As a Professional Accountant (SA) and right through my days as an article clerk one of the most underestimated sections of my duties was to calculate and submit provisional tax returns (IRP6). Yes, I did understand what it meant and will explain it here but I never knew the consequences of my advice and actions regarding provisional tax until the day I had to tell a client that we calculated and submitted the provisional tax returns incorrectly and that there is a lot of penalties payable to SARS for our mistake. It was then that I recognized the need to make sure I know the rules regarding provisional tax as stipulated in the 4th Schedule of the Income Tax Act No. 58 of 1962.
To understand how provisional tax must be submitted we need to understand why provisional tax must be submitted. Provisional tax is a pre-payment of your estimated tax liability for the year. This is a mechanism from SARS to keep their constant feed of income tax receivable going, just like PAYE is done monthly.
All companies are registered provisional taxpayers, however only the following natural persons are regarded as provisional taxpayers:
- Any person who derives income by way of any remuneration from an employer that is not registered in terms of paragraph 15 of the 4th Schedule, or
- Any person who derives income by way of any amount which does not constitute remuneration or an allowance or advance contemplated in section 8(1) of the Income Tax Act.
- Any person who is notified by the commissioner that he or she is a provisional taxpayer.
In laymen’s terms the following people needs to be registered as provisional taxpayers:
- All people who carry on a business
- All people who receive income in the form of interest, dividends, foreign dividends, rental from the letting of fixed property and any remuneration from an employer that is not registered in terms of paragraph 15 of the 4th Schedule, unless the total does not exceed R30,000 for the year.
Provisional tax payments are separated into two compulsory payments and one non-compulsory third payment. The first payment is due 6 months after the start of the financial year, the second one is due before the end of the financial year and the third non-compulsory payment is due 6 months after year end for companies and 7 months after year end for individuals. The third payment is only a prevention of interest being calculated on tax due that was not paid during the first two provisional tax payments.
First provisional tax return (Par 19 of the 4th Schedule)
SARS will issue an IRP6 return with a basic amount of taxable income that is based on the latest assessment of previous tax returns. If the previous tax return is older than 18 months, SARS will increase the basic amount by 8% per annum.
Your provisional tax calculation may not be less than the basic amount calculated by SARS unless you can justify the lower amount. As your calculation can’t be lower than the basic amount of SARS no penalties exist for underpayment of provisional tax for the first period, however there will be a 10% penalty for the late submission and payment of the provisional tax if you have missed the deadline.
If SARS has issued an IRP6 with a basic amount based on an old assessment and the latest assessment of taxable income has been issued, it may be used by the tax payer as the basic amount if that assessment was issued more than 14 days prior to the deadline of the provisional tax payment.
Second provisional tax return (Par 20 of the 4th Schedule)
The second provisional tax payment is a bit more complicated than the first. Two categories exist:
- Where the actual taxable income is less than R1 Million, or
- Where the actual taxable income is more than R1 Million.
Let’s start with the first category. If your actual taxable income is less than R1 million, your estimation of taxable income for the second period may not be less than the lower of:
- 90% of the taxable income, or
- The basic amount as calculated by SARS.
If your estimation is less than the lower of the above calculated amount, a 20% penalty will be levied on the difference between your estimation and the amount calculated above.
If your taxable income is more than R1 million, you don’t have the benefit of using the basic amount as calculated by SARS. Your estimation of the taxable income for the second provisional tax payment may not be less than 80% of the actual taxable income.
If your estimation is lower than 80% of the actual taxable income, a 20% penalty will be levied on the difference between your estimation and 80% of the actual taxable income. Again a 10% penalty will be levied on the late submission and payment if you have missed the deadline.
Provisional tax has more meat to the bone than what you though and for this reason I strongly recommend all taxpayers to keep track of their actual income and expenses. Businesses need to capture their accounting data more regularly. Software such as QuickBooks Online is most useful in supplying an easy way to capture accounting data with the professionality that is needed to comply with all required regulations such as VAT, provisional tax and income tax submissions.
For all individual provisional taxpayers as well as companies with a February financial year end, the deadline for the first provisional tax submission is 31 August. Please consult your accountant for any need to adjust your provisional tax payments.