SARS Tightens the Net

The removal of the bona fide inadvertent error defence and what it means for taxpayers

On 1 April 2026, the Tax Administration Laws Amendment Act 4 of 2026 came into effect, introducing material changes to the understatement penalty regime administered by the South African Revenue Service (SARS). For taxpayers and their advisors, one consequence of this amendment stands out above all others: the defence that a tax shortfall arose from an honest, unintentional mistake can no longer be used to avoid the penalty regime at the outset. The implications for how taxpayers approach uncertain tax positions are significant.

Background: understatement penalties and the old defence

Where a taxpayer pays less tax than is properly due, SARS is empowered to impose an understatement penalty in addition to collecting the shortfall. These penalties are determined by reference to a table of behaviours set out in the Tax Administration Act, ranging from a 10% penalty for a substantial understatement at the lower end, up to 200% for intentional tax evasion. The more blameworthy the conduct, the higher the penalty.

Under the law as it stood before 1 April 2026, a taxpayer could avoid any understatement penalty entirely by establishing that the shortfall resulted from a bona fide inadvertent error, that is, an honest mistake made without any intention to deceive. This was an absolute defence. Once successfully raised, the penalty table was never engaged. The entire penalty inquiry ended before it began.

The courts interpreted this defence broadly. In the Thistle Trust and Coronation cases, both decided in 2024, the courts found that where a taxpayer had relied on advice from a reputable, independent tax professional before filing, even where that advice subsequently proved to be incorrect, this was sufficient to establish an honest mistake. SARS was therefore precluded from imposing any penalty, regardless of the amount of tax at stake.

SARS had consistently opposed this interpretation, taking the view that the defence was being misused to insulate aggressive or contestable tax positions from any penalty exposure simply by wrapping them in a professional opinion. Having failed to persuade the courts, SARS sought and obtained legislative reform.

What changed on 1 April 2026?

The amendment did not abolish the honest mistake defence. It relocated it and significantly restricted when it can be used.

Under the new law, SARS must first work through the conduct inquiry. It examines the taxpayer’s behaviour and determines which category in the penalty table applies. Only once that process is complete does the honest mistake defence become relevant, and even then, it is available only in one specific situation: where the shortfall constitutes a substantial understatement and no blameworthy conduct has been established.

A substantial understatement is not a finding of wrongdoing. It is an objective calculation. It arises where the tax shortfall exceeds the greater of R1 million or 5% of the tax properly chargeable or refundable for the relevant period. It is the lowest-level penalty category, attracting a 10% penalty, and it applies purely by reference to the size of the underpayment, not the taxpayer’s state of mind. It is, in essence, a residual category that only becomes relevant once SARS has been unable to establish any more serious misconduct.

Where only a substantial understatement remains, the taxpayer may still invoke the honest mistake defence to have the penalty remitted. Alternatively, the penalty must be remitted if the taxpayer held, before the return was filed, a written opinion from an independent registered tax practitioner based on full disclosure of the relevant facts, concluding that the tax position taken was more likely than not correct.

For all other penalty categories, being careless, having no reasonable basis for the position adopted, gross negligence, or intentional tax evasion, the honest mistake defence is no longer available at all. A taxpayer facing a penalty in any of those categories must defeat the conduct allegation on its merits.

Where the defence no longer applies: the threshold explained

A point that requires particular attention is what happens where the tax shortfall does not meet the substantial understatement threshold, that is, where it falls below both R1 million and 5% of the tax properly owed.

In that situation, no substantial understatement arises. If SARS also cannot establish any blameworthy conduct against the taxpayer, the result is that no penalty applies at all, not because of the honest mistake defence, but because no category in the penalty table has been triggered. The taxpayer escapes the penalty regime entirely, but through the conduct inquiry rather than through the honest mistake defence.

Conversely, where the shortfall is large enough to constitute a substantial understatement but SARS cannot prove any blameworthy conduct, the honest mistake defence, or a qualifying professional opinion, becomes the taxpayer’s only route to avoiding that 10% penalty. Without one of those two things, the penalty stands.

This is the structural change that the amendment introduced. It is not that honest mistakes are now penalised. It is that the taxpayer must now navigate the conduct inquiry before the honest mistake argument can be raised, and the honest mistake argument only has practical work to do in substantial understatement cases.

A practical illustration

Consider three scenarios involving a property holding company, ABC (Pty) Ltd, which restructures its operations and, based on a written opinion from an independent tax attorney obtained before filing, treats certain proceeds as capital rather than revenue. SARS audits the company, disagrees with the treatment, and raises an additional assessment.

Scenario 1: The shortfall is R3 million. This exceeds R1 million and therefore constitutes a substantial understatement. Under the old law, ABC would have pointed immediately to its professional opinion and the honest mistake defence would have ended the matter. Under the new law, SARS first examines the conduct. Because ABC obtained a proper opinion before filing and gave the attorney full disclosure of all relevant facts, SARS is unlikely to establish carelessness or lack of reasonable grounds. Once those allegations fall away, only the substantial understatement remains. At that point, ABC can rely on its written opinion to have the 10% penalty remitted. The outcome is the same as it would have been before 1 April 2026, but ABC has had to engage with the conduct inquiry before reaching that result.

Scenario 2: The shortfall is R400 000. This falls below R1 million. Assuming SARS cannot prove any blameworthy conduct, no penalty applies regardless of the honest mistake argument, because no category in the penalty table has been met. The honest mistake defence is irrelevant here. The taxpayer’s protection comes from defeating the conduct allegations, not from any separate honest mistake argument. This is an important distinction: the defence is not needed and cannot be invoked in this scenario, but the taxpayer is still protected.

Scenario 3: The shortfall is R3 million, but ABC did not obtain any written opinion before filing. It simply made an internal judgment call and proceeded. Under the new law, ABC must now defeat the conduct allegations without the support of a professional opinion. If SARS can establish that reasonable care was not taken or that there were no reasonable grounds for the position, the honest mistake defence is not available, and the penalty stands. Even if SARS cannot establish blameworthy conduct and only the substantial understatement category remains, ABC has no qualifying opinion to rely on for remission and must litigate the meaning of the honest mistake defence itself. That is an uncertain, expensive, and entirely avoidable position to be in.

The practical takeaway

The 2026 amendment has not fundamentally altered what constitutes an honest mistake, and in many disputes a well-prepared taxpayer will reach the same outcome as they would have before. What has changed is the procedural route to that outcome and the consequences of poor preparation.

Any taxpayer adopting a tax position that involves genuine legal or factual uncertainty should obtain a written opinion from an independent registered tax practitioner before the return is filed. That opinion must be based on full disclosure of all material facts and must conclude that the position is more likely than not to be upheld. An opinion obtained after a SARS audit has commenced, or one that does not meet these requirements, will not assist.

The filing season is approaching. The changes are already in effect. Taxpayers and their advisors who have not yet reviewed their approach to uncertain tax positions should do so without delay.

This article is intended as a general overview and does not constitute legal or tax advice. Taxpayers are advised to consult a registered tax practitioner in respect of their specific circumstances.