Provisional tax is not a separate tax, but is merely an advance payment of income tax made during the year of assessment. Provisional tax payments are therefore offset against the calculated income tax payable to SARS on assessment (that is when the taxpayer submits his or her income tax return after year-end).
Provisional tax estimates must be submitted twice yearly by provisional taxpayers on or before the 31st of August (first estimate) and the 28/29th of February (second estimate).
Provisional tax payments are calculated on estimated taxable income (which includes taxable capital gains) for the particular year of assessment. It is therefore imperative that if a taxpayer have earned a capital gain during the current year, they declare it for provisional tax purposes.
In the event where a taxpayer does not include a capital gain in their provisional tax estimate (or do not advise their tax practitioners accordingly, where the taxpayer have contracted the services of a tax practitioner), an understatement penalty may be levied by the South African Revenue Service (SARS).
In certain instances, it is allowable for the taxpayer to use the basic amount provided on the provisional tax return (IRP6), as the estimate (even if the basic amount is substantially less than the actual taxable income), without incurring penalties (see bullet 2 below).
A penalty for the understatement of provisional tax will be levied by SARS in the following cases:
- Where the taxpayer’s actual taxable income is more than R1 million, a penalty will be levied if the second period taxable income estimate for the year of assessment is less than 80% of actual taxable income, as finally determined for the year of assessment.
- Where the taxpayer’s actual taxable income is equal or less than R1 million, a penalty will be levied if the second period estimate is less than the basic amount applicable to that period (i.e. the last assessed taxable income plus the applicable incremental yearly increases at 8% per year, where applicable) and the second period estimate is also less than 90% of actual taxable income as finally determined for the year of assessment. No penalty will be levied when the second period estimate is based on the basic amount applicable to that period.
- Where actual taxable income is more than R1 million, the penalty will be calculated as 20% x [normal tax on 80% of actual taxable income after rebates minus provisional and employee’s tax payments]. Where actual taxable income is less than R1 million the penalty will be calculated as 20% x [(lesser of normal tax on 90% of actual taxable income after rebates or normal tax on the basic amount after rebates) minus provisional and employee’s tax payments].
A penalty for the late payment of provisional tax can also be levied by SARS:
- With regard to first provisional tax payments the payment must be received by SARS on or before the 31 of August every year, while second provisional tax period payments must reach SARS by the of 28th of February every year.
- A voluntary 3rd provisional tax payment may also be made to avoid interest. This payment must be made 6 months after a taxpayer’s year-end for taxpayers who has a year-end other than February. For taxpayers with February year-ends the 3rd payment must be made by the end of September to avoid interest.
- If the taxpayer’s first and second provisional tax payments are late, a penalty of 10% will be levied on outstanding amounts. Interest will also be charged on all late payments. It is therefore very important for taxpayers to ensure that their payments are made on time.
If you have any enquiries, please contact Petri Westraadt at pwestraadt@fhbc.co.za