What is provisional tax?

What is provisional tax?

Provisional tax is not a separate tax from income tax. It is a method of paying the income tax liability in advance, to ensure that the taxpayer does not remain with a large tax debt on assessment. Provisional tax allows the tax liability to be spread over the relevant year of assessment. It requires the taxpayers to pay at least two amounts in advance, during the year of assessment, which are based on estimated taxable income. A third payment is optional after the end of the tax year, but before the issuing of the assessment by SARS. On assessment the provisional payments will be off-set against the liability for normal tax for the applicable year of assessment.

Who is it for?
Any person/business who receives income (or to whom income accrues) other than a salary, is a provisional taxpayer. A provisional taxpayer is defined in paragraph 1 of the Fourth Schedule of the Income Tax Act, No.58 of 1962, as any –

natural person who derives income, other than remuneration or an allowance or advance as mentioned in section 8(1) or who derives remuneration from an employer who is not registered for employees’ tax (for example, an embassy is not obligated to register as an employer for employees’ tax purposes)
company; or
person who is told by the Commissioner that he or she is a provisional taxpayer.

Excluded from being a provisional taxpayer as defined are any –

approved public benefit organisations or recreational clubs that has been approved by the Commissioner in terms of s30 or s30A;
body corporates, share block companies or certain associations of persons;
Non-resident owners or charterers of ships or aircraft;
Any natural person who does not earn any income from carrying on any business – provided that person’s taxable income will not be more than the tax threshold (for 2018 tax year: for taxpayers below age of 65 - R75 750; age 65 to below 75 - R117 300 and age 75 and over - R135 150); or the taxable income of that person (earned from interest, foreign dividends, rental from letting of fixed property and remuneration from unregistered employer) will not be more than R30 000;
A small business funding entity; and
a deceased estate.

Note: Companies automatically fall into the provisional tax system. There is no longer a registration or deregistration process to be a provisional taxpayer. The onus is on the taxpayer to determine if he or she is liable for provisional tax, and to request and submit an IRP6 return.

What steps must I take to work out the amounts due? myFINANCE-online.co.za willl assist with these calculations and tax advice.

The amount of provisional tax payable is worked out on the estimated taxable income for that particular year of assessment, as follows:

The First Period:

Half of the total estimated tax for the full year;
Less the employees tax for this period (6 months);
Less any allowable foreign tax credits for this period (6 months).

The Second Period:

The total estimated tax for the full year;
Less the employees tax paid for the full year;
Less any allowable foreign tax credits for the full year;
Less the amount paid for the first provisional period.

The Third Period (voluntary):
The total tax estimated payable for the full year;
Less the employees tax paid for the full year;
Less any allowable foreign tax credits for the full year;
Less the amount paid for the 1st and 2nd provisional tax periods.

For more information on how to work out the amounts due, click here.

When should it be paid?

The first provisional tax payment must be made within six months of the start of the year of assessment. For year of assessment starting March, this will be 31 August.
The second payment must be made no later than the last working day of the year of assessment. This will be 28/29 February.
The third payment is voluntary and may be made:
within six months of the year of assessment, in any other case.

General

If the provisional taxpayer does not submit the final provisional tax return within four months after the last day of the year of assessment, then the provisional taxpayer shall be deemed to have submitted an estimate of an amount of nil taxable income (para 19(6)).
If the Commissioner is not satisfied with the estimate of taxable income made by the taxpayer, the Commissioner can increase the taxpayer’s estimate (para 19(3)).
If the taxpayer does not make any estimate (fails to submit the IRP6s), the Commissioner can estimate the taxable income (para 19(2)).

Top Tip: Remember that, by submitting the return and payment timeously and accurately, you can ensure a hassle-free, smooth submission. Insufficient payment and/or underestimation of taxable income may lead to you being charged with penalties and interest.