Many times there’s been talk of provisional tax but what is it and who does it apply to? Dealing with SARS is something very few people find appealing and even more so when it comes to penalties and interest being levied on taxes which you are struggling to understand. As the deadline for the second provisional tax submission for the 2017 tax year is fast approaching, here are some simple guidelines on the subject.
What is provisional tax?
Firstly, provisional tax is not an additional tax, but rather a prepayment of normal taxes which contributes to the amount a taxpayer is liable for at the end of a financial year upon submission of their annual tax return. In other words, provisional tax is levied on the same basis as PAYE, the difference being that PAYE is applicable to employment income on a monthly basis, whereas provisional tax is due by legal entities and individuals with non-employment taxable income exceeding R30 000 per annum on a bi-annual basis.
Who is required to submit a provisional tax (IRP6) return?
According to the definitions of the Fourth Schedule of the Income Tax Act, a provisional taxpayer means:
- Any person receiving income that does not fall under the definitions of remuneration, allowance or advance;
- any company; and
- any person notified by the Commissioner that they are a provisional taxpayer.
The Act does however explicitly exclude the following:
- A recognised public benefit organisation;
- an approved recreational club;
- any body corporate, share block company or association of persons as defined in the Act;
- any person who
- has an annual taxable income below the tax threshold; or
- the taxable income received from interest, dividends, foreign dividends and rental of fixed property does not exceed R30 000;
- a small business funding entity; and
- a deceased estate.
Provisional tax periods
For this example take note that the company would have a financial year end of 28 February 2017. It is accepted that an individual always has a financial year ending on 28 February as it is extremely rare for SARS to allow for any other date for a natural person.
Basic amount: In terms of the tax act this amount, in a nutshell, is the taxable income amount reflected on the last assessed income tax return. (If the last assessment date is more than one year before the current year, the assessed amount must be increased by 8% per annum)
The first provisional tax return to be submitted will be due by 31 August 2016, six months into the financial year under review. This return should contain a provisional estimate of the turnover for the full year, however it will only need to have taxable income for the first six months. This estimate shall only be less than the basic amount of the taxpayer if the taxpayer is able to give sufficient reasons, but SARS does not levy penalties or interest if this amount is not relatively accurate in terms of the year end amounts.
The total liability will be the total taxable income for the first six months (including remuneration from an employer) less any employee taxes (PAYE) paid during the period.
The second provisional tax return is due on the date that the financial year ends, ie 28 February 2017 in the example. In this instance the taxable income is estimated for the entire financial year. The amount that the taxpayer is liable to pay is the tax on the afore mentioned less employee taxes and any amount paid during the first provisional tax period.
There are two rules which are applied on the estimate for this period to ensure that there aren’t penalties and interest levied:
- If, upon submission of the actual income tax return, the taxpayer has annual taxable income of less than R1 million, this estimate is required to be accurate to within 90% of the actual amount submitted; or
- where the annual taxable income is higher than R1 million, this estimate should be accurate to within 80% of the actual amount submitted.
There is allowance for a voluntary third provisional tax payment 7 months after the end of the financial year end, in our example 30 September 2017. (6 months where a company has a year end other than February)
This payment is used where a taxpayer finds that the first submissions were not sufficient to cover the year end tax liability which will come into existence upon submission of their annual income tax return. There is however no prescribed guidelines for accuracy for this payment, there is also no return to be submitted.
So in a nutshell provisional tax is really not that hard to understand and the prescriptions are quite crisp and clear.