Understanding SARS Understatement Penalties (And How to Fight Them)

An understatement penalty is far more serious than a simple admin penalty. Learn what it is, see the penalty table (0% to 200%), and find out how to dispute it.

If an administrative penalty is a slap on the wrist, an understatement penalty (USP) is a serious financial blow.

These penalties are not for being late. They are for being wrong.

SARS issues a USP when an inaccuracy on your tax return—like an undeclared sale, an omitted income source, or an incorrect claim—results in you paying less tax than you legally should have.

What is an "Understatement"?

An "understatement" is any error on your return that causes a "tax shortfall." This includes:

Failing to submit a return when you were supposed to.
An omission (e.g., "forgetting" to declare your freelance income).
An incorrect statement (e.g., claiming a R20,000 home office expense when you work at the dining room table).
An impermissible avoidance arrangement.

How Understatement Penalties are Calculated

When SARS finds an understatement, they do two things:

They calculate the "tax shortfall" (the amount of tax you failed to pay).
They apply a percentage penalty to that shortfall based on your behaviour.

This is where it gets dangerous. The penalty is not a fixed amount; it's a percentage of the tax you tried to avoid.

The Understatement Penalty Table

Bona Fide Inadvertent Error

Substantial Understatement

25%

Reasonable Care Not Taken

50%

No Reasonable Grounds for Tax Position

75%

Gross Negligence

100%

Intentional Tax Evasion

150%

(Note: These percentages can be increased for obstructive behaviour or repeat offences, up to 200%).

What Do These Behaviours Mean?

Bona Fide Inadvertent Error (0%): This is your "get out of jail free" card. It's a genuine, unintentional, and accidental mistake, like a simple typo (e.g., you typed R1,500 instead of R15,000). If you can prove it was an honest mistake, the penalty is 0%.
Reasonable Care Not Taken (50%): You weren't trying to cheat, but you weren't careful. You just accepted your auto-assessment without checking it, or you didn't keep any slips for expenses you claimed.
Gross Negligence (100%): This is a step worse. You showed a complete disregard for the rules. You didn't just "not check," you made a wild claim with no basis, like claiming 100% of your rent as a home office expense.
Intentional Tax Evasion (150%): You actively and consciously tried to cheat. You created fake invoices, hid a bank account, or deliberately omitted your entire freelance business income. This is a criminal offence.

How to Fight an Understatement Penalty

You cannot simply "Request for Remission" for a USP. You must follow the formal dispute resolution process.

Burden of Proof: SARS has the "burden of proof" to show why they are penalising you (e.g., to prove your behaviour was "grossly negligent").
Your Defence: You have the "burden of proof" to show that your behaviour was, at worst, a "bona fide inadvertent error" or that you took "reasonable care." This is why keeping good records is your absolute best defence.
Lodge an Objection (ADR1): You must formally object to the assessment via eFiling. You need to provide a detailed, factual argument explaining why the penalty is incorrect and why your behaviour warrants a lower (or 0%) penalty.

Conclusion:

An understatement penalty is serious and can be very expensive. The only defence is a good offence: keep meticulous records for every income source and every expense you claim.

Disclaimer:This article is for informational purposes only and does not constitute financial or tax advice. Tax laws are complex and subject to change. We strongly recommend consulting with a registered tax practitioner to address your specific circumstances. TaxClaw.ai is a tool to assist you in managing your tax obligations and is not a substitute for professional advice.

Previous Article Next Article

TaxClaw's AI model is reviewed by SARS Registered Tax Practitioner PR-0106041.
Tax filings are submitted by SARS Registered Tax Practitioner PR-0092910