Provisional tax hacked!

by | Feb 23, 2021

It is February 2021. All accountants and tax practitioners are running around like headless chickens. All stressed and busy with tax season. What does this mean? Do you need to file a tax return that you are not aware of? Should you also be stressed?

This can be explained in only two words: Provisional tax!

Let me clarify:

Provisional tax is a tax registration where you have to file bi-annual provisional tax returns and pay the relevant tax due.

Individuals:

If you are an individual taxpayer, your tax year ends on the last day of February. An annual income tax return can usually be filed from July or August onwards. If you are, however, registered as a provisional taxpayer, you need to file and pay provisional tax by the end of August and February annually.

Provisional, meaning, you take your estimated taxable income, calculate the tax due and pay that over to SARS. Thus declaring and paying taxes in advance for the tax year still to end.

In summary:

The 2021 tax year ends on 28 February 2021. The first provisional tax had to be calculated, return filed and any taxes paid by 31 August 2020. The second provisional tax return is due by 28 February 2021.

The difficulty taxpayers face is that the month and tax year has not ended yet. So how can you calculate your taxable income? You have to work on estimates, estimates that can lead to penalties if not accurate enough.

Registration as a provisional tax payer

Let us first start with how you register or become liable for provisional tax (please do not stop reading, I am not going into technicalities):

  1. You earn remuneration but no employee’s tax is deducted – examples can be commission or consulting fees, but only if this exceeds R30,000.00 per annum.
  2. You derive income which is not remuneration – examples can be interest income or rental income, but only if this exceeds R30,000.00 per annum.
  3. You are notified by SARS that you are a provisional taxpayer

You can also look at your last tax assessment. On page one there is a section where SARS will show a “Y” or “N” indicating whether you are a provisional taxpayer.

Based on the information above, if you do not qualify to be a provisional taxpayer you can now take a relaxing deep breath and only remember to file your annual income tax return later this year.

If you do qualify, what do you do? Do you need to phone SARS? Do you need to visit a SARS branch? Do not panic! This is a very quick and pain free registration:

  1. Log onto your eFiling profile.
  2. Click on Home (At the top of your screen next to Returns)
  3. Under User, select Tax Types.
  4. Tick Provisional Tax;
  5. Add your tax number and select your nearest SARS branch.
  6. Scroll down and click on register.

The status next to the tax types should now show as ‘Successfully Activated’.

Congratulations – You now have to file provisional tax returns every six months.

First provisional tax return

The first provisional tax return will be based on your estimated taxable income from 1 March to 31 August:

  1. Use your actual taxable income from 1 March to 31 July and estimate the amount for August. Unless you have a substantial change in income or tax deductible expenses for the six months to August, your calculations should now be as close to accurate as possible.
  2. Scale this up to 12 months and calculate the tax thereon,
  3. deducting the rebates for the tax year.
  4. If you earned any employment income and PAYE was deducted, this PAYE can also now be deducted from the tax amount due.
  5. The 12 months information should now be submitted on the provisional tax return.

SARS will then divide the tax liability by two. You are now left with the tax to pay on the first six months of the tax year. If the calculation comes to zero or is less than the rebates, then no tax is payable for that provisional tax return. You must still submit the provisional tax return.

Second provisional tax return

The second provisional tax return will be based on your estimated taxable income from 1 March to 28/29 February the subsequent year:

  1. Use your actual taxable income from 1 March to 31 January and estimate the amount for February. Unless you have a substantial change in income or tax deductible expenses for February, your calculations should now be as close to accurate as possible.You now calculate the tax thereon and,
  2. deduct the rebates for the tax year.
  3. If you earned any employment income and PAYE was deducted, this PAYE can also now be deducted from the tax amount due.
  4. The 12 months information should now be submitted on the provisional tax return.

SARS will then deduct the first provisional tax payment made in August. You are now left with the tax to pay on your taxable income earned during the last six months of the tax year. If the calculation comes to zero or is less than the rebates, then no tax is payable for that provisional tax return. You must still submit the provisional tax return.

Non-compliance

Taxable income will be your remuneration, interest, rental or any other taxable income earned for the tax period. Deductions allowed can be in the form of home office expenses, allowable donations made, contributions to a retirement or pension fund and any other expenses allowed by SARS.

SARS can raise penalties and add interest if this is not done correctly.

There is a 10% penalty for late payment of provisional tax.

Remember that when the 31st of August or 28/29th of February falls on a public holiday or the weekend, you have to submit and pay on the Friday or business day before that weekend or public holiday.

There is a 20% penalty for the underestimation of taxable income if in respect of the second provisional payment. Underestimation is determined as follows:

  • If your taxable income is less than R1 million: Your estimate of taxable income is less than the taxable income for the year or the basic amount – the lower of the two;
  • If your taxable income is more than R1 million: Your estimate of taxable income is less than 80% of the actual taxable income for the year.

The basic amount will be based on your taxable income on your last tax assessment less any lump sump payments and capital gains. This should appear on your provisional tax return.

Should you have submitted your two provisional tax returns and made payments, the annual income tax assessment will consolidate these two provisional tax returns. Payments made will be deducted from the tax assessment. If there is still an amount owed to SARS, this must be paid by 30 September (or on the Friday or business day before that weekend or public holiday). This is called the third provisional tax payment, but there is no third provisional tax return. If not paid timeously there will be interest charged by SARS. If you overpaid and SARS owes you money, the overpayment will receive interest from SARS. This interest will be taxable.

Non-individuals

If the taxpayer is not an individual, it probably is a provisional taxpayer (there are only a few exclusions to this rule). Six-monthly provisional tax periods will be based on the date of the taxpayer’s financial year end. This will always be six months from the start of the entity’s financial year and on the last date of the entity’s financial year. Remember about the rule regarding a public holiday and weekend. The third provisional tax payment will be six months (of seven months should the taxpayer’s year-end coincidentally also be at the end of February) after the start of the entity’s financial year end.

This, in a nutshell and without too much technical mumbo-jumbo, is the reason why tax season can be so stressful. But now that you know the basics I hope your stress levels have subsided to an acceptable level.

Do you wish someone else could worry about this on your behalf? Then do not hesitate to connect with waucomply

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