SARS Understatement Penalties Explained: Rates, Behaviour & VDP

What Is an Understatement Penalty?

An understatement penalty is imposed under Section 222 of the Tax Administration Act when SARS determines that a taxpayer has understated their tax liability. This can happen when you declare less income than you earned, claim deductions you were not entitled to, or otherwise submit a return that results in less tax being assessed than should have been.

The penalty is calculated as a percentage of the tax shortfall (the difference between what was declared and what should have been declared), and the rate depends on the type of behaviour that led to the understatement.

Penalty Rates by Behaviour Type

The Tax Administration Act sets out five categories of behaviour, each with a different penalty rate:

What Is a "Substantial Understatement"?

A substantial understatement occurs when the tax shortfall exceeds the greater of 5% of the tax properly chargeable or R1,000,000. This is the lowest category of behaviour and carries the lowest penalty rate.

This category is important because it can apply even when the taxpayer acted in good faith — it is based purely on the size of the understatement relative to the total tax.

What Is a "Jeopardy Assessment"?

A jeopardy assessment is issued under Section 94 of the Tax Administration Act when SARS believes there is a risk that tax will not be collected if it follows the normal assessment process — for example, if the taxpayer is about to leave the country or dissipate assets.

Jeopardy assessments attract higher penalty rates across all behaviour categories. If you receive a jeopardy assessment, seek professional advice immediately.

How to Reduce an Understatement Penalty

There are several ways to reduce an understatement penalty:

• Voluntary Disclosure Programme (VDP) — if you disclose the understatement before SARS discovers it, the penalty can be dramatically reduced. See our VDP guide.
• Challenge the behaviour classification — if SARS has classified your behaviour as "gross negligence" but you believe it was merely a "substantial understatement", you can object under Section 104.
• Object to the assessment — if you believe the understatement calculation itself is incorrect, you can object to the underlying assessment.