The SARS penalty trap — how institutional reporting errors punish blameless taxpayers

Incorrect source codes by financial institutions prevent tax return processing, resulting in unjust fines for taxpayers, raising concerns about systemic issues.

Murshid Obaray is a businessman, a lecturer in the school of commerce at a tertiary institution and a business coach. He serves on the board of an NPO called MOT, and on the Legal Practice Council’s disciplinary committee and appeals tribunal.

Withdrawing money from a pension fund should be a straightforward, regulated process. Yet for some, what begins as a legitimate financial transaction can spiral into months of tax penalties. The question is whether this is an isolated administrative failure or whether other South Africans are quietly finding themselves trapped in the SA Revenue Service’s (SARS’) penalty machinery because of reporting errors.

In 2023, I withdrew money from a pension fund managed by Discovery. The withdrawal itself was uneventful. The problem arose when Discovery submitted the wrong “source code” to SARS — the classification that tells the tax authority what type of income is being reported.

Because of this misclassification, SARS has not been able to process my ITR12 tax return. Instead, the system has treated me as though I have failed to submit, issuing monthly fines for non‑submission. Each penalty arrives automatically, indifferent to the fact that the error lies not with me but with the reporting chain between the pension fund and SARS.

Discovery has repeatedly assured me that the matter is being rectified. Months later, nothing has changed. My broker, who facilitated the withdrawal, has tried to intervene. At the call centre, both of us have been met with offers of assistance and promises of action, but those promises have not translated into resolution.

To understand why this matters, it helps to know what a source code is. SARS uses codes to classify income, namely salary, pension, lump‑sum withdrawal, investment return, and so on. Each code triggers a specific tax treatment.

When a pension withdrawal is coded incorrectly, SARS’ system cannot reconcile the transaction with the taxpayer’s return. The return is effectively blocked. The taxpayer is then penalised for non‑submission, even though submission is impossible until the error is corrected.

This is not a matter of a missing form or a late filing. It is a structural glitch: the system punishes the individual for an institutional mistake.

The result is a Kafkaesque loop. The taxpayer is fined for failing to submit. The taxpayer cannot submit because the institution has misreported. The institution promise