Recent amendments to the Tax Administration Act reflect a continued shift by the South African Revenue Service towards a more structured and enforceable penalty framework. The Tax Administration Laws Amendment Act 4 of 2026, assented to on 31 March 2026 and effective 1 April 2026, amends sections 222 and 223 of the Tax Administration Act. The changes fundamentally restructure the understatement penalty enquiry and materially narrow the defences available to taxpayers. The broader implication is clear: penalty risk is increasingly determined upfront, at the time a tax position is taken and filed.
A more constrained role for “inadvertent error”
Historically, taxpayers could rely on the bona fide inadvertent error defence to exclude an understatement from the penalty regime entirely. Where successfully invoked, SARS was precluded from imposing an understatement penalty, and the enquiry never reached the section 223 behaviour categories at all.
The 1 April 2026 amendments change this structure legislatively, not merely in practice.
The defence has not been removed, but it has been repositioned and materially limited through amendments to both sections 222 and 223. Critically, it no longer operates as a threshold exclusion that short-circuits the entire penalty enquiry. Under the amended section 222(1), where an understatement involves behaviour subject to the penalty table in section 223, the taxpayer is required to pay the understatement penalty in addition to the tax due, the bona fide inadvertent error defence is no longer available as a standalone relief for those categories. For conduct-based penalty categories (reasonable care not taken, no reasonable grounds for the tax position taken, gross negligence, and intentional tax evasion), no error-based defence survives at all.
The defence now survives only in the context of the substantial understatement category, and even there it operates as a remittance ground rather than an upfront exclusion.
Reinforcing a behaviour-based framework and a new sequencing
Under section 223 of the Tax Administration Act, understatement penalties are determined by reference to defined categories of taxpayer behaviour:
- Substantial understatement
- Reasonable care not taken
- No reasonable grounds for the tax position taken
- Gross negligence
- Intentional tax evasion
The amendments reinforce and structurally entrench the primacy of this framework by legislatively resequencing the enquiry. SARS must now first establish whether the understatement resulted from one of the listed behaviours in the penalty table. Only once that enquiry is resolved, in the taxpayer’s favour on all conduct-based categories does the question of substantial understatement arise as a residual category. The ability to invoke a general error-based defence to avoid this enquiry entirely has been eliminated.
The role of “substantial understatement”
Substantial understatement remains a defined category within the penalty table and is triggered where the tax prejudice exceeds:
- R1 million, or
- 5% of the tax payable or refundable (whichever is greater)
It does not involve culpable conduct but rather arises from an objective quantum calculation. It typically applies where no more culpable behaviour (such as negligence or evasion) is established and the understatement is objectively significant. The standard penalty rate for substantial understatement is 10%, rising to 20% in obstructive or repeat cases.
Under the amended section 223(3), two distinct routes to remission are available in substantial understatement cases:
First route – bona fide inadvertent error: SARS must remit the penalty where the understatement resulted from a bona fide inadvertent error. This is framed as an objective jurisdictional fact: if the condition is met, remission is mandatory.
Second route – independent opinion: SARS must remit the penalty where the taxpayer (a) made full disclosure of the arrangement to SARS by no later than the date the relevant return was due, and (b) was in possession, also by that date, of an opinion by an independent registered tax practitioner confirming that the taxpayer’s position is more likely than not to be upheld if the matter proceeds to court.
It is important to note that while the amendment settles where the bona fide inadvertent error defence now sits in the statutory architecture, it does not resolve what the defence means. The cases of Thistle Trust and Coronation, in which taxpayers successfully relied on this defence in the context of consciously adopted tax positions remain relevant to that question. The courts have not yet been asked to determine the meaning of bona fide inadvertent error under the post-amendment structure.
Increased importance of contemporaneous support
As the scope for front-end defences narrows, the importance of contemporaneous technical support becomes critical. In particular, reliance on an independent registered tax practitioner’s opinion is increasingly important where complex or uncertain tax positions are adopted. For such an opinion to be effective under section 223(3), it must:
- Be provided by an independent registered tax practitioner (a statutory requirement under the amended provision)
- Be based on full and accurate disclosure of all relevant facts and the overall arrangement
- Conclude that the tax position is more likely than not to be upheld
- Be obtained by no later than the date the relevant return is due
Opinions that address only part of a transaction, that are given by a non-independent or unregistered adviser, or that are obtained after the filing date are unlikely to provide meaningful protection.
Practical implications for taxpayers
The amendments reinforce several key themes:
- Good faith alone is no longer sufficient: The fact that an error is genuine does not, in itself, eliminate penalty exposure, particularly where the quantum crosses the substantial understatement threshold.
- Behavioural standards are central: Taxpayers must be able to demonstrate that positions were taken with appropriate care and on reasonable grounds. For conduct-based categories, no error-based defence remains available.
- Materiality increases risk: Larger transactions require heightened scrutiny given the operation of the substantial understatement threshold.
- Timing is critical: The relevant analysis, supporting evidence, and any protective opinion must exist at the time of filing, not be developed during an audit.
- The practitioner must be registered: An opinion from an unregistered adviser will not satisfy the section 223(3) requirements, regardless of its quality.
Concluding remarks
While the underlying penalty percentages remain unchanged, the amendments significantly increase the practical exposure of taxpayers to those percentages by removing the ability to avoid the regime entirely through the bona fide inadvertent error defence. The structural resequencing means that the behaviour enquiry must now be confronted in every case, and an error-based argument is available only at the remittance stage for substantial understatement and only through the specific channels the statute now prescribes.
The direction of travel is clear: a move towards a more certain, behaviour-driven regime, with limited reliance on subjective or retrospective defences.
For taxpayers operating in complex environments, the implication is straightforward: penalty risk must be actively managed at the point of taking a tax position, through robust technical analysis, appropriate governance, contemporaneous documentation, and where material positions are adopted, a compliant opinion from an independent registered tax practitioner, obtained before the return is filed.
If you would like to assess how these changes may impact your current tax positions, review your documentation framework, or obtain support in strengthening your defence against potential understatement penalties, please get in touch, our team would be pleased to assist.
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