Sars narrows ‘honest mistake’ defence: what tax penalty changes mean

CERTAIN tax amendments receive significant public attention, while others effect substantive changes to the balance of power between SARS and taxpayers without widespread notice.

- WILLEM OBERHOLZER

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.