleges gross negligence or intentional tax evasion, the dispute becomes more serious. The taxpayer’s defence must deal directly with the conduct alleged by Sars, the facts known at the time, the internal controls in place and the absence of the required degree of blameworthiness.
Following the amendment, penalty disputes must be addressed with reference to the specific behaviour identified by Sars as justifying the penalty.
The Thistle Trust problem
The uncertainty around “bona fide inadvertent error” was not academic. It appeared in significant litigation, including The Thistle Trust matter, where the Constitutional Court recognised that the phrase was capable of different plausible interpretations and that its meaning would affect future tax cases.
This uncertainty has resulted in practical challenges for both taxpayers and Sars.
For taxpayers, the phrase provided a potential defence, albeit with ambiguous parameters. For Sars, it introduced complexity into the penalty regime, as it could be invoked even in circumstances where SARS considered the taxpayer's position to have been deliberately adopted and subsequently found to be incorrect.
The 2026 amendment appears to constitute a legislative response to this uncertainty.
Rather than retaining bona fide inadvertent error as a broad gateway defence, the legislature has restricted its application and linked it specifically to substantial understatement. The penalty framework is now more closely aligned with taxpayer behaviour.
What taxpayers should do differently?
The amendment necessitates a revised approach to the preparation of material tax positions by taxpayers.
Tax is frequently regarded as a compliance function, but this perspective is unduly narrow. For companies, trusts, high-net-worth individuals and family-owned groups, material tax positions constitute governance decisions with implications for cash flow, risk management, reputation and future interactions with Sars.
A taxpayer who adopts a material tax position should now ask the following questions before filing the return:
These considerations are not mere administrative formalities. The contemporaneous documentation may ultimately determine whether the taxpayer is able to resist the imposition of a penalty.
The danger of after-the-fact advice
A frequent deficiency in tax disputes i, a taxpayer submits a return, Sars raises a query, and the taxpayer subsequently requests an adviser to prepare a memorandum in support of the adopted position. While such a memorandum may have some utility, it does not carry the same evidentiary weight as a contemporaneous tax opinion obtained prior to the submission of the return. before the return was filed.
The statutory opinion-based protection for substantial understatement penalties is time-sensitive. The opinion must exist by the relevant return due date and must be based on full disclosure.
At this juncture, tax governance assumes commercial significance.
A prudent taxpayer will not defer preparation until Sars initiates an enquiry. The requisite documentation and analysis should be completed prior to the submission of the return.
This is not only a problem for aggressive taxpayers.
The amendment will have the greatest impact in the routine areas of tax practice where uncertainty is prevalent.
A trust distributes income or capital gains. A company claims a deduction. A group implements a restructuring. A taxpayer classifies a receipt as capital rather than revenue. A vendor treats a transaction in a particular way for VAT purposes. A cross-border service fee is charged. A loan is impaired. A taxpayer relies on a double tax agreement.
These transactions are not inherently abusive; rather, they represent the routine matters encountered in commercial tax practice.
However, where the amounts involved are material and Sars subsequently disputes the position, the taxpayer's ability to defend against penalties will depend substantially on the quality of the contemporaneous documentation.
The critical issue will not be the taxpayer's ability to provide a sympathetic narrative after the event, but rather whether the taxpayer can demonstrate the absence of the relevant statutory behaviour or compliance with the requirements for remission.
A revised standard of tax discipline
The implication is not that taxpayers should become defensive or reluctant to adopt legitimate tax positions. Rather, it is that tax positions must be subject to appropriate governance.
A taxpayer is entitled to arrange affairs within the confines of the law, to adopt a considered position, and to disagree with Sars. However, these rights are most effectively exercised when supported by appropriate records, professional advice and timely action.
Accordingly, the 2026 amendment should be regarded as part of a broader evolution in South African tax administration. Sars is placing increasing emphasis not only on the figures disclosed in the return, but also on the underlying behaviour, processes and evidentiary discipline.
Taxpayers who regard tax compliance as a routine annual exercise will be exposed to increased risk.
Taxpayers who treat tax as a board-level governance function will be better protected.
The practical takeaway
The phrase 'bona fide inadvertent error' remains within South African tax law, but it no longer serves as a broad, primary defence in the understatement penalty regime.
The practical rule is as follows:
In modern tax disputes, being right is important.
The ability to demonstrate the reasonableness of the taxpayer's conduct at the relevant time is frequently equally important.
* Oberholzer CA(SA), MCom (Tax), is the CEO of Fyncor Advisory Services.
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