What is provisional tax?

Provisional tax is not a separate tax.  It is an estimate of tax for the first six months of the tax year payable in August and then an estimate of the tax payable for the year payable in February. In essence therefore paid after six months of the year has been completed and then after the full 12 months has been completed.

Who is a provisional taxpayer?

The definition of a provisional taxpayer can be found in the Fourth Schedule of the Income Tax Act.  It is very important to understand whether or not you fall within this definition as it not only affects whether or not you are required to file a provisional tax return and make provisional tax payments, but also the due date of when your income tax return must be filed.  Non-compliance with both these obligations and deadlines may lead to SARS imposing penalties.

• Companies and Close Corporations

All companies and close corporations are provisional taxpayers and must register and submit provisional tax returns and make the payments as discussed above.

• Natural persons and Trusts

The type of income earned by natural persons and trusts determine whether they fall within the definition of a provisional taxpayer. As a general rule, if these taxpayers receive other income that is not remuneration from an employer from which PAYE is deducted, then they will most likely be a provisional taxpayer.

If you earn income from the following sources, then you would qualify as a provisional taxpayer:

• Trade income from carrying on a business;
• Independent contractors – but watch out for this if there is PAYE deducted this might mean you are not a provisional taxpayer;
• Property rental – see also below on who is NOT a provisional taxpayer;
• Investment income, such as interest, REITS, dividends – see also below on who is NOT a provisional taxpayer;
• Salary or similar income from remuneration from an employer who does not deduct PAYE where the employer is not registered with SARS. This may be for example where the employer is a foreign employer.

Who is NOT a provisional taxpayer?

• Natural persons if they do not earn income from carrying on any business during the tax year and their:
  • Taxable income is less than the tax threshold – as below:

OR

• The total taxable income from interest, dividends, foreign dividends, rental income from the letting of fixed property and remuneration from an employer not registered with SARS for employees’ tax (PAYE) does not exceed R30 000.
• The following taxpayers are also excluded from the definition of a provisional taxpayer:
  • Any approved tax-exempt public benefit organisation (PBO) and recreational clubs;
  • Qualifying body corporates, share block companies or associations of persons contemplated in section 10(1)(e) of the Income Tax Act;
  • Small business funding entities;
  • Non-resident owners or charters of ships and aircraft who are assessed in terms of section 33 of the Income Tax Act;
  • Deceased estates;
  • Approved associations as defined in section 30B of the Income Tax Act.
  •  
• It is also important to note that directors of companies, members of close corporations and beneficiaries of trusts do not automatically qualify as provisional taxpayers. The above rules relating to the type and amount of income earned are applicable to determine whether or not these persons are a provisional taxpayer or not.
• The test of whether or not a person is a provisional taxpayer must be done annually based on the specified criteria and this could change from year-to-year. Just because a taxpayer is registered as a provisional taxpayer, files provisional tax returns and makes provisional tax payments does not automatically mean that a taxpayer is indeed a provisional taxpayer as defined in the Income Tax Act.
• The above is important as it also has an impact on what your filing due date for your income tax return is. Where income tax returns are filed after the due date SARS impose late filing administrative penalties.  The filing due dates for filing of 2023 income tax returns are:
  • Individuals who are NOT provisional taxpayers: 23 October 2023
  • Provisional taxpayers: 24 January 2024

How is provisional tax calculated?

A provisional taxpayer must submit two provisional tax returns, the first return six months after the beginning of the year and the second return at the end of the year of assessment.  The taxpayer must estimate his or her or its taxable income for the year when filing each of the two provisional tax return.  For the first provisional tax return, the taxpayer may not make an estimate of taxable income which is less than the “basic amount” unless the Commissioner agrees to accept such a lower estimate.

The taxable portion of capital gains and losses is included in both the first and second calculations.

Lump sum benefits such as retirement lump sums and severance benefits are excluded.

First return

• Estimate the total taxable income for the year. The taxpayer may use the “basic amount” as the taxable income, but the Commissioner may query and adjust this.
• Calculate the tax payable and deduct the rebates – medical, primary, secondary and tertiary.
• Divide the above in two.
• Deduct employees’ tax (PAYE) paid in this first six months.
• Deduct foreign taxes paid that will qualify for a section 6quat

Second return

• Estimate the total taxable income for the year.
• Calculate the tax payable and deduct the rebates – medical, primary, secondary and tertiary.
• Deduct employees’ tax (PAYE) paid during the year.
• Deduct foreign taxes paid that will qualify for a section 6quat
• Deduct the first provisional tax payment made.

When must provisional tax be paid?

Provisional tax must be paid at least in two amounts in advance during the year of assessment.

• The first payment is due within the first 6 months of the tax year.
• The second payment must be paid on or before the last business day of the tax year.
• A third voluntary (top-up) payment can be made after the tax year before the assessment is issued – 7 months after the last day of the year of assessment for taxpayers with a February year-end and 6 months for all other taxpayers. The top-up payment can be done to avoid interest being charged by SARS as interest is charged 6 or 7 months after the year of assessment on the shortfall of final income tax as assessed less provisional tax and employees tax paid for that period.

Penalties

First return

• Late Payment and Interest

10% of the amount not paid by the due date.

Interest at the prescribed rate is charged and will continue to be charged until the taxpayer has paid the tax in full.

Second return

• Late Payment

10% of the amount not paid by the due date.

Interest at the prescribed rate is charged and will continue to be charged until the taxpayer has paid the tax in full.

• Late or non-submission

If a provisional taxpayer does not submit the second provisional tax return within 4 months after the last day of the year of assessment, then it is deemed to be a submission of a NIL return in which case the taxpayer will be subject to the underestimation penalties.

• Underestimation penalty

Where the taxpayer’s actual taxable income is more than the estimate of taxable income on which the provisional tax for the year was calculated and paid, SARS may impose an underestimation penalty.  The calculation and amount of the penalty is calculated in two different ways depending on whether the final assessed taxable income for the year is equal or less than R 1 million or more than R1 million.

• Taxable income less than R1 million

The penalty will apply if the estimate of taxable income is less than:

• 90% of the taxable income; and
• The basic amount

The penalty is calculated by calculating the tax after deducting the rebates on both 90% of the actual taxable income as submitted in the income tax return and comparing this to the tax on the basic amount after deducting the rebates.  The lower amount of the above is then used, PAYE and provisional tax actually paid during the year of assessment is deducted.  If this is greater than NIL, then a 20% penalty is charged.

This means that as long as the estimate that was used was not less than the basic amount, no penalty will be levied.

Without going into too much detail of what the “basic amount” is, this amount is the taxable income reflected in the last assessment issued by SARS, less certain prescribed amounts such as capital gains.  Where the last assessment was issued more than 18 months before this provisional tax return filing date, then the basic amount is increased with 8% per year from the end of the latest year assessed to the current year of assessment for which the provisional tax return is being filed.  For a detailed explanation on the meaning of “basic amount”, you can consult SARS Interpretation Note 1 (Issue 3).

• Taxable income more than R1 million

The penalty will be levied if the estimated taxable income was less than 80% of the actual taxable income.

It is calculated by calculating the income tax on 80% of the actual taxable income, deducting the rebates and total PAYE and provisional tax actually paid during the year of assessment.  The penalty is 20% of this amount.

• Remission of penalties

Once SARS has imposed underestimate penalties, taxpayers can request SARS to remit penalties, however certain requirements must be met.  To remit underestimate penalties the taxpayer must be able to show that the estimated taxable income was seriously calculated and that there was no deliberate or negligent attempt to understate the estimation.

Other administrative penalties, such as the late payment penalties have different requirements for remission, which requirements are set out in the Tax Administration Act.

It is often difficult to discharge the onus and the whole remission and dispute process can become time-consuming and costly for taxpayers.

Conclusion

As can be seen from the above, applying the tax legislation applicable to provisional tax can be full of pitfalls.  Taxpayers must ensure that they firstly understand whether or not they are a provisional tax payer and then secondly make sure they calculate the estimated taxable income correctly and make the payment on time.  This is the only way to avoid costly penalties.

If you are unsure whether or not you are a provisional taxpayer, we recommend that you contact us (a registered tax practitioner) to assist you with determining your tax status and to assist you with complying with your tax obligations.

The information and material published in this article is provided for general information purposes only and does not constitute tax advice. We make every effort to ensure that the content is correct and accurate. Please consult one of our partners on any specific tax problem or matter.