Failing to pay provisional tax when you are obliged to do so can result in costly penalties, so if you have any doubts about whether you’re a provisional taxpayer or not, it’s best to check, particularly because the first provisional tax deadline (August 31) is fast approaching.
You may qualify as a provisional taxpayer if you earn income on which the South African Revenue Service (SARS) is not able to collect tax until you declare it. If you earn only a salary from an employer who deducts pay-as-you-earn (PAYE) tax each month and pays it to SARS on your behalf, you are not likely to be a provisional taxpayer.
Are you a provisional taxpayer?
You may be a provisional taxpayer if you earn income from sources such as:
• Renting out property;
• Running a small business, a home business or freelance work; or
Online tax practitioner TaxTim says you aren’t a provisional taxpayer if you earn income from other sources, but:
• You earn a salary on which you pay PAYE but are under the age of 65 and your taxable investment income (interest and/or dividends) or rental income, is less than R30 000 for the 2016/17 tax year. To be taxable, your investment income must exceed the exemption: R23 800 in interest income a year. Remember, investment income from a tax-free savings account is tax free;
• You are under 65 and your taxable income does not exceed the threshold of R75 000 for the tax year;
• You are over 65 but not over 75 and your taxable income does not exceed the tax threshold of R116 150; or
• You are over 75 and your taxable income does not exceed R129 850.
You need to file a return
If you are earning taxable income from which tax is not deducted, SARS does not want to wait until you fill in your return and are assessed before it receives tax from you. It therefore asks you to declare your earnings (where these exceed the limits outlined above) twice a year by way of a provisional tax return – known as an IRP6 – and to pay provisional tax during the tax year in which you incur that tax.
So, if you are a provisional taxpayer, before the end of August you need to declare on an IRP6 your estimated income for the tax year that started on March 1, 2016 and pay the tax due for the first six months of the tax year (the first provisional tax period).
You have to file another return by February 28 next year for the second half of the year (the second provisional tax period).
If you need to increase the amount you declared in the second return, and hence the tax you paid, you must do so by September 30 next year (the third provisional tax period).
Filling in a provisional tax return does not mean you don’t have to fill in your normal tax return (ITR12).
ITR12s must be filed by November 25, unless you are a provisional taxpayer who eFiles your return. In this case, you have until January 31, 2017 to file your ITR12 for the tax year from March 2015 to February 2016 (the 2016 tax return) and until the end of January 2018 to file your 2017 ITR12 return.
You need to be registered as a provisional taxpayer to file an IRP6 return.
If you are not registered as a taxpayer, you must visit your nearest SARS branch with a completed IT77 form available from www.sars.gov.za.
If you are already registered as a taxpayer, you can register as a provisional taxpayer online from your eFiling profile. Alternatively, you must go to a SARS branch or phone the call centre.
What do you declare?
• Your income. There are only two fields for filling in your income on the return: turnover and estimated taxable income. TaxTim says your turnover is your total gross income and you need to add up income from business, empoyment, royalties, and dividends and interest from investments. Exclude all retirement lump sums.
Your estimated taxable income is your turnover less the deductions for business expenses and for your retirement fund contributions.
In arriving at these amounts, consider the following:
• If you earn a salary, consult your August payslip for your earnings to date and double this amount. If you know you will earn more in the second half of the year – for example, by receiving a bonus – try to make your estimate as accurate as you can.
• If you run a business, include the full income you expect to receive for the year based on your current earnings in the turnover, TaxTim says.
Subtract your expected business expenses for the full year when you calculate the estimated taxable income.
If your business income is seasonal, you can’t just double the turnover and expenses you made in the first six months but must estimate your earnings for the year as accurately as you can.
• If you earn royalties, include what you expect to earn for the full year.
• If you receive investment income in the form of dividends or interest, include what you expect to earn for the full year. Your investment company should have sent you a provisional IT3b certificate that shows your income to date. You will have to estimate the amount for the rest of the year.
• If you received a lump sum from a retirement fund, exclude this amount.
• If you earn a salary and contribute to a retirement fund, check the retirement fund deductions to date recorded on your August payslip (from March 1 this year provident fund contributions are also deductible) and double this amount. Subtract this from your total income.
• Add up your contributions to a retirement annuity fund to date and double the total if your contributions will stay the same for the rest of the year, or estimate a higher amount if your contributions will increase. Subtract this from your income total.
• Medical scheme credits. Determine your medical scheme fees credit (R286 a month for the first two dependants on your scheme plus R192 a month for each dependant thereafter for the 2016/17 tax year). Determine other medical expenses to claim. If you are under 65 with no disability, include any contributions paid to a medical scheme that exceed four times the medical credit. Then add any expenses not recovered from your scheme. Then subtract from this total 7.5 percent of your taxable income. If anything remains, calculate 25 percent of it and declare this on the return as your additional medical expenses credit.
If you are under 65 and are disabled, or have a disabled dependant, or are over 65 with or without a disability, include any contributions that exceed three times medical credit, plus any medical expenses not recovered from your scheme. Then multiply this amount by 33.3 percent and declare this as your additional medical expenses credit.
• The tax you have already paid. If you are a salary earner and tax has been paid on your behalf, you should declare the tax paid to date (for the first six months). If you have paid tax on foreign income or dividends, you should declare the amount paid for the past six months.
•Tax Tim has a useful medical scheme tax credits calculator.
If you are no longer a provisional taxpayer
If you are no longer a provisional taxpayer, SARS says you do not need to formally deregister. It says if you are not liable for provisional tax, you do not need to submit an IRP6 return.
THE PENALTIES YOU COULD FACE
If you fail to submit a provisional tax return, you will be deemed by SARS to have declared no income and you will be penalised for underestimating your income.
You may also be liable for a penalty for underestimating your provisional tax if:
• Your taxable income is less than R1 million, but your total payments for the first and second provisional periods are less than 90 percent of the income tax payable on assessment and less than what is known as the “basic amount”, which is the income tax you were liable to pay in your most recent assessment. The penalty will be calculated at 20 percent of the difference between the tax payable based on your estimate and the lesser of:
- Tax on 90 percent of your actual income; and
- Tax on your “basic amount”.
• Your taxable income is more than R1 million, but your total payments for the first and second provisional periods are less than 80 percent of the normal income tax payable on assessment, regardless of the basic amount. The penalty will be calculated at 20 percent of the difference between the tax payable as per your estimate and tax calculated on 80 percent of your actual taxable income, TaxTim says.