By Chris Herbst, Chartered Business Accountant in Practice (CBAP) with CIBA, General Tax Practitioner (GTP) with SAIT, Stellenbosch University. Team registered with SAIT, SAIPA and CIBA.
An understatement penalty usually arrives at the end of something else: a verification, an audit or an estimated assessment. The letter shows the additional tax, then a second line with a percentage applied to it. That percentage is not a number SARS picks. It comes from a fixed table in section 223 of the Tax Administration Act 28 of 2011, and the row SARS chose tells you how it has classified your behaviour. This guide explains the definitions, the table, the defences and the dispute steps on eFiling, so you can read your own assessment and decide what to do next.
What is an understatement penalty?
An understatement penalty is a penalty SARS must add to the tax payable when a return understates your tax, unless the understatement results from a bona fide inadvertent error. Section 222(1) states that the taxpayer must pay it "in addition to the tax payable for the relevant tax period", as reproduced in the SARS Guide to Understatement Penalties (Issue 2).
Is it the same as a late submission penalty?
No. A late submission penalty is a fixed amount administrative penalty under Chapter 15 of the Act, explained in our guide to the SARS late submission penalty under section 211. An understatement penalty sits in Chapter 16 and is a percentage of the shortfall in tax. The SARS guide notes that the Act prohibits imposing both an understatement penalty and a fixed amount penalty for the same non-compliance.
Does interest apply as well?
Yes. The penalty is charged on top of the tax, and the SARS guide notes that where the tax is overdue a percentage-based penalty can also apply. Interest and the percentage-based penalty are separate charges from the understatement penalty itself.
What counts as an understatement under section 221?
Section 221 defines an understatement as any prejudice to SARS or the fiscus as a result of one of five things. The list is short and each item is a question you can test against your own return.
- A default in rendering a return, meaning a return that was not submitted.
- An omission from a return, such as interest, rental income or a disposal left out.
- An incorrect statement in a return, such as a deduction claimed that was not due.
- If no return is required, the failure to pay the correct amount of tax.
- An impermissible avoidance arrangement, which is an arrangement to which the general anti-avoidance rules are applied.
What does prejudice to SARS mean?
Prejudice means harm to SARS or the fiscus, usually less tax assessed than was properly chargeable or a larger refund than was properly refundable. The SARS guide discusses the term and ties it to the shortfall calculation in section 222(3).
Can an estimated assessment carry an understatement penalty?
Yes. Section 223(2) provides that the penalty is also chargeable where SARS issues an assessment based on an estimate under section 95, or an assessment agreed with the taxpayer under section 95(3). If you have received one, read our guide on the SARS section 95 estimated assessment as well.
How is the understatement penalty calculated?
The penalty is the shortfall multiplied by the highest applicable percentage from the section 223 table. Section 222(2) applies that percentage to each shortfall in relation to each understatement in a return, so one return can carry more than one penalty line.
What is the shortfall?
Section 222(3) sets the shortfall as the sum of three differences:
- The tax properly chargeable for the period less the tax that would have been chargeable if the understatement were accepted.
- The amount properly refundable less the amount that would have been refunded if the understatement were accepted.
- The difference in an assessed loss or other benefit carried forward, multiplied by the maximum tax rate applicable to the taxpayer under section 222(5).
Section 222(4) removes any duplication where the first two differences overlap.
What does a worked example look like?
Take an illustrative case. A return omits interest, and the corrected assessment raises the tax for the year by R40,000. If SARS classifies the omission as reasonable care not taken, the standard case percentage is 25%, so the penalty is R10,000 on top of the R40,000. If the same behaviour is a repeat case within five years, the 50% column applies and the penalty is R20,000.
What are the penalty percentages in the section 223 table?
The table has six behaviour rows and four percentage columns: the standard case, the obstructive or repeat case, voluntary disclosure after notification of an audit or investigation, and voluntary disclosure before notification. The two main columns, as reproduced in the SARS Guide to Understatement Penalties, are set out below.
- Substantial understatement: Standard case: 10%; Obstructive or repeat: 20%
- Reasonable care not taken: Standard case: 25%; Obstructive or repeat: 50%
- No reasonable grounds for tax position: Standard case: 50%; Obstructive or repeat: 75%
- Impermissible avoidance arrangement: Standard case: 75%; Obstructive or repeat: 100%
- Gross negligence: Standard case: 100%; Obstructive or repeat: 125%
- Intentional tax evasion: Standard case: 150%; Obstructive or repeat: 200%
What are the voluntary disclosure columns?
Where the understatement is disclosed through the voluntary disclosure programme, columns 5 and 6 replace the higher rates. After notification of an audit or investigation, the rates are 5%, 15%, 25%, 35%, 50% and 75% down the six rows. Before notification, they are 0% for the first four rows, 5% for gross negligence and 10% for intentional tax evasion.
What is a repeat case?
Section 221 defines a repeat case as a second or further case of any of the behaviours in items (i) to (vi) of the table within five years of the previous case. A repeat case moves the penalty into the higher column.
Can SARS choose a lower percentage?
No. The SARS guide explains that the regime was designed around prescribed objective criteria, with no discretionary approach. Section 222(2) requires the highest applicable percentage, so the question in a dispute is which row your behaviour falls into, not whether SARS should be lenient.
What is a substantial understatement?
A substantial understatement is a case where the prejudice to SARS exceeds the greater of 5% of the tax properly chargeable or refundable for the period, or R1,000,000. The definition is in section 221, and the SARS guide spells out the consequence: prejudice of R1,000,000 or less can never be a substantial understatement.
Can a substantial understatement penalty be remitted?
Yes, and it is the only row that can be. Section 223(3) requires SARS to remit it if you made full disclosure of the arrangement by the date the return was due, and held an opinion from an independent registered tax practitioner, issued by that date, based on full disclosure of the facts, confirming that your position is more likely than not to be upheld in court.
How does SARS decide which behaviour row applies?
SARS applies the row that matches your conduct, and section 102(2) places the burden of proving the facts on which it based the penalty on SARS. The SARS guide footnotes this onus directly, which matters when you dispute the row chosen.
What does reasonable care not taken mean?
The SARS guide judges reasonable care against a reasonable person in the taxpayer's own circumstances. Its example is a pensioner with no financial training who carefully extracts interest from bank statement codes and misses one amount marked with a different code. The guide treats that as reasonable care taken. A retired chartered accountant making the same omission would not meet the standard.
What is a tax position, and when are there no reasonable grounds for it?
Section 221 defines a tax position as an assumption underlying an aspect of a return, such as whether an amount is taxable, deductible or taxed at a lower rate. The no reasonable grounds row applies where that assumption was taken without a reasonable basis. Support for the position in the Act, in SARS guidance or in a considered opinion obtained before filing is what shows reasonable grounds.
How is gross negligence different?
The SARS guide describes gross negligence as a more serious deviation from the reasonable person standard than the lower rows. Where that level of behaviour is not shown, the guide says the finding may instead be that reasonable care was not taken or a reasonable tax position was not adopted.
When does intentional tax evasion apply?
The top row requires intent. It carries 150% in the standard case and 200% in a repeat or obstructive case, and voluntary disclosure before notification reduces it to 10%.
When is there no penalty because of a bona fide inadvertent error?
There is no understatement penalty where the understatement results from a bona fide inadvertent error. Section 222(1) makes this the one complete exception. The SARS guide reads the words in their ordinary meaning: a mistake made in good faith that did not result from deliberate planning, and not a considered decision to leave an amount out.
Is a deliberate omission ever an inadvertent error?
No. In the guide's pensioner example, the omission was not an inadvertent error because the amount was purposefully left out, even though no penalty applied because reasonable care was taken. The two defences are different tests, so test your facts against both.
What evidence supports the defence?
The records you used to prepare the return, the working papers, and anything showing how the error happened. For a source code transposed on the ITR12, the IRP5 or certificate next to the return usually tells the story. Our guide to SARS verification supporting documents lists what SARS expects to see.
How does voluntary disclosure reduce an understatement penalty?
A valid voluntary disclosure reduces the penalty to the column 5 or 6 rate. Section 229, reproduced in the SARS guide, requires SARS, once a voluntary disclosure agreement is concluded, to grant understatement penalty relief to that extent, not to pursue criminal prosecution for the default, and to grant 100% relief on administrative non-compliance penalties other than late submission penalties. The SARS Voluntary Disclosure Programme page sets out the application route.
Does timing matter?
Yes. The before notification column is far lower than the after notification column: 0% against 15% for reasonable care not taken. A disclosure made before SARS notifies an audit or investigation earns the lowest rate.
Is this relevant to undeclared crypto?
It is the same regime. Our guide on the SARS Voluntary Disclosure Programme for undeclared crypto explains the steps for crypto disposals and income that were left off earlier returns.
How do I dispute an understatement penalty on eFiling?
You dispute it by lodging a Notice of Objection (NOO) against the assessment. Section 224 makes the penalty, and a decision not to remit a substantial understatement penalty, subject to objection and appeal under Chapter 9. The SARS dispute guide GEN-PEN-05-G02 (revision 23, effective 1 April 2026) says that where you disagree with an assessment including understatement penalties, you lodge an NOO, and supporting documents are mandatory.
What are the steps?
- Read the notice of assessment. SARS must state the grounds for the assessment, including the grounds for the penalty, as the SARS guide explains.
- If the grounds are not adequate, request reasons first. On eFiling the Request for Reason option sits under the Returns menu.
- Log in to eFiling, open Returns, select Disputes\Suspension of Payment and click New.
- Select the tax type, Income Tax, and the year of assessment, then choose Notice of Objection.
- Identify the penalty line you dispute and state your grounds: the row is wrong, the error was bona fide and inadvertent, or the understatement itself is wrong.
- Upload your supporting documents. The dispute guide treats them as mandatory for an NOO.
- If you cannot pay while the dispute runs, request suspension of payment on the same eFiling dispute screens.
How long do I have to object?
The SARS objections page states that an objection must be submitted within 80 business days after the date of the assessment or decision. Where you requested reasons, the 80 business days run from the date SARS provided them or confirmed that no further reasons will be given.
What if the objection is disallowed?
You may lodge a Notice of Appeal (NOA) on eFiling. The SARS guide adds that if the underlying assessment is overturned on objection or appeal, the penalty falls away with it.
Can I avoid a penalty by correcting my return first?
Correcting an error yourself is the right first step, and the route depends on where your return is. A SARS Request for Correction lets you submit a corrected ITR12, and the SARS Request for Corrections page sets out when it is available and when an objection is required instead. Where the error is material and deliberate, or spans several years, the voluntary disclosure programme is the route that carries statutory penalty relief.
What if SARS has already sent a section 46 letter?
Then SARS has started asking questions, and the timing of any disclosure matters. Our guide to the SARS section 46 letter covers who can respond on your behalf.
What are the common mistakes with understatement penalties?
- Disputing the tax and ignoring the penalty line. Name the penalty and its row in your NOO grounds, or it stands.
- Arguing for leniency. The table leaves no discretion. Argue the row, the defence, or the underlying figure.
- Missing the 80 business days. A late objection needs grounds for condonation, which the Notice of Objection form asks for in its own section.
- Objecting without documents. The SARS dispute guide makes supporting documents mandatory for an NOO.
- Confusing the two defences. A bona fide inadvertent error removes the penalty; reasonable care taken removes the reasonable care row. Test both.
- Disclosing after the audit notice. The after notification column is higher. Disclose before SARS writes.
- Assuming a substantial understatement penalty is final. Section 223(3) remittance is mandatory where its conditions are met.
Do You Need Help With an Understatement Penalty?
An understatement penalty turns on the row SARS chose and the evidence behind your return. We read the assessment and its grounds, test them against section 223 and the SARS guide, and prepare the request for reasons or the Notice of Objection with the documents SARS expects. See our personal tax pricing, browse our SARS compliance guides, read how we approach SARS audits, or contact us to talk through your assessment.
