MLC and the Evidence Required to Sustain an Understatement Penalty

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MLC and the Evidence Required to Sustain an Understatement Penalty

• 30 September 2026
• Tax Administration
• The Tax Faculty

Understatement penalties, the burden of proof, eFiling credentials and the consequences of an unsuccessful penalty appeal.

At a glance

The 150% understatement penalty in Taxpayer MLC v CSARS survived because the court accepted that SARS had proved intentional tax evasion and rejected the taxpayer's explanation for the fraudulent returns. Use of the taxpayer's eFiling credentials was important evidence, but the case also turned on her admissions, the false claims and the credibility of her account (Taxpayer MLC v CSARS (IT 77272, Tax Court, Gqeberha, 11 August 2026)).

The distinction between the ultimate burden of proof and an evidential burden is central. The South African Revenue Service (SARS) bore the burden of proving the facts supporting the penalty. Once prima facie evidence connected the false submissions to the taxpayer, she had to produce evidence supporting the reasonable possibility that she had been ignorant of them. Her explanation failed on the facts.

The revised returns and the audit

The taxpayer was employed by a government department and derived income solely from her salary. Her original 2020 and 2021 returns were filed in December 2020 and September 2021 respectively. Revised returns followed in August 2023, claiming farming expenditure and losses despite the absence of farming operations. Altered IRP5 certificates reflected inflated pay-as-you-earn (PAYE) credits inconsistent with the original employer documents.

The table identifies the disputed claims. It is not a complete return calculation linking each item to the refund and should not be used, by itself, to reconstruct the assessment.

SARS paid a substantial refund and subsequently selected the returns for audit following an automated risk assessment. When it requested evidence of the R2 million farming capital expenditure, the taxpayer produced no supporting invoices and admitted that she had not conducted farming operations. At the pre-trial conference, she accepted the capital and interest calculations, the undue nature of the refund, and the use of her eFiling login details for the revised returns. The penalty remained contested.

Practice point: For a penalty appeal, identify the facts already admitted and the issue still in dispute. Agreement on capital and interest does not supply a complete answer to the separate question whether SARS has proved the behaviour supporting its chosen penalty rate.

The figures require a rounding qualification

The refund was approximately R1.38 million, or R1.4 million when rounded. The liability was described in round terms as R3.6 million, comprising capital of approximately R1.4 million, interest of R141 171 and a 150% penalty of approximately R2.1 million. The distinction between rounded figures and an exact reconciliation matters.

Adding the amounts in the table produces R3 641 171. That arithmetic total is not an exact reconstruction of the assessed liability because the capital and penalty figures are rounded. Similarly, 150% of R1.4 million equals R2.1 million, but the calculation does not establish the exact statutory shortfall. The underlying assessments would be required for an exact reconciliation.

SARS had to establish the penalty category

Section 102(2) of the Tax Administration Act places the onus on SARS to prove the facts justifying an understatement penalty. Section 129(3) requires the Tax Court to determine the penalty appeal on that basis, with power to reduce, confirm or increase the penalty (Tax Administration Act, ss 102(2), 129(3) and 221–223).

Section 221 defines an understatement by reference to prejudice to SARS or the fiscus arising from specified defaults, including an incorrect statement in a return. Section 222 provides for the penalty, with the applicable percentage determined under section 223 by the taxpayer's behaviour. The issue in MLC was whether intentional tax evasion, attracting the 150% standard-case rate, had been established.

The table is a selected comparison of penalty rates, not the complete section 223 matrix. Rate selection requires the applicable statutory row and column; a behavioural label alone does not determine the percentage in every case.

Where a taxpayer relies on a bona fide inadvertent error, the applicable wording and temporal operation of sections 222 and 223 require separate attention. The treatment of that contention should not be assumed without identifying the version governing the returns and penalty in issue.

Practice point: Examine the evidence for the selected behavioural category and the applicable part of the penalty table. A challenge to the percentage requires engagement with the factual characterisation that supports it.

The eFiling explanation failed on the evidence

The taxpayer alleged that SARS officials had manipulated her returns. She said that, while seeking assistance with a 2004 tax issue, she had encountered difficulty uploading documents and supplied her login details to a call-centre official. She also alleged that a caller demanded payments after telling her that she had been overpaid. Her version referred to R52 000 and a further R600 000, the latter in six instalments of R100 000. These were allegations, not findings that SARS officials had committed fraud.

The court considered the eFiling rules in Government Notice 644, published on 25 August 2014. Users must create and secure their credentials, may not share their access code with anyone, including a SARS official, and are responsible for transactions performed using their user identity and access code (Government Notice 644, published on 25 August 2014, eFiling rules).

The taxpayer nevertheless had an opportunity to support a reasonable possibility that she had been ignorant of the false submissions. The court rejected her testimony as an uncorroborated recent fabrication. Her account was inconsistent with earlier explanations and her admissions. She knew that the money came from SARS and was not due, retained part of it, and had not reported the alleged events to the police.

The court found, on a balance of probabilities, that SARS had established the facts supporting intentional tax evasion. This was a penalty appeal. The civil finding should not be described as a criminal conviction under section 235.

Practice point: Discuss credential security with clients and preserve evidence when unauthorised filing is alleged. Do not equate use of an access code with an automatic 150% penalty in every case; the result turned on a factual enquiry and a credibility finding.

The penalty and the costs consequence

The court declined to disturb the 150% penalty and dismissed the appeal. It also ordered costs against the taxpayer because her grounds of appeal were unreasonable. The costs outcome is a separate consequence of the litigation; it should not be described as a further percentage added to the understatement penalty.

Practitioner action checklist

MLC illustrates the consequences of a failed factual defence to a serious penalty. Its practical value lies in tracing the proof required, the taxpayer's response and the court's rejection of that response. The rounded amounts and abbreviated penalty table should remain expressly qualified.

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