SARS targeting one group of taxpayers in South Africa

The Supreme Court of Appeal (SCA) has warned taxpayers that undisclosed foreign income will be aggressively taxed and heavily penalised by the South African Revenue Service (SARS).

The ruling has made it clear that the onus rests firmly on individuals to provide evidence or face severe consequences.

In a recent decisive judgment, the SCA ruled against a taxpayer who failed to account for a foreign deposit of R1.67 million.

In the 2026 case of Lutzkie v CSARS, a taxpayer unsuccessfully sought to avoid an additional assessment and penalties raised by SARS by offering conflicting narratives to explain the deposit.

Tax Consulting SA senior tax attorney Richan Schwellnus said this judgment sends a broader warning to taxpayers that SARS has far-reaching powers to tax undisclosed foreign income.

It also shows taxpayers that the taxman can impose severe penalties where consistent, credible explanations cannot be presented to substantiate such receipts.

“The SCA decision in Lutzkie is not simply a case about a taxpayer who changed his version of events,” Schwellnus said.

He explained that this is a case about how SARS applies core tax principles, correctly discloses taxable receipts to the tax authority, and imposes penalties when a taxpayer fails to substantiate their position with reliable evidence.

The taxpayer’s fatal error was not merely an inconsistency, but also the failure to appreciate that South African tax law places the full onus on a taxpayer to prove that income is not taxable.

This legal requirement is specifically set out under section 102(1) of the Tax Administration Act (TAA), Schwellnus noted.

“In this case, SARS conducted a lifestyle audit and identified the foreign deposit into the taxpayer’s account from an entity in the British Virgin Islands,” he said.

“The taxpayer’s initial explanation was uncomplicated, stating that the receipt was a loan to fund legal fees.”

Despite providing an acknowledgement of debt, Schwellnus explained that SARS still rejected the taxpayer’s averment.

“However, by the time the matter reached the Tax Court, the taxpayer’s explanation had changed completely,” he said.

Inconsistent explanations trigger serious tax risks

The foreign deposit was no longer categorised as a loan, and the previously submitted acknowledgement of debt was now said to be something that “did not happen”.

“The taxpayer’s foreign payment was now claimed to be the repayment of a shareholder loan from a dissolved foreign company, of which the taxpayer was the beneficial owner,” Schwellnus explained.

The taxpayer’s inability to maintain a consistent narrative adversely affected credibility, directly impacting the application of the Income Tax Act.

Notwithstanding that the disputed foreign income was received by the taxpayer in 2006, SARS still exercised its legislative powers to audit the taxpayer and query the inbound payment.

“This serves as a stark warning that even the effluxion of time offers little protection to taxpayers in cases of non-compliance,” Schwellnus said.

The SCA also reaffirmed that the burden of proving that income and receipts are not taxable firmly rests with taxpayers.

Where a taxpayer avers that an amount received is a loan or that invested capital is being repaid, the taxpayer must prove it.

“Not through assumptions or reconstruction years after the fact, but through reliable and credible documentary evidence,” Schwellnus said.

“The categorising and correct declaration of funds received by taxpayers will determine the tax treatment thereof.”

When a taxpayer’s explanation is dubious and unsubstantiated, the taxpayer will fail to discharge the onus of proof imposed by the TAA.

The taxpayer’s evidence fails

In the Lutzkie case, the taxpayer did not testify to explain the transaction himself, Schwellnus said. Instead, his auditor attempted to reconstruct a believable version from historical emails and information gathered long after the 2006 transaction.

The court described this as an attempt to “construct a version out of nothing” and referred to the taxpayer and his auditor’s explanation as “contrivance and intentional obfuscation”.

This was not a criticism of poor record-keeping, but rather a finding that the taxpayer’s evidence was so unreliable that it could not possibly discharge his burden of proof.

“Credibility, in this case, determined whether the evidence presented could possibly operate in the taxpayer’s favour, which was not the case,” Schwellnus explained.

The taxpayer argued that the 90% penalty issued by SARS was excessively punitive because he had not intended to evade tax.

“The SCA firmly rejected this argument, as it ruled that the taxpayer’s shifting explanations and the reliance on documents that were later disavowed justified SARS’s view of the seriousness of the conduct,” Schwellnus said.

“In a notable remark, the court expressed that SARS could have imposed a 200% penalty and that 90% was lenient.”

Courts are assessing not only the underlying transaction but also how taxpayers and their advisors conduct themselves during audit and dispute-resolution processes.

According to Schwellnus, an ever-evolving explanation becomes a noteworthy aggravating factor.

A clear warning for taxpayers

Schwellnus said the facts seen in the Lutzkie case are precisely those that should trigger consideration of a Voluntary Disclosure Programme (VDP) application before SARS starts asking questions.

“Where undisclosed income has accrued to, or been received by taxpayers, the VDP process may be their saving grace,” he said.

“However, the timing of a VDP application is crucial, as once SARS initiates a lifestyle audit or starts asking questions about suspect deposits, the VDP door is effectively closed.”

At that point, Schwellnus said taxpayers are no longer able to use the VDP process to regularise their tax defaults.

“By coming clean timeously, taxpayers can lawfully avoid criminal prosecution and even avoid the imposition of penalties by SARS,” he explained.

“The VDP process exists precisely to deal with situations where there is a tax default, the transaction history is complex, and the tax treatment may not have been correctly declared to SARS.”

Schwellnus added that it allows taxpayers to regularise their affairs before credibility becomes an issue in litigation.

He stressed that where taxpayers suspect that their complex international financial affairs have not been fully and correctly declared to SARS, this judgment should serve as a stark warning.

“By proactively enlisting the assistance of specialist tax attorneys to review their tax affairs, taxpayers may keep SARS audits and queries at bay,” he said.

As the Lutzkie case demonstrated, adopting a head-in-the-sand approach and waiting for SARS to kick off a lifestyle audit before assembling a paper trail is high-risk and costly.