The South African Revenue Service (SARS) has long been known for its rigid stance on “bona fide inadvertent errors,” a designation that exempts taxpayers from harsh understatement penalties ranging from 10% to a staggering 200% of tax shortfalls. However, recent rulings by South Africa’s highest courts have shifted the landscape, offering clarity and a measure of relief to taxpayers who rely on professional advice.
In 2022, a turning point emerged in the CSARS v The Thistle Trust case. SARS conceded before the Supreme Court of Appeal (SCA) that relying on a professional tax opinion could qualify as a bona fide inadvertent error. This concession cracked open the door for broader interpretations of the term, which SARS had previously confined to simple typographical mistakes, excluding deliberate tax positions.
But was this a binding precedent? That question lingered, as the matter wasn’t fully argued in court. Nevertheless, the SCA’s acknowledgment added significant weight to the notion that professional advice could shield taxpayers from penalties.
Taxpayer Wins and Evolving Definitions
The conversation advanced in 2023 with another pivotal case, CSARS v Coronation Investment Management SA (Pty) Ltd. Here, the SCA excused Coronation from penalties even without full disclosure of the advice it had relied on. Both the Thistle Trust and Coronation cases eventually made their way to the Constitutional Court, whose rulings have since reshaped the discourse.
The Coronation Ruling
The Constitutional Court ruled in Coronation’s favor, finding that the foreign business establishment (FBE) exemption applied to its controlled foreign company. This victory nullified SARS’ attempt to impose understatement penalties, delivering a significant win for the taxpayer.
The Thistle Trust Decision
In October 2024, the Constitutional Court upheld the SCA’s ruling in the Thistle Trust case. While siding with SARS on the main issue, the court dismissed SARS’ bid to revisit its earlier concession on understatement penalties. It concluded that doing so would be unjust, particularly as the matter hadn’t been thoroughly debated in lower courts.
The court underscored the importance of reasonable grounds and professional reliance, noting that the Trust had exercised due care in its tax filing. The judges emphasized that merely opposing SARS’ position should not automatically trigger penalties.
Implications for Penalty Assessment
The Constitutional Court’s remarks clarified SARS’ burden in proving taxpayer misconduct under the Tax Administration Act. To impose penalties, SARS must show that a taxpayer’s actions fit specific behavior categories, ranging from “substantial understatement” to outright evasion.
Taxpayers who fully disclose arrangements and rely on professional opinions are now better protected. However, this safeguard hinges on the quality of the advice meeting section 223’s standards.
Looking Forward: A New Tax Compliance Playbook
While the Constitutional Court refrained from defining “bona fide inadvertent error” explicitly, its rulings, alongside the SCA’s interpretations, signal a need for SARS to rethink its narrow approach. For taxpayers, the message is clear: securing compliant, robust tax opinions is not just advisable—it’s essential in navigating South Africa’s evolving tax landscape.
