Authored by Aviwe Onceya and Busisiwe Mahlangu
An understatement penalty (“USP”) is imposed under the South African tax regime when SARS believes that a taxpayer has prejudiced the South African Revenue Service (“SARS”) or the fiscus by, for example, understating their tax liability, as contemplated in section 221 of the Tax Administration Act 28 of 2011 (“the TAA”). In such circumstances, SARS is empowered to levy a USP ranging between 10% and 200% of the resultant “shortfall” in tax, the applicable penalty rate being contingent upon the taxpayer’s categorised “behaviour” as enumerated in section 223 of the TAA. These behaviours include, inter alia, instances where a taxpayer has failed to take reasonable care in the completion of a tax return, adopted a tax position without reasonable grounds, acted grossly negligently, or engaged in intentional tax evasion.[1]
It is, however, significant that section 222(1) of the TAA as it reads at the time of writing, carves out a material exception: no USP is payable where the understatement arises from a “bona fide inadvertent error” on the part of the taxpayer.[2] The exact meaning and scope of the words “bona fide inadvertent error” has been the topic of much debate in recent years, but suffice it to state that reliance on professional advice has been held to exempt, as it were, taxpayers from the understatement penalty (see detailed article on recent Constitutional judgments regarding the meaning of this phrase here). In our view, this principle recognises that SARS may not penalise a taxpayer whose understatement stems from an honest, good-faith mistake that neither reflects an intent to mislead nor an intention to prejudice SARS or the fiscus.
Taxpayers bear the burden of proving to SARS that an understatement was caused by a ‘bona fide inadvertent error’. The most common defence provided by taxpayers against the imposition of USPs:
‘bona fide’ reliance on professional tax advice.
But is it that simple?
Professional Advice
Many taxpayers rely on tax professionals to complete and submit tax returns on their behalf or to advise them on how to complete and submit returns. If a taxpayer obtains and relies on independent expert tax advice in preparing a tax return, any resulting understatement is often argued to be an innocent error made in good faith. Stated differently, the bona fide inadvertent error defence is raised if it transpires that the return was incorrectly completed. Will that defence automatically succeed? Let’s consider briefly some recent authority on the issue.
In The Thistle Trust v CSARS[3], the Trust relied on an independent legal opinion when completing its tax returns. The Supreme Court of Appeal (“the SCA”) ruled that this reliance meant that the understatement resulted from a bona fide inadvertent error by the Trust. The Constitutional Court also noted that the Trust relied on professional advice and acted in line with the advice received, and that SARS could not prove any of the required culpable behaviours. Consequently, SARS could not impose the USP as the Trust’s reliance on the legal opinion was made in good faith and without an intention to deceive.
In CSARS v Coronation Investment Management[4], the taxpayer had a complex foreign income structure and relied on expert tax advice when it claimed an exemption on the foreign income. The SCA excused Coronation from all penalties on the basis that its reliance on expert advice gave rise to a bona fide inadvertent error, even though Coronation did not disclose the opinion’s contents. The Constitutional Court later ruled on the merits in Coronation’s favour, making the penalty issue moot in that court.
By contrast, in Ntayiya v CSARS[5], the SCA in effect upheld the imposition of a USP by SARS, noting that there was no credible evidence of a bona fide inadvertent error by the taxpayer. The appellant, an attorney by profession, had submitted consecutive nil income tax returns for a number of years while he actually earned income during these periods. SARS audited the taxpayer and imposed a 150% understatement penalty. The SCA held that the taxpayer’s purported reliance on his auditors’/accountant’s advice concerning the declaration of his nil tax returns is without persuasive merit: the income the taxpayer received was from the taxpayer’s own legal practice. He would have been the one to authorise the payment from his own practice to his own personal bank account, and so cannot later reasonably claim to have relied on advice supporting the “no income story”. Consequently, the SCA upheld the imposition of a USP by SARS despite the taxpayer’s defence against the USP being reliance on professional tax advice from his auditors when completing and submitting his tax returns.
Professional advice as a defence against understatement penalties
The three cases collectively demonstrate that whilst reliance on professional advice may be a credible defence against understatement penalties, the actual existence of the advice and indeed the bona fide reliance thereon must be proved (as opposed to merely alleged). In both Thistle and Coronation, the taxpayers could prove that they received professional advice (those taxpayers having obtained formal advice in writing), and indeed that they relied upon qualified experts in good faith. By contrast, in Ntayiya, it appears the taxpayer not only did not prove the advice existed but, crucially, could not convince a court that even if such advice existed, that he relied on it in good faith.
In summary, reliance upon competent professional advice constitutes a potent defence to the imposition of understatement penalties. Where a taxpayer procures, considers, and acts upon a well-reasoned expert opinion in good faith, South African courts have generally characterised any resulting understatement as a bona fide inadvertent error, thereby precluding the levying of penalties. Conversely, as illustrated in Ntayiya, taxpayers who fail to demonstrate bona fide reliance on independent professional guidance, or who adduce no evidence to that effect, remain exposed to the imposition of substantial USPs.
[1] Provision is also made for the imposition of a penalty in the case of a ‘behaviour’ called “substantial understatements”.
[2] It should be noted that the 2025 Tax Administration Laws Amendment Bill proposes to remove “bona fide error as gatekeeper, so to speak, to the understatement penalty regime and to rather apply it as a remission ground for particular types of understatement penalties. At the time of drafting this article, that bill has not been promulgated.
[3] THISTLE TRUST v COMMISSIONER FOR SOUTH AFRICAN REVENUE SERVICE ([2025] (1) SA 70 (CC), 2024 (12) BCLR 1563 (CC)), 87 SATC 103
[4] CORONATION INVESTMENT MANAGEMENT SA (PTY) LTD v COMMISSIONER FOR SOUTH AFRICAN REVENUE SERVICE ([2024] (6) SA 310 (CC), 2024 (9) BCLR 1128 (CC)), 87 SATC 150
[5] NTAYIYA v SOUTH AFRICAN REVENUE SERVICES, 81 SATC 345
