Under the current TAA framework, taxpayers have been able to avoid understatement penalties by demonstrating that the understatement resulted from a bona fide inadvertent error, regardless of the extent of the prejudice to SARS. The term is not defined in the TAA, and South African courts have historically applied a broad interpretation – often at odds with SARS’s consistently narrower view that the defence should be limited to genuine, unintended mistakes, and should not extend to interpretational disputes or conduct amounting to carelessness or negligence.
The proposed amendments seek to resolve this long-standing interpretational tension by restricting the availability of the defence. Going forward, the bona fide inadvertent error defence will apply only in cases of substantial understatements. A “substantial understatement” is defined as one causing prejudice to SARS or the fiscus that exceeds the greater of 5% of the tax properly payable or R1,000,000.00. Once this threshold is met, the taxpayer’s intention becomes less relevant: SARS will instead assess the understatement with reference to its quantum and the taxpayer’s conduct, applying the behaviour-based matrix in section 223.
Despite the narrowed scope of the defence, SARS has indicated – most explicitly in its public responses to comments on the 2025 draft legislation- that reliance on appropriate professional advice will generally be regarded as reasonable conduct. This means that a taxpayer who has acted honestly, in good faith, and based on competent professional guidance should not be subject to understatement penalties, provided their compliance efforts were reasonable and diligent. The principle remains that penalties are not intended to punish taxpayers who take meaningful steps to meet their tax obligations.
Overall, the anticipated amendments to sections 222 and 223 are intended to enhance certainty by limiting the bona fide inadvertent error defence and aligning penalties more closely with both the seriousness of the understatement and the taxpayer’s behaviour. While these amendments may finally settle the debate between taxpayers and SARS regarding the scope of the defence, SARS will still shoulder the burden of proving the facts supporting any understatement penalty.
Considering these developments, taxpayers should ensure that their tax positions are carefully reviewed and that professional advice is obtained where uncertainty exists.
Our Tax Advisory Team is available to assist with assessing potential exposure and ensuring compliance under the evolving penalty regime.
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