Being Compliant With Your Second Provisional Payment
27 February 2010
Posted by: Author: Lise Claassen and Kirsty Fry
Being Compliant With Your Second Provisional Payment
The second provisional payment for the 2010 tax year is due at the end of this month—and the rules have changed
The old method of basing the 2nd provisional tax payment on the "basic amount” without the risk of incurring penalties on under payment has been withdrawn.The basic amount is a taxpayer's taxable income as reflected in its most recent assessment received from SARS, less any capital gains included in such assessment. This method has worked well since the introduction of provisional tax, providing a quick and easy method of calculating provisional tax payable and a "safety net” from the imposition of penalties in the event of an under estimation. Taxpayers could make a lower estimate than the basic amount, but would have been liable for penalties if this estimate was less than 90% of the final assessed income.
SARS has for some time felt that taxpayers should make a proper estimate and not rely on the basic amount to calculate their provisional tax. The basic amount safe haven was particularly beneficial when a taxpayer was in a growth phase, in which case the taxpayable based on the basic amount would have been less than that based on the actual taxable income of the taxpayer. While this practice was legitimate, SARS had to wait until the voluntary top-up provisional payment to realise the growth in taxes resulting from a growing economy.
In order to address this perceived abuse of the basic amount, SARS abolished the use of the basic amount for purposes of determining the 2nd provisional tax payment due.
This change was effective from the commencement of years of assessment ending on or after 1 January 2009, and required taxpayers to prepare a detailed calculation of taxable income at year-end, including capital gains.At the same time, the 10% margin of error allowed between the estimate of taxable income used for purposes of the 2nd provisional tax payment and the final taxable income as assessed was increased to 20%. Thus, if such an estimate was less than 80% of the taxpayer's actual taxable income, additional tax of 20% could be levied on the difference between the tax paid and the tax on 80% of actual taxable income.
Removing the basic amount safe haven has created a major burden to taxpayers as it requires an accurate calculation of taxable income prior to year end. Independent bookkeepers that determine profits of small businesses are now under pressure to make an estimate of taxable income for their customers long before the books have been written up. Even large companies are hard pressed in calculating an accurate estimate of taxable income when considering variables such as foreign exchange and inter company transactions.
After intense lobbying from the tax and business community, SARS has made further amendments which are effective from the commencement of years of assessment ending on or after 1 January 2010. A two-tier system has been introduced as follows:
Tier one—smaller taxpayers with current year taxable income up to R1 million Estimate can be based on the lesser of the basic amount or 90% of actual taxable income, and where the assessment is not current the basic amount will be increased by 8% per annum.
If the estimated amount does not reach the required level, an automatic penalty of 20% of the shortfall will apply. The penalty may be reduced or waived if the taxpayer can show that the estimate was seriously calculated with due regard to relevant factors, or was not deliberately or negligently understated.
Tier two - taxpayers with current year taxable income in excess of R1 million Estimate must be at least 80% of actual taxable income.If the estimate falls short, SARS may impose a discretionary penalty of up to 20% of the shortfall if it is not satisfied that the estimate was seriously calculated with due regard to relevant factors, or was not deliberately or negligently understated.
Although SARS has undertaken that it will not automatically impose penalties on tier two taxpayers, this is unlikely to be the case in practice. We envisage that the usual practice of SARS to impose penalties, requiring taxpayers to subsequently object thereto,will continue.
Interest on the overpayment of provisional taxes will only accrue to the taxpayer from the effective date, which is usually six months after year-end (unless the company has a February year-end, in which case the effective date is seven months after year-end, which is the same for individuals). This means that an overpayment of provisional tax could not only have a cash flow impact, but would also result in the forfeiture of at least six months’ interest.
It is unfortunate that SARS has persisted with these amendments as it has imposed a significant additional burden on taxpayers to make accurate calculations of taxable income at year end.Feedback from several tax practitioners indicates that it takes at least ten times as long to calculate provisional tax than it used to under the old system.
While the concession for taxpayers with taxable income of less than R1 million is welcomed,taxpayers with income approaching that level will still have to do the calculations, bearing in mind that a capital gain could push them above the required level, in which case they will be liable for penalties for underestimating taxable income even if they satisfy the basic amount test.
Source: By Lise Claassen and Kirsty Fry(Taxbreaks)