There are many pitfalls when it comes to provisional tax
08 March 2013
Posted by: Erich Bell
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.
provisional tax return
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.
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.
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
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.
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
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.
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
result into strict punishment in the form of interest, penalties and even
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
of the second period’s provisional tax payment will attract the following additional
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.
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
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
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
Source: Doria Cucciolillo