The South African Revenue Service’s (“SARS”) strategy is well established: make it easy and cost-effective for taxpayers to comply with their obligations, and difficult and costly for those who do not. On 11 August 2026, another taxpayer faced this costly reality and felt the pain of claiming a farming expense deduction that should never have been attempted.
Dylan Jacobs
Tax Attorney
SARS initially refunded the taxpayer to the tune of approximately R1.38 million, based on an incorrectly submitted tax return. The taxpayer thought she was in the clear. But then SARS, through its enhanced AI capabilities, picked up the risk assessment and investigated. SARS asked for proof of the farming assets, only to be told that no farming operation existed and no equipment had been purchased.
The refund was reversed, interest was added as well as a 150% understatement penalty for being an errant taxpayer.
Feeling rather aggrieved, the salaried taxpayer turned to the courts for help. The Tax Court found the law was clear and upheld the SARS penalty. Another taxpayer learned just how costly non-compliance can be.
The Taxpayer Reaps What Was Sown
Once the audit was complete, SARS reversed the tax position and raised additional assessments totalling approximately R3.6 million. This included the tax owing, interest amounting to more than R141,000 and an understatement penalty of approximately R2.08 million.
The penalty was imposed at 150%, with SARS categorising the conduct as intentional tax evasion. Although the taxpayer accepted that the refund was not due, she maintained that the penalty should not stand and pursued the matter through objection, appeal, Alternative Dispute Resolution and ultimately in the Tax Court.
By the time the matter reached Tax Court, the issue was whether SARS was entitled to characterise the conduct as intentional tax evasion and impose the corresponding 150% penalty?
The Court found that it was “correctly categorised as intentional tax evasion” and that the penalties are mandatory.
The Principles Applied by the Court
From reading the judgment it is clear that the Court applied several important principles which extend well beyond fictitious farming claims.
First, there must be prejudice to SARS for them to impose an understatement penalty. An incorrect statement in a return only constitutes an “understatement”, as defined in section 221 of the Tax Administration Act No. 28 of 2011 (the “TAA”), where it causes prejudice to SARS or the fiscus. Here, the false farming expenses and altered PAYE information of the taxpayer produced an undue refund, and the Court found that the incorrect statements had “resulted in prejudice to SARS”.
Second, SARS still carries the burden in terms of section 102(2) of the TAA when it comes to the imposition of an understatement penalty. It must prove the facts on which the understatement penalty is based. In this case, the Court found that SARS had done so “on a balance of probability”.
The behaviour behind the understatement then determines the percentage. Section 223 sets out the applicable penalty table, with intentional tax evasion attracting a 150% penalty in a standard case. The Court found that the fraudulent revised returns had been submitted “with the intention of securing a refund” and were therefore correctly categorised as intentional tax evasion.
Once that finding was made, SARS had no discretion simply to overlook the penalty. As the Court put it, “The penalties are mandatory and are prescribed by the Act.” Having treated the matter as a standard case of intentional tax evasion, SARS was therefore required to impose the corresponding 150% penalty.
The judgment also serves as a reminder that eFiling credentials remain the taxpayer’s responsibility. The taxpayer sought to distance herself from the returns by alleging that she had provided her login details to a SARS official. The Court stressed that those credentials must be kept secure and may not be shared with anyone, including SARS officials.
Perhaps most damaging was the fact that the taxpayer’s version changed over time. This was important under section 235(2), which effectively required her to show a reasonable possibility that she was unaware of the false statements and that such ignorance was not due to negligence. Her earlier discussions with SARS officials had been reduced to writing and signed, while even her objection made no mention of third-party fraud.
Her case was further weakened by the fact that she knew the refund was not due and had retained part of it for herself. The Court rejected her later explanation as a “recent fabrication”, referring to her “gleeful acceptance of her share of the spoils”.
First Mover Advantage
SARS may have a well-established strategy, but taxpayers are not without one of their own.
Where a SARS risk is identified early, first mover advantage is the most important step for the taxpayer to manage exposure and regularise their position.
Where a tax risk exists, your first move should be deliberate, not reactive. Before making disclosures, engage advice from a specialist tax attorney or tax consultant, particularly where the position can be assessed under legal privilege before SARS sets the process in motion.
In this matter, the taxpayer first received a refund and may have thought she was in the clear. By the end of the process, she faced a liability of millions, including substantial penalties.
That is precisely why SARS risk is better dealt with before SARS deals with it for you.
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