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There are many pitfalls when it comes to provisional tax

08 March 2013   (0 Comments)
Posted by: Erich Bell
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As we are getting closer to the end of February, provisional taxpayers are faced with the inevitable: the second provisional tax return! Provisional taxpayers often misunderstand their tax obligations and end up over-paying or, worse, under-paying provisional tax. They then have to pay significant amounts of penalties, additional tax and interest for non-compliance to the South African Revenue Service (SARS).

Who must register?

Not every taxpayer is required to register for provisional tax purposes. The Income Tax Act sets out specifics as to who qualifies as a provisional taxpayer and who doesn’t. Employees are normally exempt since prepayment of taxes is already made in the form of Pay As You Earn (PAYE). However, once a person (including a company) receives any other form of income that for example arises from carrying on a trade or constitutes passive income (like interest, foreign dividends or renting of property), he or she will become liable to register as a provisional taxpayer. In short, any income not defined as "remuneration” will give rise to provisional tax implications.

Exclusions to this general rule apply in respect of certain natural persons:

·         A taxpayer who is 65 years or older will not be considered a provisional taxpayer if his or her taxable income for the year of assessment does not exceedR120 000 as long as he only receives income in the form of remuneration or passive income.

·         A taxpayer younger than 65 years can also qualify for an exemption if his or her taxable income for the year of assessment does not exceed R63 556 (the 2013 tax threshold) of which a maximum amount of R20 000 is allowed to constitute passive income.

As soon as a person qualifies as a provisional taxpayer (and no exemption applies), he or she is responsible to register within 30 days. This can either be done electronically through e-filing (by adding provisional tax to an existing user’s profile) or by submitting a written application to the nearest SARS branch.

After registration is completed, it is important that a taxpayer familiarise himself with the relevant due dates for the submission of provisional tax returns as well as the payment thereof. Every provisional taxpayer is required to submit two compulsory provisional tax returns in which he or she estimates the current year’s taxable income.

The first provisional tax return

The first provisional tax return is due within the first six months of a person’s tax period (31 August in the case of a natural person). The provisional taxpayer is not allowed to base his first provisional tax payment on an estimate that is less than the basic amount, unless he or she has obtained prior approval from SARS to do so. The basic amount normally represents the taxable income most recently assessed by SARS. Any unusual receipts or accruals during that specific year may be excluded from the basic amount, for example taxable capital gains, taxable portions of termination lump sums and taxable portions of retirement fund lump sums. If the basic amount is based on a period of assessment that ended more than a year before the estimation is required, it has to be increased with 8% for each twelve-month period that has passed. The adjustment is made to ensure that the first payment is not estimated too low.

Once the normal tax liability is calculated it must be divided by two since the calculation relates to the first half of the assessment period. If applicable, the provisional tax payable may be reduced with employees’ tax and foreign taxes (that qualifies for a section 6quat-rebate) incurred during the relevant six-month period.

The second provisional tax return

The second provisional tax return is submitted at the end of the taxpayer’s assessment period (28 February in the case of a natural person). The provisional taxpayer’s second provisional tax liability is calculated by estimating his or her total taxable income for the tax year. If the provisional taxpayer’s taxable income for the tax year is R1 million or less, the lesser of the basic amount or 90 percent of his or her actual taxable income may be used to provide the estimate without the risk of incurring an additional tax of 20 percent on any shortfall. However, if the taxable income for the current year of assessment exceeds R1 million, the estimate must equal at least 80% of the actual taxable income in order to eliminate the risk of additional tax of 20 percent in the case of a shortfall.

In order to determine the second provisional tax payment, the following amounts may be deducted from the normal income tax liability arising from the above figures: amounts paid during the year in the form of employees’ tax, foreign taxes (that qualifies for a section 6quat-rebate) as well as the first payment of provisional tax.

The 16%-dilemma when using the basic amount

Provisional taxpayers had until 31 January 2013 to submit their income tax returns for the 2012 assessment year. At the end of February 2013 they will be required to make the second provisional tax estimate for the 2013 assessment year. If the 2012 income tax return was not filed electronically, they will most probably not have received an assessment from SARS before the end of February. Therefore taxpayers will have to go two years back and calculate the basic amount on the taxable income for 2011, resulting to an increase of 16% in the basic amount.

The third provisional tax return

Taxpayers are allowed to make a third voluntary payment of provisional tax in order to avoid penalties and interest that may result from previous estimate shortfalls. This situation occur where the provisional taxpayer’s actual taxable income exceeds the estimates used to calculate his or her first and second provisional tax payments. In order to calculate the third payment, the taxpayer’s normal tax liability is based on his actual taxable income for the period of assessment. This amount is reduced with the first two provisional tax payments as well as employee’s tax and foreign taxes (that qualifies or a section 6quat-rebate) paid during the assessment period.

The third payment must be made within seven months after the taxpayer’s year of assessment has ended (if it is on 28 or 29 February). If the person’s tax period falls on any other day, he has to make payment within the first six months that follows.

Administrative issues

Every provisional tax payment must be accompanied by an IRP6-return. This form provides SARS with the information on which the taxpayer estimates his provisional tax calculation. The IRP6-return for the first provisional tax period will, for example, indicate an estimate of the current year’s taxable income as well as the normal tax liability that arise from it. The taxpayer must specify the tax portion that relates to the preceding 6 months as well as employees’ tax and foreign taxes (that qualifies for a 6quat-rebate) that was paid during this period. SARS will provide the basic amount relating to the most recent assessed year’s taxable income and it will already be adjusted with the 8% or 16% increase, if applicable.

Interest and penalties

Non-compliance can result into strict punishment in the form of interest, penalties and even imprisonment.

SARS will not regard delayed registration or non-possession of an IRP6-return as reasonable grounds to postpone provisional tax payments. Therefore these situations will most probably attract once off penalties ranging between R250 and R16 000. If payment is insufficient or not made on time, a penalty of 10% is levied on the outstanding balance.

Insufficient estimates of the second period’s provisional tax payment will attract the following additional penalties:

·         For taxpayers with a taxable income of R1 million or less: a 20% penalty will be levied to the extent that the insufficient provisional tax estimate (calculated at the lesser of the normal tax payable on the basic amount or on 90% of his actual taxable income) exceeds his prepaid taxes. The penalty will only be levied if the estimate for the second period is less than the basic amount or 90% of the actual taxable income.

·         For taxpayers with a taxable income that exceeds R1 million:  if the second estimate is less than 80% of the taxpayer’s actual taxable income for the current year, a 20% penalty will be levied to the extent that the normal tax calculated on 80% of his actual taxable income exceeds his prepaid taxes.   

The taxpayer will also incur an additional penalty if SARS does not receive the second provisional tax estimate within the required time period. The penalty is levied at a rate of 20% on the difference between the normal tax payable for the current year of assessment and any prepaid taxes.

A taxpayer may be remitted from the above mentioned penalties if he can prove to the Commissioner that the non-compliance did not occur intentionally or as a result of his negligence.

Furthermore, a taxpayer will be charged with interest on the unpaid balance of his provisional tax at the prescribed rate (currently 8.5%). The interest will be calculated from the day the provisional tax became payable up and until the day it is settled.

Apart from the above, additional interest is levied when provisional tax is not paid in full. Interest will start to accumulate after the due date for the third voluntary payment expired. This means that a taxpayer will currently have to account for interest at a rate of 8.5% to the extent that his normal tax liability exceeds his prepaid taxes.

In order to avoid exposure to the various penalties and interest, a taxpayer must rather be safe than sorry and overestimate his provisional tax payments. Although it may restrict the taxpayer’s current cash flow, it can save him a lot of additional taxes in future. SARS is furthermore obliged to pay interest (at a current rate of 4.5%) if a taxpayer’s prepaid taxes exceeds his normal tax liability with a minimum of R10 000 or if the taxable income for the assessment period exceeds R50 000 (individuals and trusts) or R20 000 (companies). The interest is payable from the date on which the third provisional tax payment is due and will accumulate until the amount is paid back to the taxpayer.

Knowledge is a taxpayer’s best defence against the pitfalls of provisional tax. It is extremely important for taxpayers to ensure that they are up to date with the registration requirements and that payment deadlines are met. Provisional tax must be managed in such a way that the taxpayer’s normal tax liability is settled consistently over the assessment period without creating any unnecessary tax liabilities.

Source: Doria Cucciolillo


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