SARS Successfully Defends R3 Billion Tax Assessment in Court

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A taxpayer walked out of its own tax appeal. The judge carried on without them. The bill at the end? Roughly R3 billion in disallowed deductions, a 200% penalty plus severe cost consequences. The judgment also references ongoing criminal investigations. Every accountant advising on deductions, group structures, or cross-border payments needs to read this one.

What Happened

In Taxpayer LE (Pty) Ltd v Commissioner for SARS (IT 77151, handed down 10 April 2026 in the Johannesburg Tax Court), a South African subsidiary of a Chinese state-owned rail group had won three Marshall locomotive contracts worth about R25 billion between 2012 and 2014.

SARS investigated and found the company had inflated its cost of sales by R3.05 billion. About 20% to 21% of each contract value had been routed, via "Business Development Services Agreements", to Hong Kong and UAE shell companies controlled by a third party. SARS called them kickbacks. The company called them consulting fees.

SARS also disallowed a R225 million "interest" deduction on a loan that did not really exist, plus a stack of consultancy and management fees paid to local entities with no proof of work done.

Why the case matters for your practice

Here is what every practitioner should take from this judgment.

1. Section 23(o) has teeth.

   If a payment looks like a bribe or a kickback, it is not deductible. Full stop. SARS does not need a criminal conviction first. Interpretation Note 54 confirms this, and the court applied it directly. If you are signing off on a deduction, ask whether the payment could fall under the Prevention and Combating of Corrupt Activities Act. If yes, it is gone.

2. Prescription will not save a dirty return.

   The company argued the older years (2013 to 2016) had prescribed under the three-year rule in section 99(1) of the Tax Administration Act (TAA). The court reminded everyone that section 99(2) lifts the limit where there has been fraud, misrepresentation, or non-disclosure of material facts. Once SARS proves that, every year is back on the table.

3. The taxpayer carries the onus and the duty to begin.

   Section 102 of the TAA and Rule 44 are clear. The taxpayer starts. The taxpayer proves. If your client cannot produce records showing the expense was actually incurred in the production of income, the deduction falls. Mr F's evidence was uncontested because the company led no evidence at all. We have seen this before. As covered in How Incomplete Records Led to an R87 Million Tax Nightmare, poor records plus obstruction equals a 200% penalty every time.

4. SARS can now reach into Hong Kong.

   The most important new ground. SARS obtained bank statements, trust declarations, and Business Development Services Agreements from Hong Kong's Inland Revenue Department through the Exchange of Information article in the Double Taxation Agreement. The court ruled that documents exchanged through this treaty channel are authentic without further proof, and can be used in any tax matter where they are foreseeably relevant, not just the taxpayer originally named in the request. If your client has offshore structures, assume SARS can see them.

5. Walking away from your appeal does not end it.

6. Following Lion Match Co (Pty) Ltd v Commissioner SARS (2025), the court proceeded by default and confirmed the assessment under section 129(2) of the TAA. There is no hiding. There is no waiting it out.

Practical takeaways

Before signing off any deduction involving consulting fees, management fees, interest on intra-group loans, or payments to offshore entities, ask three questions:

1. Can the client prove the service was rendered? (Invoices alone are not enough. SARS will want deliverables, emails, and bank trails.)

2. Does the recipient have the capacity to render the service? (RG and TQ in this case did not even exist when the contracts were signed.)

3. Is the payment commercially proportionate? (A 20% "advisory fee" on a R2 billion contract will not survive a SARS audit.)

If any answer is shaky, document your reservations and get a written opinion from an independent tax practitioner before the return goes in. As we covered in SARS Gets New Teeth, the bona fide inadvertent error defence now requires that opinion to exist on or before the return due date, not afterwards.

This case is a marker. SARS, armed with the Illicit Economy Unit, international information exchange, and a willing tax court, is moving from theory to enforcement.