The Basics of Provisional Tax

By Bradley Woolridge CA (SA), Director at Burns Acutt – 16 August 2020

WHAT IS PROVISIONAL TAX?

Provisional tax is not separate from Income Tax – It is the part payment (Provisional Estimate) of Income Tax.

Income earned in the tax year, which does not have direct taxes levied against it, requires a tax payment, which is essentially what Provisional Tax is.

Some basic examples would be:

• Interest income
• Capital gains
• Rental income

On assessment the provisional tax payments will be offset against the liability for normal tax for the applicable year of assessment.

WHO IS A PROVISIONAL TAXPAYER?

Any person who receives income (or accrues income) other than a salary, is a provisional taxpayer.

Most salary earners are therefore non-provisional taxpayers if they have no other sources of income.

It is important to note that receiving exempt income does not make you a provisional taxpayer, e.g. receiving interest income below the exemption if you are under 65 of R23 800 (over 65: R34 500).

All Companies, Close Corporations and Trusts are required to be provisional taxpayers.

HOW ARE THE PROVISIONAL TAX PAYMENTS CALCULATED?

The First Period (50%) of Estimated Taxable Income for the year is payable

• Less any allowable foreign tax credits for this period (6 months).

The Second Period (100%) of Estimated Taxable Income for the year is payable

• Less any allowable foreign tax credits for the year and Less the amount paid for the first provisional period.

The Third Period (voluntary) to pay any shortfalls in the provisional estimates before assessment

ESTIMATES OF TAXABLE INCOME

The amount of the estimate submitted by a provisional taxpayer shall not be less than the basic amount unless the Commissioner agrees to an estimate that is lower than the basic amount.

The Commissioner may call upon a provisional taxpayer to justify any estimate or to furnish particulars of the income and expenditure, or any other particulars that may be required.

If the Commissioner is dissatisfied with the estimate, he or she may increase it to what he or she considers reasonable, even if this is more than the basic amount.  This increase is not subject to objection and appeal.

The ‘basic amount’ is the taxpayer’s taxable income assessed by the Commissioner for the last year assessed.

It excludes capital gains, lump sum withdrawal benefits and any severance benefits.

Specifically Company Provisional taxpayers:

Must submit a return of an estimate of the total taxable income expected. Even if the provisional tax calculation results in a nil payment. The basic amount is the taxable income as last assessed less any taxable capital gain.

The basic amount for all taxpayers must be increased by 8% if the estimate is made more than 18 months after the end of the latest preceding year of assessment.

FAILURE TO SUBMIT A PROVISIONAL TAX RETURN (IRP6)

The Commissioner may estimate the taxable income and determine the amount payable if the provisional taxpayer fails to submit an estimate.

The estimate made by the Commissioner is effective for the relevant period within which the provisional taxpayer is required to make the payment.

WHEN MUST PROVISIONAL TAX BE PAID?

Personal Income Tax Runs from 1 March – 28/29 February.

Company Income Tax is as per the company’s year end.

First period: This payment must be made within six months from the commencement of the year of assessment in question. (August if your financial year end is February).

Second period: This payment must be made no later than the last day of the year of assessment in question. (Financial year end – Usually February).

INTEREST AND PENALTIES

Interest is either levied on an underpayment of provisional tax or paid to the taxpayer on an overpayment of provisional tax.

A penalty will be levied on the shortfall where it has been determined that the actual taxable income is more than the taxable income estimated on the second provisional tax return if:

• Taxable income > R1 000 000 – estimate is less than 80% of the actual taxable income.
• Taxable income < R1 000 000 – estimate is less than 90% of the actual taxable income.

At Burns Acutt we apply 90% and 95% of taxable income to be prudent unless instructed otherwise.