Provisional Tax Surprise Letters
27 November 2011
Posted by: Author: Jonathan Russon
Provisional Tax Surprise Letters
Taxpayers who think that they were safe if they used the SARS basic amount for the first provisional tax estimate (P1), and increased it by 8% per annum are in for a nasty surprise when they start receiving letters from SARS asking for management accounts to justify using the basic amount x 8% per annum.
Your immediate response would be, "But it’s the first period estimate only, and we used your 2010 year last assessed and increased it by 8% to arrive at 2011 year.”The alarming truth is that SARS is well within its rights to do this to you. We need to refer to Interpretation Note No 1 – 30 November 2001.
Paragraphs 19(1)(a) and (b) of the fourth schedule require a provisional taxpayer to submit an estimate of the total taxable income that it may derive in any particular year of assessment [no distinction is made between P1 and P2]
Paragraph 19(1)(c) stipulates that this estimate must be at least equal to the basic amount and that SARS may agree to a lower estimate. So the basic amount is the minimum that a taxpayer must use,and nowhere does it say that using this minimum will get you home Scot free. Para 19(3) then quite clearly states that SARS may call upon you to justify this minimum estimate, and SARS may increase the estimate to an amount that they consider reasonable.
You may object under the grounds that the business is cyclical and the first six months are not indicative of the entire year, but it seems that once SARS see management accounts where the six month profit is more than the basic amount x 8%, they seem to become frenzied, and logic does not always prevail. (Especially in the case where SARS employees may work on incentives for increased collections), and if your year last assessed is more than two years old, then definitely forget about simply relying on the basic amount x 8%.If your management accounts show a higher figure than your original estimate, and SARS queries this, it will insist on revising the estimate.
Para 25(1) then provides for additional estimates to be raised by SARS and the taxpayer has 14 days to object, from the date of the letter of intention to raise the estimate and then, after those 14 days, the objection period expires. SARS will inform you whether your objection is accepted and, if not, you have to pay within 14 days of the revised assessment being issued.
There is no point arguing that SARS practice differs from the theory, because on the IRP6 it states quite clearly. Note that in terms of Paragraph 19(3) of the Fourth Schedule SARS may increase an estimate submitted by you even if you have accepted the proposed calculation reflected in column A - as this calculation is not regarded as being a final estimate - except in circumstances as in note 8 above.
So as a last resort, when we try to see what Note 8 states on the IRP6, it appears as:
Note that if, for the first period, you do not submit a completed IRP6 return within 120 days from the payment due date, and you only make a provisional tax payment for this period, it will be accepted that you are in agreement with the amount payable in column A. The calculation in column A will be regarded as the estimated taxable income and this estimate shall be final and conclusive in terms of Paragraph 19(2) of the Fourth Schedule to the Act.As one can see, point 8 offers no comfort at all to the problem of SARS as it refers to something completely different!
The bottom line is that SARS needs to discuss with the relevant stakeholders, whether a taxpayer can use the basic amount x 8% for their P1 estimates and if they are safe in doing so. SARS also need to issue another Interpretation Note as the last one issued in NOV 2001 is far too long in the tooth.
It seems that the only safety in using the basic amount x 8% for P1 estimates is that you will avoid the underestimate penalty; however, in this uncertain world, the taxpayers need to be certain that if they used SARS’ basic amount and increased it by 8% per annum, they will not be subject to revised provisional tax estimates.
Source: By Jonathan Russon (TaxTALK)