After realising that not everyone gets as excited about tax as we do, we decided to try and break it down into areas that are easier for entrepreneurs to understand, starting with the concept of Provisional Tax. In this article, we will be covering 5 key questions around Provisional Tax.
1. What is Provisional Tax?
Provisional tax is a process during your tax year to pay funds over to SARS to account for income taxes due. Provisional tax is NOT a separate tax, it is your income taxes spread over the financial year and is compulsory. Once SARS assesses your income tax, the money paid in provisional tax is used as payments against the final amount due.
2. Who is liable for Provisional Tax?
Most businesses with very limited exceptions* as well as individuals who have more than one source of income, or who have income that is not taxed via payroll (PAYE).
Freelancers, sole proprietors and consultants should be registered for provisional tax.
*Excluded from being a provisional taxpayer is any of:
- Approved public benefit organisations or recreational clubs that have 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 2021 tax year: for taxpayers below age of 65 – R83 100; age 65 to below 75 – R128 650 and age 75 and over – R143 850); 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.
Extract from SARS.gov.za
3. When do I need to pay Provisional Tax?
Provisional Tax 1
Provisional Tax 1 is due 6 months after the start of your financial year.
Provisional Tax 2
Provisional Tax 2 is due by the last day of your financial year.
Provisional Tax 3
Provisional Tax 3 is due 6 months after your company’s financial year-end unless you have a February year-end, then you have 7 months after the year-end.
4. How do I calculate my Provisional Tax?
Provisional tax is based on taxable income, which is the income left after you have deducted expenses and then adjusted for non-deductible expenses (expenses not allowed in terms of tax rules). So, in essence, it is calculating an estimated net taxable income and then paying tax on the estimated amount due for the full financial year.
Practically speaking, to start your first provisional tax estimation:
- Start with your profit and loss for the first 5-6 months and adjust for various items that are not taxable in terms of tax legislation. Common examples of this are certain legal expenses, provisions or accruals and donations.
- Once completed, you need to forecast your remaining profit for the rest of the year.
- Using this net profit, you calculate your annual tax due by applying the appropriate tax rate, which is either 28% or the Small Business Tax rates. 50% of this amount is due for payment in the first return.
- Complete your IRP6 on eFiling and make payment.
5. What happens if I pay the wrong amount or if I pay late?
- Overpayment of your provisional tax return will lead to SARS refunding you when your final tax return is completed and assessed. SARS will refund the overpayment with interest.
- An underdeclaration will lead to a penalty. If your final income tax return (ITR12) is more than the amount you paid in your provisional tax returns (IRP6) then SARS will penalise you for the difference. The amount of the penalty depends on your taxable income amount.
SCENARIO 1
If your taxable income is under 1 million, you will be penalised if your estimation is less than 90% of your taxable income.
The penalty will be 20% of the difference between normal tax payable on your estimate and the lesser of:
- Tax on 90% of your actual taxable income
- Tax on your ‘basic’ amount – the amount you declared in your previous year’s tax Assessment (ITA34).
SCENARIO 2
If your taxable income for the year is more than 1 million, your second provisional tax return needs to be no less than 80% of your taxable income. The penalty will be 20% of the difference between the normal tax payable for your estimate and the tax calculated on 80% of your actual taxable income.
Late payments have an immediate 10% penalty imposed on the amount outstanding to SARS and the whole amount outstanding is subject to interest at the SARS prescribed rate.
Late submissions of provisional tax returns are subject to the under-declaration penalty as SARS assumes the submission is nil.
Closing thoughts
Provisional tax is a great opportunity, every six months, to reflect on past performance and to plan for the future of your business. While submission of your provisional tax is a process of estimation, you can also use these projections to feed into your budgets, KPI’s and cash flow projections. Ensure you are honest with your estimations and realistic in what you can achieve in the year ahead.
