Over the past few years, significant changes have been effected to the provisional tax rules. However, not all provisional taxpayers have kept abreast of these changes. The result? These taxpayers often do not fully understand their tax obligations and end up over-paying or, worse, under-paying their tax and having to fork out significant amounts of cash to pay the South African Revenue Service (SARS) the resultant penalties, additional tax and interest for non-compliance.
This article sets out the more important tax rules of which individual provisional taxpayers should be aware. It also highlights some common pitfalls that are usually overlooked and provides some tax tips.
What is provisional tax?
It is a tax payment made to SARS during the course of the tax year on taxable income that you’ve effectively already earned. The purpose of provisional tax is to enable you to settle your annual income tax liability in instalments during the tax year. In other words, you pay your income tax as you earn your income and, by so doing, you avoid having to pay a significant tax liability on assessment.
The concept of a “provisional taxpayer” is often confused with that of a “taxpayer”. Not all taxpayers are provisional taxpayers and both categories have their own set of tax rules. The most notable difference between the two is that provisional taxpayers are obliged to make bi-annual tax payments to SARS in order to avoid interest and penalty charges, whereas taxpayers are required to settle their outstanding tax liability only on assessment.
Even if you are not a provisional taxpayer and hence are not required to submit provisional tax returns, you are still required to register as a normal taxpayer and you are still obliged to submit your annual income tax return and pay your income tax liability to SARS.
Who must register?
It is important to know when you qualify as a “provisional taxpayer”. This is because if you are required to register as a provisional taxpayer and fail to do so, you may be liable for penalties and interest.
New administrative penalty rules were introduced two years ago. These rules provide that where you, as a taxpayer, fail to register as required by the tax laws (for example, you fail to register as a provisional taxpayer) or fail to submit your provisional tax returns timeously, SARS may impose a fixed penalty. This penalty is calculated with reference to your taxable income in the previous tax year and can range from R250 to R16 000 a month for a maximum of 35 or 47 months (depending on the circumstances). You can, however, request SARS to remit this penalty.
The following people are required to register with SARS as provisional taxpayers within 30 days from the date of becoming a provisional taxpayer:
* Any person (other than a company) who derives income which does not constitute remuneration or an allowance or advance as contemplated by the Income Tax Act (the Act);
* Any company; and
* Any person who is notified by SARS that he/she is a provisional taxpayer.
The first category above would generally include individuals who have their own businesses, partners in partnerships who earn profit-share, and individuals who do not carry on a business but earn taxable investment income (for example, interest, dividends and/or rentals) in excess of R20 000 for the tax year. Note that directors of private companies and members of close corporations are no longer automatically required to register as provisional taxpayers and are required to do so only if they fall within any of the above categories.
The following people are exempt from registering as provisional taxpayers:
* Any public benefit organisation, recreational club or share block company;
* Certain body corporates and associations;
* Any individual under 65 years of age who does not carry on a business and whose taxable income for the tax year will not exceed the tax threshold (for the 2012 tax year, the tax threshold for under-65s is annual taxable income of R59 750);
* Any individual under 65 years of age who does not carry on a business and whose taxable income for the tax year derived from interest, dividends and rentals from fixed property will not exceed R20 000; and
* Any individual (other than a director of a private company) who is 65 years of age or older, who does not carry on a business and whose taxable income for the tax year will not exceed R120 000 and will be derived only in the form of remuneration, interest, dividends, or rentals from fixed property.
The above limits of R20 000 and R120 000 refer to “taxable income” and not “gross income”.
When are payments due?
You are required to make two provisional tax payments during the tax year and may also make a third, voluntary payment. For individuals, the first payment is generally due at the end of August and the second payment at the end of February of each tax year. The third, voluntary payment is due at the end of September of the following tax year.
If, for valid reasons, you are unable to make the first and second payments by the respective due dates, you may apply to SARS for an extension of the period.
Your provisional tax payment must be accompanied by your provisional tax return, the IRP6 form. This form is used to calculate your provisional tax liability. Historically, SARS issued these IRP6 forms to provisional taxpayers but it no longer does so, and you are now required to request an IRP6 form via eFiling, from the SARS call centre or from your nearest SARS branch.
You can also now obtain an IRP6 form even if you are not yet registered for provisional tax. This is to avoid the historical situation where taxpayers delayed the payment of their provisional tax because they had not yet received their IRP6 forms or they had not been registered by SARS as provisional taxpayers at the time when the payment was due. These circumstances can no longer be used as an excuse to delay provisional tax payments.
A new IRP6 form was introduced last year, and if you submit your provisional tax forms via eFiling, the provisional tax payment is automatically calculated on this form. A word of advice: check the SARS calculation on the IRP6 form carefully. In particular, check that you agree with SARS's estimate of your taxable income. Also remember to check that the tax payments disclosed on the IRP6 form are correct, since SARS may not necessarily have complete information of all the tax payments made by you in respect of the tax period.
As a provisional taxpayer, you can also now request a “provisional tax statement of account” from SARS. This statement will indicate your provisional tax history for different tax periods (for example, your payments made, estimate of taxable income, interest charged and/or earned, and penalties levied by SARS). This statement can be a very useful tool for taxpayers who wish to reconcile their provisional tax payments.
If you fail to submit your IRP6 form to SARS timeously, or you submit your form but pay the tax late, you will be liable for penalties and interest.
How are payments calculated?
The most important point to bear in mind here is that the tax laws prescribe how your provisional tax liability for each period must be calculated. Do not deviate from these rules unless you have SARS's permission to do so, because you may be charged significant penalties and interest.
Your first provisional tax liability is calculated by estimating your total taxable income for the tax year in respect of which the payment is made, calculating the tax on the income after applying the tax rebates, dividing this tax liability by two and then deducting from this liability any employees’ tax paid for the first six months of the tax year and any foreign tax credits you qualify for in respect of these first six months.
You are not permitted to base your first provisional tax payment on an estimate of taxable income that is less than the basic amount applicable to that tax period, unless you have obtained prior approval from SARS to do so.
Calculating the basic amount
It is important to understand how the basic amount should be calculated, because if you use an incorrect figure, you may incur penalties and interest charges.
The basic amount is equal to your taxable income as assessed by SARS for the “latest preceding tax year”, less:
* Taxable capital gains;
* Taxable portions of termination lump sums; and
* Taxable portions of retirement fund lump sums that are included in that taxable income figure.
Your “latest preceding tax year” is the last tax year in respect of which you were assessed, provided that the tax assessment for that tax year was issued to you not less than 60 days before the due date of the provisional tax payment. (This rule is illustrated in Example 2, below.)
SARS may also disclose a “taxable income” figure on your IRP6 form. If the assessment in respect of that taxable income amount was issued before the IRP6 form was issued, you may use this taxable income figure to calculate your provisional tax payment (even if the assessment is issued less than 60 days before the due date of your provisional tax payment).
Importantly, if you are calculating a provisional tax liability (first or second) for a period that ends more than one year after the end of the latest preceding tax year (in other words, if the assessment that you are using to determine your basic amount for your provisional tax calculation is older than one year), the basic amount per that assessment must be increased by eight percent a year from the end of the relevant tax year (in other words, the latest preceding tax year) to the end of the tax year in respect of which the estimate is made. (This rule is illustrated in Example 3, below.)
Note that as long as you base your first provisional tax payment on your basic amount (as adjusted by eight percent per tax year where applicable), you will not incur any penalties for under-estimating your taxable income, even if your actual taxable income turns out to be much higher than your basic amount. You should therefore make use of this opportunity to hang on to your hard-earned cash a little while longer before paying it over to SARS. This relief does not apply to the second provisional tax payment where your actual taxable income for the tax year exceeds R1 million.
If you fail to submit your first or second provisional tax estimate, SARS may estimate your taxable income, and such an estimate will be final (you cannot object to it). You may also, in these circumstances, have to pay penalties for late submission of your provisional tax. It is therefore crucially important that you submit your completed IRP6 form in time – even if no tax is payable.
SARS may also call on you to justify any provisional tax estimate made by you or to furnish particulars of your income and expenditure or any other information. If dissatisfied with the estimate, SARS may increase it to an amount that it considers to be reasonable, and the estimate as increased will be final.
Always keep accurate records of your provisional tax calculation to enable you to support your estimates should SARS request you to justify them.
Your second provisional tax liability is calculated by estimating your total taxable income for the tax year, calculating the tax liability on it (after applying tax rebates), and then deducting from this amount any employees tax paid for the full year, any provisional tax paid to date for the tax year and any foreign tax credits you may qualify for in respect of the full tax year.
* If your taxable income for the tax year is greater than R1 million, you can no longer use the basic amount when calculating your second provisional tax payment without the risk of incurring additional tax/penalties for under-estimating your taxable income. Your estimate of taxable income must be equal to at least 80 percent of your actual taxable income for the tax year. Where this is not the case, SARS may impose additional tax equal to 20 percent of any shortfall (see Example 4, below).
* If your taxable income for the tax year is R1 million or less, you may base your estimate of taxable income for purposes of calculating your second provisional tax payment on the lesser of your basic amount or 90 percent of your actual taxable income, without incurring any penalties for under-estimating your taxable income. If you do not use either of these amounts, SARS will impose an additional tax of 20 percent on any shortfall (see Example 5, below).
In both the above scenarios, if SARS is satisfied that your estimate of taxable income was seriously calculated with due regard to all the factors, or that the estimate was not deliberately or negligently understated, it may waive the additional tax in whole or in part.
Note that, as is the case with the first provisional tax payment, you are not permitted to base your second provisional tax payment on an estimate of taxable income that is less than the basic amount unless you have obtained prior approval from SARS. That said, even if you obtain SARS approval, if your estimate of taxable income is less than 80 percent of your actual taxable income (where your actual taxable income exceeds R1 million) or 90 percent of your actual taxable income and your basic amount (where your actual taxable income is R1 million or less), SARS may impose additional tax of 20 percent on any shortfall.
Individuals whose taxable income for the tax year exceeds R50 000 may make a third, voluntary provisional tax payment on or before September 30 of the following tax year to avoid having to pay interest on any outstanding tax liability.
Penalties and interest
The table at the end of the article (click on the link) sets out the penalties and/or additional tax that may be imposed by SARS if you do not comply with the provisional tax rules. In addition to the above penalties, the normal administrative penalties raised on defaulting taxpayers may also be imposed (for example, if you fail to register as a provisional taxpayer). SARS may waive all or part of a penalty if it is satisfied that you did not intend to evade or postpone the payment of tax.
Interest on under-payments and late payments
If your actual taxable income for the tax year exceeds R50 000 and you have an outstanding tax liability for the tax year, you will be charged interest. This interest will be calculated on the outstanding tax liability (at the prescribed interest rate) from the effective date (which in the case of individuals is October 1 of each tax year) to the date of assessment or the date on which you settle the outstanding tax liability, whichever is the earlier.
SARS may waive this interest if the late payment is as a result of circumstances beyond your control. In this case, your outstanding tax liability is equal to the normal tax payable on your taxable income less the sum of your provisional tax paid, your employees’ tax paid and any foreign tax credits that you qualify for in respect of the tax year.
Thus, in order to avoid interest being charged on your outstanding tax liability, you should make a third, provisional tax payment before the effective date of each tax year.
SARS may waive the interest in the first tax year during which you become a provisional taxpayer. The discretionary power of SARS to waive interest is subject to objection and appeal.
Interest on over-payments
You will be paid interest by SARS on any excess amount if the sum of your provisional tax paid (including voluntary provisional tax), employees’ tax paid and any amount of foreign tax credits that you qualify for in respect of the tax year exceeds your normal tax liability for the tax year and:
* The excess amount is greater than R10 000 for the tax year; or
* Your taxable income is greater than R50 000 for the tax year.
This interest will generally be calculated from the effective date (October 1 of each tax year) to the date that you are refunded the excess amount at the prescribed interest rate.
Note that any interest earned from SARS is taxable in your hands, whereas any interest paid by you to SARS is not deductible for tax purposes.
It is also important to note that any tax payment is first offset against penalties, then interest, then additional tax and only then against your outstanding tax liability.
It is important that you understand your tax obligations as a provisional taxpayer because failure to comply with the rules could result in your having to fork out significant amounts of cash to SARS.
EXAMPLE 1. AM I A PROVISIONAL TAXPAYER?
You are under 65 years of age, do not carry on any business and earn remuneration of R200 000 and interest income of R40 000 for the tax year. Your “taxable income” in respect of this interest income will be R17 200 (R40 000 minus R22 800). You will therefore not be regarded as a provisional taxpayer as your only other income is remuneration.
EXAMPLE 2. DETERMINING THE ‘LATEST PRECEDING TAX YEAR’
You are calculating your first provisional tax payment for the 2012 tax year, which is due on August 30, 2011. Your last year assessed was the 2011 tax year. Your 2010 assessment was issued in November 2010.
* If SARS issues your 2011 assessment on June 20, 2011 (in other words, the assessment is issued not less than 60 days before the due date of your provisional tax payment), your basic amount for purposes of calculating your first 2012 provisional tax payment will be your taxable income as shown on your 2011 assessment, because the 2011 tax year is your “latest preceding tax year”. The reason for this is that 2011 was the last tax year for which you were assessed and the assessment was issued not less than 60 days before the first provisional tax payment was due (it was issued more than 60 days before August 30, 2011).
* If SARS issues your 2011 assessment on August 15, 2011 (in other words, the assessment is issued less than 60 days before the due date of your provisional tax payment), your basic amount for purposes of calculating your first 2012 provisional tax payment will be your taxable income as shown on your 2010 assessment, increased by eight percent for each tax year to the 2012 tax year (see Example 3). The reason for this is that 2010 was the last tax year for which you were assessed and the assessment was issued less than 60 days before the first provisional tax payment was due (the 2010 assessment was issued less than 60 days before August 30, 2011).
EXAMPLE 3. CALCULATING THE BASIC AMOUNT WITH 8% ANNUAL ADJUSTMENT
You are calculating your first provisional tax payment for the 2012 tax year, which is due on August 30, 2011. Your last year assessed was the 2011 tax year and the taxable income shown on that assessment is R600 000. Your 2011 assessment was issued on August 15, 2011. Your taxable income as assessed for the 2010 tax year was R550 000 and your 2010 assessment was issued during November 2010.
As noted in Example 2, your basic amount for purposes of calculating your first 2012 provisional tax payment will be your taxable income as shown on your 2010 assessment, increased by eight percent for each tax year to the 2012 tax year.
Thus, your basic amount in this case would be equal to R638 000 {R550 000 x (8% + 8%)}. This is your taxable income per your 2010 assessment, increased by 16 percent (that is, eight percent for the 2010 tax year and another eight percent for the 2011 tax year).
This method of adjusting the basic amount could yield an unfair result for taxpayers. This is particularly so where the actual increase in your taxable income for the tax year is less than eight percent. For example, in the above case, the basic amount is, in fact, higher than your 2011 taxable income of R600 000. In addition, if your taxable income for the 2012 tax year only increased by, say, six percent from 2011 (given the current inflation rate, this is quite a likely scenario for a number of taxpayers), it will amount to R636 000 (R600 000 x 6%). This means the basic amount that you use to calculate your first 2012 provisional tax payment would, in fact, also be higher than your actual taxable income for the 2012 tax year. This does create an unfair tax result as you are then effectively paying provisional tax based on an estimate of taxable income that is higher than your actual taxable income for 2012.
In this case, if you expect your taxable income to be significantly less than what it was in the previous tax year (because of economic conditions or if you did not work a full year, for example), you may, before the due date for your first provisional tax payment, ask permission from SARS to base your estimate for the first provisional tax payment on an amount lower than your basic amount. If permission is granted, no penalties will be charged. This relief does not, however, extend to the second provisional tax payment, and SARS may impose penalties if there is a shortfall (as calculated in terms of specific rules) in your estimate.
PENALTIES ON UNDERESTIMATE OF SECOND PAYMENT
EXAMPLE 4. TAXABLE INCOME OF GREATER THAN R1 MILLION
Your basic amount is R800 000. You base your second provisional tax payment on this amount. Your actual taxable income for the tax year is R1 100 000 because you received a performance bonus.
Since your estimated taxable income of R800 000 is less than 80 percent of your actual taxable income (that is, less than R880 000), you will be liable for an underestimate penalty in respect of your second provisional tax payment. This penalty will be calculated as follows:
Calculation of additional tax at 20%
Normal tax on 80% of your actual taxable income (that is, on R880 000): R277 495
Less: normal tax on estimated taxable income of R800 000: R245 495
Equals: shortfall/underestimate: R32 000
Additional tax at 20%: R6 400
EXAMPLE 5: TAXABLE INCOME OF LESS THAN R1 MILLION
Your basic amount is R800 000. You base your second tax payment on R700 000 (an estimate lower than your basic amount). Your actual taxable income for the tax year is R900 000. You are liable for an underestimate penalty because your estimated taxable income of R700 000 is less than 90 percent of your actual taxable income of R900 000 (that is, R810 000) and it is less than your basic amount of R800 000.
Calculation of additional tax at 20% Normal tax on lesser of:
* Basic amount of R800 000 (tax = R245 495); and
* 90% of your actual taxable income, that is, R810 000 (tax = R249 495): R245 495
Less: normal tax on estimate of taxable income of R700 000: R205 495
Equals: shortfall/underestimate: R40 000
Additional tax at 20%: R8 000
It is important to note that the additional tax/penalty on the underestimate of taxable income is calculated by comparing the normal tax payable on the taxable income figures without taking into account any actual tax that has been paid (for example, by way of PAYE). This may therefore yield an unfair result.
* Anthea Scholtz is a tax director at Deloitte.
This article was first published in the third-quarter 2011 edition of Personal Finance magazine.