The Deadly Sins of The New Provisional Tax Legislation
31 March 2011
Posted by: Author: Muneer Hassan
The Deadly Sins of the New Provisional Tax Legislation
SAICA regards the legislation as being prejudicial to certain provisional taxpayers, and calls for amendments
The South African Institute of Chartered Accountants (SAICA)has called for amendments of the provisional tax legislation when Finance Minister Pravin Gordhan tables this year's budget (which had not yet taken place at the time of writing—Editor).This should be addressed urgently—especially because the current legislation governing this area means that some taxpayers end up paying more than they should, SAICA observes.
With the support of other professional bodies, SAICA in 2009lobbied for the retention of the"safe harbour” basic amount when making the second provisional tax payment.The basic amount is the taxable income reflected in the most recent assessment received from SARS.Unfortunately, the drafting of the legislation has turned out to prejudice provisional taxpayers with taxes that are proportionally out of sync with the country's economic realities.
As things stand, affected provisional taxpayers should have the basic amount increased by 8%every year where the return has not been assessed.But that is not the case. Instead, their taxable income is lifted by a massive 16%, which has surely left a hole in the pockets of many over the past year. This is caused by the fact that the legislation is not an appropriate reflection of what was intended.
The 16% increment is unaffordable,way above inflation, and puts pressure on the livelihoods of people in this category.This inappropriately drafted legislation affects all provisional taxpayers whose annual taxable income sits at R1 million or less.This includes all companies, close corporations, most trusts, and individuals that are self-employed taxpayers.
Individuals earning rental,dividend and/or interest income in excess of R20 000 per annum and below the age of 65 are also classified as provisional taxpayers.Taxpayers in these and other sectors have ended up parting with an unaffordable increase in provisional tax of 16% every year while their taxes are being assessed.Significantly, in instances where they choose to go below the basic amount, provisional taxpayers expose themselves to serve penalties where the estimate does not fall within 90% of the tax due as finally determined by SARS.
To put the dilemma in context:All provisional taxpayers with a February year-end, for the second provisional tax payment of 2011due on 28 February 2011, will have their basic amount increased by 16% unless they have already received their 2010 assessment within 60 days from the end of February 2011.
It is highly unlikely that the taxpayer would have received the2010 assessment, as the due date for provisional taxpayers to have filed their 2010 tax returns was on or before 31 January 2011.In light of this problem, we suggest that the Act be amended to ensure that in a "normal scenario”—for example,where a taxpayer has only been assessed on the 2009 tax year when submitting the 2011/01 or 2011/02 provisional tax return—the basic amount only be increased by 8%.(Period 2011/01 refers to the first provisional tax return, and 2011/02 refers to the second provisional tax return.)
To effect the changes, a Section of the relevant Act should be amended to reflect "from the end of such year to the beginning of the year of assessment in respect of which the estimate is made”. This will result in the annual increments of 0% in the first year followed by8% in the second year and 16% thereafter, and so on.Compounding the problem is the fact that "the 8% annual increase is a fixed percentage in the Act”, but that has to be aligned annually with inflation.
A second and even more serious problem with the legislation is that the under-estimate penalty is linked to the taxable income numbers,without regard to the actual tax paid. Thus the penalty will apply even if the actual tax paid by the taxpayer is correct—or even if it's an over-payment. Late bonus payments are probably the best example. To put this in context, let us look at an example of a taxpayer who estimates taxable income at R1 million and pays provisional tax to ensure that such an amount is fully taxed. If a late bonus payment, say,an extra R200 000 is received, the fact that this R200 000 might be fully taxed at 40% through the PAYE system does not save the taxpayer from the provisional tax penalty. This is grossly unfair,because the full tax was in fact collected by SARS.
We hope that the Minister takes this issue seriously and effects the necessary changes very soon, so as to put an end to an unfair situation where provisional taxpayers are charged more than they ought to pay.
Source: By Muneer Hassan (Tax Breaks)