When Sars penalties become the real tax bill

The most expensive line in a Sars assessment is not always the additional tax.

Often, it is the penalty.

For many taxpayers, that comes as a surprise. They assume that if an error was not deliberate, the penalty should fall away. They point to the accountant who prepared the return, the tax practitioner who gave advice, or the fact that nobody set out to mislead Sars. In ordinary language, that may sound persuasive. In a Sars dispute, it is not enough.

South Africa’s understatement penalty regime has moved the battleground from intention to evidence. The decisive question is no longer simply whether the taxpayer acted dishonestly. The question is whether there was an understatement, whether Sars suffered prejudice, what behaviour category Sars has selected, how the shortfall was calculated, and whether the taxpayer can prove that the penalty is wrong in law or excessive on the facts.

That distinction matters.

An understatement is not limited to fraud. It may arise from an omission in a return, an incorrect statement, a failure to submit a return, a failure to pay the correct amount of tax where no return is required, or an impermissible avoidance arrangement. Sars’ own understatement penalty guide treats prejudice to Sars or the fiscus as a central trigger, and the shortfall is then quantified by comparing the correct tax position with the tax position reflected or accepted before the understatement was identified.

The penalty percentage is then driven by conduct. The statutory table distinguishes between a substantial understatement, reasonable care not taken in completing a return, no reasonable grounds for the tax position taken, an impermissible avoidance arrangement, gross negligence and intentional tax evasion. The more culpable the conduct, the more severe the penalty. Sars’ guide describes the regime as a progressive sanctions framework, with higher penalties for more serious behaviour and mitigation where voluntary disclosure relief applies.

This is where taxpayers often misread the risk. They defend themselves against an allegation of evasion when Sars may not need to prove evasion at all. A taxpayer can avoid intentional misconduct and still face a penalty if Sars concludes that reasonable care was not taken, that the tax position had no reasonable grounds, or that the understatement was substantial.

The law has also changed in a way that makes loose explanations more dangerous. The Tax Administration Laws Amendment Act, 2026 amended section 222 of the Tax Administration Act. The amended wording provides that where an understatement involves behaviour listed in the understatement penalty table in section 223, the taxpayer must pay the understatement penalty determined under section 222(2). The previous wording excluding an understatement resulting from a bona fide inadvertent error was removed from section 222, while section 223(3) was amended to deal expressly with remission of a penalty imposed for a substantial understatement where the understatement results from a bona fide inadvertent error.

In practical terms, this does not mean Sars is always right. It does mean that taxpayers must be far more disciplined in how they fight penalty assessments.

The phrase “bona fide inadvertent error” remains important, but it is not a magic password. The Constitutional Court’s judgment in The Thistle Trust v Commissioner for Sars placed the phrase squarely within the tax-dispute landscape. Sars records the case as dealing with understatement penalties and bona fide inadvertent error under the Tax Administration Act. The lesson for taxpayers is not that every honest mistake escapes penalty. The lesson is that the nature of the mistake must be proved.

That proof must usually exist before the dispute begins.

A taxpayer who wants to resist an understatement penalty should be able to produce the return, the working papers, the tax computation, the source documents, the advice obtained before filing, the review process followed, and a chronology of what Sars was told and when. Where a company or trust is involved, the governance file should also show who approved the tax position and whether the relevant directors or trustees understood the commercial arrangement giving rise to the tax treatment.

A short letter saying “there was no intention to evade tax” will rarely be enough. Sars is entitled to ask harder questions. Who prepared the return? What information did that person have? Was the issue reviewed? Was there a tax opinion? Was Sars given full disclosure? Was the taxpayer’s position objectively arguable at the time? Did the taxpayer ignore an obvious risk? Was the error isolated, repeated, systemic or commercially convenient?

These are not academic questions. They decide money.

For business owners, the penalty dispute should be treated as a financial-risk matter, not only a tax-compliance issue. An understatement penalty can distort cash flow, affect bank covenants, complicate financial reporting, influence audit conclusions, and expose directors or trustees to awkward governance questions. Where the assessment is large, the penalty may also change settlement strategy. A taxpayer who cannot produce a proper file may find that the penalty becomes the pressure point in the entire dispute.

The procedure also matters. Sars’ current eFiling dispute guide records that taxpayers may submit a request for remission, notice of objection, notice of appeal, request for reasons, request for late submission or suspension-of-payment request when disputing penalties, interest, assessments or administrative penalties. Those steps are not interchangeable. A remission request is not the same as an objection. A request for reasons is not a suspension of payment. A suspension of payment does not, by itself, win the merits of the dispute.

The sequencing must be managed carefully. Taxpayers should first understand what Sars has assessed, what behaviour category has been applied, how the shortfall was calculated, and whether Sars has given adequate reasons. Only then can the adviser decide whether the correct response is remission, objection, appeal, settlement, voluntary disclosure analysis, suspension of payment, or a combination of those steps.

There is also a broader policy issue. Sars is under pressure to collect revenue efficiently. Penalties are part of that enforcement architecture. They are intended to deter non-compliance, not merely compensate the fiscus for late payment. That is why penalty disputes are becoming more evidence-heavy and less forgiving of poor record-keeping.

But the same system also requires discipline from Sars. A penalty should not be imposed by formula or assumption. Sars must identify the understatement, connect it to statutory prejudice, apply the correct behaviour category, calculate the shortfall properly, and give the taxpayer a procedurally fair opportunity to challenge the decision.

The taxpayer’s mistake is assuming that fairness will be obvious.

It will not be obvious unless it is documented.

The new reality is blunt: in a Sars penalty dispute, memory is weak, intention is contested, and hindsight is discounted. Evidence carries the case. Taxpayers who keep proper records, obtain advice before filing, disclose material facts, and document their reasoning are in a far stronger position to challenge penalties. Those who reconstruct the file only after the assessment has arrived are already on the back foot.

The tax bill may start with Sars. The outcome will often depend on the taxpayer’s own paper trail.

* Oberholzer is the chief executive officer of Fyncor.

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