A practical perspective on provisional tax

Classification of provisional taxpayers

All companies are classified as provisional taxpayers. 

A natural person is only regarded as a provisional taxpayer if:

• Any remuneration is earned from an employer who is not registered for employee’s tax i.e. PAYE had not already been deducted from the taxpayer’s taxable earnings.
• A taxpayer derives income from other sources, apart from remuneration or an allowance / advance. Examples include income derived from the carrying on of any business, interest income, foreign dividends and other taxable investment income, rental from the letting of fixed property, and or any other taxable income which exceeds R30 000.

Calculation of provisional tax

Provisional tax may be calculated on at least the SARS basic amount, which is essentially the taxable income of the preceding year’s tax return submission and assessment.

It is important to note that a taxpayer should evaluate their tax matters during each provisional tax submission, thereby ensuring that the provisional tax is calculated on the latest information available to the taxpayer for the respective tax year.

Should a taxpayer be able to support an estimated taxable income figure lower than that of the basic amount, considering their current taxable position for the respective year, this lower estimate may be submitted.

Provisional tax underestimation pitfalls

Ensuring accuracy in terms of the second provisional tax estimate calculation is crucial, given that an underestimation of the second provisional tax would result in underestimation penalties being levied by SARS.

Should the actual taxable income for the year exceed R1 million and the estimated taxable income as per the second provisional tax submission is not at least within 80% of the actual taxable income for the year, a 20% penalty will be imposed on the tax difference of the aforementioned amounts.

Should the actual taxable income for the year be less than R1 million and the estimated taxable income as per the second provisional tax submission is not at least within 90% of the actual taxable income for the year, a 20% penalty will be imposed on the lesser of the tax difference between the estimate and either 90% of the actual taxable income for the year or the basic amount.

Individual taxpayers should consider any capital gains transactions, such as the sale of shares, primary residence or investment properties, which would need to be accounted for and included accordingly in the calculation of the provisional tax payable for the respective year.

Companies with assessed losses carried forward should also take cognisance of the implementation of the assessed loss limitation rule effective for years of assessment commencing on or after 1 April 2022, whereby the utilisation of available assessed losses carried forward from prior years would be limited to the higher of R1 million or 80% of the current year taxable profit. Should the entity be in a profit position for the current year, this limitation should be applied accordingly, when calculating the provisional tax liability for the respective year.

Provisional tax submission deadlines

The first provisional tax submission is due within six months from the beginning of the taxpayer’s year of assessment.

The second provisional tax submission is due on the last business day of the respective year of assessment.

Therefore, individual provisional taxpayers and entities with a February year-end are required to submit the bi-annual provisional taxes in August and February respectively.

Late payment of provisional taxes would result in interest and a 10% penalty being levied by SARS.

Top-up payment

While a third provisional tax payment is voluntary, taxpayers may opt to settle any outstanding balance of tax payable upon finalisation of the actual taxable income figures for the year, pending submission of the annual income tax return. 

The top-up payment is an option available to taxpayers to avoid or reduce the imposition of interest on underpayment of provisional tax, which begins accruing on the outstanding amount six months after year-end (seven months for individuals and entities with a February year-end) up until submission of the income tax return and payment of the outstanding tax due.

It is, however, important to note that the top-up payment does not mitigate against underestimation penalties as has been detailed above.

The takeaway

Taxpayers should ensure that their estimated taxable income is seriously calculated considering all the necessary financial information and transactions impacting their taxable income for the tax year. It is crucial that taxpayers provide accurate information to tax practitioners dealing with their provisional tax submissions, to ensure that the estimates are as accurate as possible in order to avoid unnecessary underestimation penalties and interest being levied by SARS.

Furthermore, SARS has increased the frequency of provisional tax estimate verifications in terms of paragraph 19(3) of the Fourth Schedule to the Income Tax Act, which has led to SARS issuing revised provisional tax notices if the estimate cannot be supported.

Authors:

Nazmeera Badrodin, Assistant Manager

Ridwaan Seedat, Director