Provisional tax is not a separate tax, but is merely an advance payment of income tax payable, made during the year of assessment. Provisional tax payments are therefore offset against the calculated income tax payable to the South African Revenue Service (SARS) on assessment (when the income tax return is submitted by the taxpayer and assessed by SARS).
Provisional tax estimates must be submitted twice a year by provisional taxpayers on or before the 31st of August (first estimate) and the 28/29th of February (second estimate), if the provisional taxpayer has a February year-end.
When the provisional taxpayer has a year-end other than the last day of February, the first estimate is due 6 months after the beginning of the financial year and the second estimate within 12 months at the end of the financial year.
Provisional tax payments are calculated on estimated taxable income (which includes taxable capital gains) for the particular year of assessment. It is therefore vital that when taxpayers have earned capital gains, they include it in their provisional tax estimate.
In the event where a taxpayer does not include a capital gain in their provisional tax estimate, an understatement penalty may be levied by 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].
Penalties and interest 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, while second provisional tax period payments must reach SARS by the 28th/29th of February for provisional taxpayers with a February year-end.
- For provisional taxpayers with a year-end other than the end of February, payment must be received by SARS on the last business day of the first 6-month period of its financial year (1st estimate) and on the last business day of its financial year (2nd estimate).
- 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 with a year-end other than February. For taxpayers with a February year-end 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% can be levied on outstanding amounts in both instances. Interest will also be charged on all late payments.
- It is therefore important that taxpayers ensure that their payments are made on time. In certain limited instances penalties and interest may be remitted by SARS, if a taxpayer submits a valid request.
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