Tax Opinions: Your Shield in a Sharpening Compliance Landscape

By Jané Visagie & Danielle Annandale

The Draft Tax Administration Laws Amendment Bill, 2025 (Draft TALAB) introduces key changes to the understatement penalty provisions under sections 222 and 223 of the Tax Administration Act, No. 28 of 2011 (TAA). These proposed amendments reflect SARS’ continued focus on accountability, disclosure and proactive compliance.

In this edition of WTS Renmere’s Tax Flash, we unpack the most important changes and explain why obtaining a formal tax opinion in appropriate circumstances has never been more relevant for taxpayers.

Current Framework: Sections 222 and 223

Section 222 of the TAA, as it currently reads, allows SARS to impose an understatement penalty (USP) “in the event of an ‘understatement’ by the taxpayer… unless the ‘understatement’ results from a bona fide inadvertent error”. It follows that where an understatement was made, the only circumstance in which SARS is not obliged to levy a USP, is if SARS is satisfied that the understatement resulted from a bona fide inadvertent error.

The extent of the USP depends on the extent of the understatement and the taxpayer’s measure of blameworthiness, as per the understatement penalty percentage table in section 223(1).

If the understatement did not result from a bona fide inadvertent error, section 223(3) provides that SARS must remit a USP imposed for a ‘substantial understatement’ if SARS is satisfied that the taxpayer made full disclosure to SARS of the arrangement and was in possession of an opinion by an independent registered tax practitioner that meets specific requirements (including specific wording) by no later than the date that the relevant return was due.

Key Amendments in the Draft TALAB 2025

The Draft TALAB 2025 proposes to refine and tighten the USP provisions with effect from the date of promulgation of the yet to be finalised Tax Administration Laws Amendment Act.

Firstly, it removes the latter part of section 222(1) — namely, the wording “unless the understatement results from a bona fide inadvertent error”. This amendment means that SARS must impose a USP, even where the understatement arises from a bona fide inadvertent error.

The so-called “bona fide inadvertent error” escape clause has been relocated to section 223(3), where the proposed amendment explicitly links such an error to the category of ‘substantial understatement’. It is not clear whether the intention is that a USP can be remitted irrespective of the percentage USP levied by SARS, provided that a ‘substantial understatement’ is objectively present, or whether the USP can only be remitted under section 223(3) if SARS imposed the 10% penalty for a ‘substantial understatement’. In our view, provided that a ‘substantial understatement’ as defined occurred (i.e. resulting in prejudice exceeding the greater of 5% of the amount of ‘tax’ properly chargeable or refundable for the relevant tax period, or R1 million), the section 223(3) escape hatch should be available, irrespective of whether or not SARS has attributed blameworthiness. The measure of SARS’ discretion in the matter is also not clear, given that section 223(3) provides that “SARS must remit” a USP, but only where “SARS is satisfied” that the understatement resulted from a bona fide inadvertent error or that the taxpayer was in possession of a tax opinion as envisaged in section 223(3)b). This uncertainty highlights the importance of obtaining a tax opinion, where appropriate. Even if SARS were to argue that USP remission is only possible in the case of a 10% ‘substantial understatement’ penalty, having a tax opinion in hand could serve as evidence of reasonable care taken and good faith (as recently seen in CSARS v The Thistle Trust 2023 (2) SA 120 (SCA)), thus counteracting the blameworthy behaviour alleged by SARS to support a higher penalty percentage and thereby potentially granting access to the realm of a 10% penalty which can certainly be remitted under section 223(3).

Irrespective of any interpretative ambiguity, taxpayers should anticipate heightened scrutiny of their disclosures and supporting documentation. Where SARS identifies an understatement, it will expect contemporaneous evidence that the taxpayer actively sought and relied on professional advice.

Additional Reasons Why a Formal Tax Opinion Matters

Whilst penalty protection certainly is an important consideration, there are more fundamental reasons why it is prudent to obtain a tax opinion:

1. A tax opinion allows an opportunity for comprehensive analysis

Although the insights provided in high-level tax advice obtained through manners such as meetings, calls and email communications may be accurate, the advice is often given on an in-principle basis and without regard to all the pertinent facts. Soliciting a formal tax opinion ensures that the advisor considers the relevant legislation and case law in detail, thus asking the right questions to clients so as to gain access to all relevant facts.

2. A tax opinion allows you to understand the nature of the transaction risks

A tax opinion allows you to make an informed decision as to the tax treatment of a matter or as to the implementation of a transaction structure, with access to the full extent of risks and technical vulnerabilities.

3. A tax opinion serves as a record of advice provided and arrangements concluded

Staff turnover and the effluxion of time could result in a taxpayer or tax advisor not recalling relevant facts, discussions or motivations at the time that an issue arises in future. A tax opinion serves as a record of the advice provided and the rationale behind the relevant views.

4. A tax opinion allows for time and cost savings in respect of post-transaction implementation

A proper tax opinion provides guidance on compliance requirements (including the disclosure of the transaction in the tax return and financial statements), simplifies post-transaction implementation and facilitates interaction with auditors and other advisors. A taxpayer who is in possession of a tax opinion therefore stands a good chance of understanding and meeting the compliance obligations.

In short, a tax opinion is both a defensive tool and a compliance enabler. It shows SARS that the taxpayer took reasonable steps to verify the tax treatment adopted and did not act negligently.

Closing Insight

The Draft TALAB 2025 reinforces SARS’s message: tax compliance begins before filing.

Proactive tax risk management and contemporaneous documentation are no longer optional, they are essential to protect against financial and reputational exposure.

It is therefore vital that taxpayers seek professional tax advice at the earliest opportunity — ideally before implementing a transaction or filing a return. Early engagement allows the correct tax treatment to be adopted from the outset and ensures that appropriate measures are in place to achieve full compliance and manage potential risks.

Obtaining a formal tax opinion in appropriate circumstances is not just a safeguard against potential penalties; it is a cornerstone of sound tax governance and responsible decision-making.

If you would like to understand how the Draft TALAB 2025 may affect your business or would like assistance in obtaining a section 223 compliant, defensible tax opinion, please contact: WTS Renmere