Understanding Provisional Tax and Avoiding Penalties
“The hardest thing in the world to understand is the income tax.” – Albert Einstein
Taxes, indeed, can be quite the brain buster, but fret not! We’re here to make the concept of South African provisional tax as clear as a sunny day in Durban.
What Is Provisional Tax?
Provisional tax is a method employed by the South African Revenue Service (SARS) to collect income tax IN ADVANCE, usually in two instalments. It’s designed to help taxpayers spread their tax liability over the year, avoiding a massive bill when annual tax returns are due. Essentially, it’s a way to pay-as-you-earn, but for those who don’t have regular monthly income tax deductions, like freelancers, small business owners, and companies.
Criteria for Provisional Taxpayers
You might be wondering, “Do I qualify as a provisional taxpayer?” Let’s break it down:
- Individuals: If you earn income other than a salary, such as rental income, interest, or income from a side business, you’re likely a provisional taxpayer. One would need to consider this annually as you could be a provisional taxpayer in year but not the next.
- Companies: If you’re a registered company, you automatically fall into the provisional tax category, unless you are registered for Turnover Tax.
- Exclusions: If you earn less than R30,000 from interest, dividends, or rental income annually, or if you’re under 65 years old and earn less than R20,000 from other non-salary income, you are not required to register for provisional tax.
Penalties to Watch Out For
No one likes penalties, especially when it comes to taxes. Here’s what you need to be aware of to avoid additional charges:
“Nil” Returns
Even if you (where you meet the criteria) or your company owes no tax, a ‘nil’ return showing taxable income as equal to zero must still be filed on time. Failing to do so will attract administrative penalties, even on a nil return. The penalty is usually R250 per month per outstanding return.
Late IRP6 Submission
If an IRP6 is filed more than four months after the deadline, SARS will consider a ‘nil’ return to have been submitted. Unless the actual taxable income really was zero, an under-estimation penalty will also apply to a late submission or on submission of your annual income tax return.
Late Provisional Tax Payments
Not making your provisional tax payments on time will result in an immediate late payment penalty, calculated at 10% of the provisional tax amount, regardless of whether it’s not paid at all or simply paid late.
Interest on Underpayment
Interest will also be levied on the underpayment of provisional tax because of underestimation and on late payments. To avoid this, it’s crucial to make accurate estimates and timely payments.
Basic Example of Provisional Tax Calculations
Let’s put theory into practice with a simple example for a small business:
Imagine you run a small business and expect a taxable income of R300,000 for the year. Here’s how you would calculate your provisional tax for the year:
- Step 1: Estimate your taxable income for the year: R300,000.
- Step 2: Calculate the tax payable based on the current tax rates. For simplicity, we’ll assume a flat tax rate of 28% for businesses:
- Total tax payable: R300,000 x 28% = R84,000.
- Step 3: Divide this amount into two instalments:
- First provisional tax payment (due 31 August): R84,000 / 2 = R42,000.
- Second provisional tax payment (due 28/29 February): R42,000.
If you pay these amounts on time, you can avoid penalties and interest. However, if your estimates change, you can adjust your second instalment accordingly.
In conclusion, understanding and managing provisional tax doesn’t have to be a colossal task. By staying informed and proactive, you can ensure compliance and avoid unnecessary penalties. Should you have any doubts or need professional assistance, don’t hesitate to consult us. Happy tax filing!
Written by:
Thirusha Govender
Founder and Director
+27 33 386 1302
thirusha@controlpro.works / info@controlpro.works
www.controlproconsulting.co.za