The concept of a "bona fide inadvertent error" is a critical yet regrettably undefined term within the Tax Administration Act, No. 24 of 2011 (“TAA”). Section 222(1) of the TAA states that an understatement penalty is only applicable if the understatement does not arise from a "bona fide inadvertent error". 

However, despite its significance in tax compliance and tax dispute resolution in South Africa, no statutory definition or official guidance has been provided to clarify its precise meaning.

The Legislative Gap

The absence of a statutory definition for "bona fide inadvertent error" creates uncertainty for taxpayers and tax practitioners. In the Explanatory Memorandum to the 2013 Tax Administration Laws Amendment Bill, it was indicated that guidance would be issued on the interpretation of the term. 

However, to date, no such guidance has been forthcoming from Parliament nor National Treasury. This lack of clarity necessitates reliance on the ordinary grammatical meaning of the phrase as well as judicial interpretation where available.

Suggested Definition by National Treasury in the 2025 Budget Speech Review

In a recent development, National Treasury, in the latest Budget Speech Review, proposed that the term "bona fide inadvertent error" be formally defined in the TAA. This proposal aims to provide much-needed clarity and consistency in its application, ensuring taxpayers and SARS have a common understanding of what constitutes a “bona fide inadvertent error”. If implemented, this legislative amendment could significantly reduce disputes related to understatement penalties, by clarifying exactly what constitutes a “bona fide inadvertent error”.

Ordinary Meaning and Legal Interpretation

The term "bona fide" is well established in law and generally means "in good faith," or "without intention to deceive or commit fraud." The Oxford Dictionary defines "inadvertent" as "unintentional," and "error" as a "mistake." When combined, the phrase "bona fide inadvertent error" can be understood to mean an "unintentional honest mistake".

This interpretation is supported by case law, including the decision in ABC Holdings (Pty) Ltd v The Commissioner for the South African Revenue Service(Case number ITI13772). The court in this matter stated that:

"...a misstatement made by a taxpayer on his or her return resulting in an understatement, while acting in good faith and without the intention to deceive…"

This judicial perspective reinforces the notion that where a taxpayer makes an honest mistake without fraudulent intent, such an error should be classified as a "bona fide inadvertent error", which in turn should not attract an understatement penalty.

Practical Implications for Taxpayers

Given the lack of a precise statutory definition, taxpayers must be able to demonstrate that any understatement was indeed an honest and unintentional mistake. Factors that could be relevant in assessing whether an error qualifies as being a "bona fide inadvertent error" include:

• The taxpayer’s past compliance record;
• The complexity of the tax issue in question;
• Whether reasonable care was exercised in preparing the tax return; and
• The nature of the misstatement and whether it indicates a pattern of negligence.

The Need for Legislative Clarity

Due to the subjective interpretation of the factors listed above, the uncertainty surrounding the application of the term "bona fide inadvertent error" highlights the need for SARS or the legislature to provide definitive guidance. Without clear parameters, taxpayers may find themselves unfairly penalized for genuine mistakes, while SARS retains broad discretion in determining whether an understatement results from an error or negligence.

National Treasury’s proposal to define this term in the TAA is a welcome step in the right direction. If enacted, it would provide a framework for assessing mistakes and ensuring fairness in tax administration for South African taxpayers.

Conclusion

The definition of "bona fide inadvertent error" remains an open issue in South African tax law. While the ordinary grammatical meaning and case law does provide some guidance, the lack of an official definition leaves room for interpretation and potential disputes. 

However, with National Treasury’s proposal to clearly define this term in the TAA, there is hope for increased certainty and fairer application of understatement penalties. Taxpayers are advised to stay informed about legislative developments and seek professional advice to navigate these changes effectively.

Written by André Daniels, Head of Tax Controversy & Dispute Resolution at Tax Consulting SA