The Tax Administration Act (28/2011) came into effect on October 1 2012. The rationale behind the act's introduction was to streamline, modernise and align the previous tax administration provisions and ultimately lower the cost and burden of tax administration in South Africa. One of the key changes to the tax administration regime following the act's promulgation was the conversion from the so-called 'additional tax' regime to the understatement penalty regime.

While the objective criteria and shift towards greater certainty have been welcomed, a key challenge remains as the new regime's criteria are open to differing interpretations. When the Tax Administration Act was introduced, it was understood that SARS would ultimately provide guidance as to its interpretation of the different criteria. The South African Revenue Service (SARS) finally published its Guide to Understatement Penalties on March 28 2018 – albeit several years after the act's promulgation.

Previous regime

Under the now-repealed Section 76 of the Income Tax Act (58/1962), SARS could impose additional tax of up to 200% in the event of a taxpayer default or omission. Several issues were encountered in respect of the additional tax regime, including the lack of certainty, uniformity and transparency in SARS's application of the relevant provisions. For instance, it was often difficult to ensure that taxpayers in comparable circumstances were treated consistently. Further, the way in which the provision was constructed meant that SARS:

  • often commenced the penalty process by imposing the maximum additional tax of 200%; and
  • considered reducing the penalty only to the extent that the taxpayer could prove extenuating circumstances.

The Memorandum on the Objects of the Tax Administration Bill 2011 expanded the rationale for the relinquishment of the additional tax regime for two further reasons:

  • It would remove any uncertainty as to whether additional tax may be imposed only under a money bill, as contemplated in Section 77 of the Constitution.
  • The South African courts have held on more than one occasion that the additional tax was a penalty and not a tax on, for example, income (as the name suggested).

New regime

The new understatement penalty regime was thus introduced with effect from October 1 2012. It is based on certain objective categories of behaviour. In other words, the understatement penalty percentage imposed is dependent on the taxpayer's behaviour, the categories of which include:

  • substantial understatement;
  • a failure to take reasonable care in completing a return;
  • a failure to take reasonable grounds for a tax position;
  • an impermissible avoidance arrangement;
  • gross negligence; and
  • intentional tax evasion.

Notably, the onus to prove the grounds for the imposition of an understatement penalty and the applicable percentage is on SARS.

Remaining challenges

While the conversion from the additional tax regime to the understatement penalty regime has been welcomed, particularly given the fact that it is now based on certain objective criteria, the challenge is that behaviours listed in the understatement penalty percentage table are not specifically defined in the Tax Administration Act. Therefore, other legislative interpretive tools must be relied on in order to define the specific behaviours. While there have already been some cases dealing with the understatement penalty regime, the South African judicial precedent will still take time to fully develop this aspect of tax law.

Nevertheless, guidance could be obtained from other sources, such as:

  • case law pertaining to the now-repealed additional tax regime;
  • South African criminal case law defining some concepts (which is not a perfect substitute); and
  • guidance and judicial precedent from other jurisdictions with similar regimes, such as Australia and New Zealand.

New guide

The Guide to Understatement Penalties is quite extensive and provides insight and examples regarding several contentious issues underpinning the new understatement penalty regime, including:

  • what triggers an understatement;
  • how to calculate an understatement penalty based on a tax shortfall; and
  • what constitutes a 'bona fide inadvertent error' (the subject of much consternation).

Notably, the guide also discusses and provides examples of each of the listed behaviours.

While the guide will certainly shed some light on SARS's interpretation of the relevant provisions and will no doubt prove useful to taxpayers, it is not binding and is merely of persuasive value. Taxpayers should thus keep this in mind when faced with this ever-increasing contentious aspect of tax law.

For further information on this topic please contact Jerome Brink at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email ( The Cliffe Dekker Hofmeyr website can be accessed at

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