Tax Tuesday: Provisional tax

In Latest, Tax Tuesday by Kristia van Heerden

Provisional tax exists to secure regular cash flow for government throughout the year, similar to the PAYE system. Where PAYE applies to remuneration, provisional tax applies to non-salary type income.

As with PAYE, provisional tax doesn’t operate as a separate tax, but rather as the prepayment of a yet to be determined income tax liability.

Who are provisional taxpayers?

  • All companies are by definition provisional taxpayers.
  • Individuals who earn an income other than that of an employee are provisional taxpayers.
  • Individuals who have been notified by SARS that they are provisional taxpayers.

However, a number of exclusions apply. This includes deceased estates, small business funding entities, certain public benefit organisations, etc.

It’s important to note that individuals may be excluded from having to pay provisional tax if they don’t earn income from a business and their taxable income doesn’t exceed:

the tax threshold for the year (for 2019: R78 150 for individuals under 65, R121 000 for individuals under 75 and R135 300 for all other individuals); or

R30,000 in the form of interest, dividends or rent received from letting immovable property.

Your journey as a provisional taxpayer in three (simplified) steps

  1. You file your annual income tax return which determines the final amount of tax due for the assessment year.
  2. This tax liability is reduced by provisional tax payments already made (and PAYE withheld).
  3. Depending on whether too much or too little provisional tax has been paid, the difference is then either due to SARS or to you, the taxpayer, as a refund of the overpaid provisional tax.

What does it mean to be a provisional taxpayer?

You must file more returns and pay tax in advance.

A provisional tax return must be filed twice a year (typically halfway into a tax year and again on the last day thereof).
In this return, you’re required to estimate the taxable income for the year and pay provisional tax on that amount. If the second provisional tax estimate submitted on yearend is inaccurate, an underestimation penalty will be charged.

Late payment penalties of 10% also apply if the estimated tax is not paid on time (which is due on the same date as the returns).

Many taxpayers are unaware of their provisional tax obligations. In practice, this is typically the case for salaried individuals earning a second stream of income. Take the person renting out a second property for example. Or someone selling their second property or shares. That individual will, based on the above prerequisites, have to ensure that they file bi-annual provisional tax returns and pay the requisite amount over to SARS in time (due by 31 August and 28/29 February each year). Failure to comply will lead to late payment penalties or underestimation of the amount of provisional tax due. And the kicker: failure to submit a provisional tax return when required is considered to be Rnil estimate entered.

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