As SARS clamps down on compliance, we thought it would be a good idea to provide a refresher on the ins and outs of provisional tax. Martin Bredell, a personal income tax compliance officer in our Joburg office, has the lowdown…
Over the past few years, SARS has become much stricter with their implementation of and adherence to income tax legislation. “Tax compliance” has become the latest buzz word – as evidenced by the recent Nugent Commission Inquiry.
In light of all this, Sentinel wants to make sure you all understand provisional tax, a very important aspect of income tax. If provisional tax is not handled correctly, you could end up paying penalties and interest – and nobody wants that to happen.
This article serves as a broad overview of provisional taxes and an introduction and explanation of the principles for a natural person. It should not be used as a binding or comprehensive document, as each person’s situation is different.
What is provisional tax?
Provisional tax is not a separate or additional tax from your annual income tax, but merely a mechanism for SARS to get you to pay your normal income tax liability in advance. This happens in at least two instalments during each tax year, for that tax year. Provisional tax is an advance payment of a taxpayer’s normal tax liability (similar to PAYE) which is supposed to ease the cashflow burden of a large tax liability on assessment.
Who is it for?
A provisional taxpayer is someone who earns “other income” besides remuneration (e.g. salary, pension, annuity income) from an employer that is registered for employee’s tax. Examples of “other income” include:
- rental income
- taxable local and foreign interest
- taxable foreign dividends
- taxable trust distribution / attribution consisting of the above
- other trading / business income (i.e. freelancers, sole proprietors, independent contractors)
- remuneration from an employer not registered for PAYE. (This includes foreign employment income – see below for details.)
There are some exemptions:
A person who earns income from carrying on a business will never be exempt from provisional tax, irrespective of if they make a profit or a loss or the level of their total income.
For persons who don’t carry on a business but who do receive aforementioned “other income” the following exemptions apply:
- Your total taxable income (employer income plus “other income”) will not amount to more than the tax threshold for the 2021 tax year:
- below the age of 65: R 83,100
- aged 65 to 74: R 128,650
- aged 75 and over: R 143,850
- Your taxable “other income” (consisting of interest, dividends, foreign dividends, rental from letting of fixed property and remuneration from an unregistered employer) will not exceed R30,000 in total, during the year of assessment.
- Deceased estates
To sum up. If you carry on a business (regardless of income) or if your “other income” surpasses the thresholds above, you are a provisional taxpayer.
When are the payments due?
A provisional taxpayer is generally required to make two compulsory provisional tax payments. The first six months into the current year of assessment (on or before 31 August 2020 – called period 2021/01) and the other at the end of the year of assessment (on or before 28 February 2021 – called period 2021/02). Taxpayers may make an additional voluntary payment, generally known as the third or top-up payment (on or before 30 September 2021 – period 2021/03), for the purpose of avoiding or reducing possible interest that could arise should their first two provisional payments be inadequate. A late or under-payment will result in penalties and interest, even if it’s just one day late.
How is it calculated and submitted to SARS?
Provisional tax payments are calculated on estimated taxable income for the year of assessment. This estimated taxable income amount is submitted to SARS on an IRP6 return (details are not reflected on the return, but SARS can call for a detailed calculation if they choose to do so). An IRP6 return must be submitted for both the first and second period, even if the amount of the provisional tax payment is nil. Non-submission can lead to various penalties and interest.
How is it assessed?
These provisional tax payments, together with any PAYE withheld during the year by your employer, will be offset against the total liability for normal tax on all your taxable income when your final tax return (ITR12) is submitted and assessed by SARS.
What about capital gain?
Taxpayers realise capital gain by disposal of an asset such as selling a property or shares etc. Incurring taxable capital gain doesn’t make you a provisional taxpayer (although this could change in the future). However, if you are a provisional taxpayer, you will have to include the taxable capital gains realised in that tax year in your estimated taxable income.
And foreign employment income?
Before 1 March 2020 foreign employment income was fully exempt from South African income tax if all the requirements were met. Since 1 March 2020 only the first R 1.5 million is exempt. Any non-exempt portion falls under “other income”, as it’s remuneration from an employer not subject to the SARS PAYE system. If you do earn foreign employment income, please contact us for further discussion.
The importance of variable transactions
There are certain transactions or types of income which can cause your taxable income to fluctuate and push you either just over or just under the exemption thresholds. Regarding income, the most common ones are rental income and interest. The most common transaction type is the disposal of an asset (like a property, shares, or even lumpsum withdrawals of retirement funds) which results in a capital amount which usually earns interest. Also, when a deposit has been paid for the purchase of a property it earns interest and could just push you over the exemption threshold of R 30,000.
And unusual/infrequent transactions
SARS has updated the IRP6 forms to include a line item for “Unusual / Infrequent amounts” included in the taxable income amount in the calculation. Although this term isn’t defined by SARS, it relates to out of the ordinary transactions in YOUR personal circumstances. Such as a once-off disposal of assets or a huge once-off increase in rental profit which needs to be included in the calculation, but then in addition needs to be separately reflected on the IRP6.
Provisional tax and trust distributions/attributions:
In practice, the income distributed / attributed to beneficiaries of a trust is usually determined after year-end, when the annual financial statements are drawn up. Final tax planning is done at this stage while looking at various aspects of the trust (incl. loans subject to S7c) and the beneficiaries. It can happen that the taxable income allocated to beneficiaries now exceeds the exemption threshold. To err on the side of caution, we advise that beneficiaries of a trust which generates income should rather view themselves as provisional taxpayers, do the calculations and submit the IRP6 returns.
Calculations and payments
Twice a year (ahead of Period 01 and 02) we will send out communication to all our provisional tax clients to request information for their estimated taxable income calculation. Once this is done, we will send you the calculation and relevant payment instructions for your approval.
The onus is on each taxpayer to determine if they are liable for provisional tax submission, and subsequently to request and submit an IRP6 return via e-filing. This needs to be determined each year, during the relevant tax year.
SARS will only determine on assessment of each year’s final tax return whether or not they view you as a provisional taxpayer for that year. This means that your provisional taxpayer status could change a few times during future years, depending on your circumstances.
What if I’m not sure?
In some cases, it’s difficult to determine with certainty if you will exceed the exemption threshold in a certain year. In that case, our advice is to rather view yourself as a provisional taxpayer, do the calculation and submit the IRP6 returns. The other alternative is to not submit and run the risk of possible penalties and interest, should SARS then deem you to have a been a provisional taxpayer for that year of assessment.
In the past you had to register/deregister for provisional taxpayer status, but now it’s just a simple activation process on e-filing. SARS will not hesitate to levy penalties and interest if you have neglected to activate provisional taxpayer status for a given year. If you have become a provisional taxpayer during the course of this year, please inform us timeously, so that we can activate your provisional tax status on e-filing before 31 August 2020. We will then update our system to classify you as a provisional taxpayer and you will receive periodic communication from us in that regard.
Your tax, your responsibility.
The responsibility is on you to inform us of any changes in your provisional tax status. The onus is on you to inform us of variable or unusual transactions and provide us with the relevant information timeously.
That said, you are not alone.
We are here to assist and help you in any way we can. If you are unsure, pop us an e-mail or give us a call and let us assist you.
SARS has given certain qualifying taxpayers the option to defer their provisional tax payments. This is a relief for cash flow purposes in extreme cash-strapped situations and not a tax rebate. You will still have to pay all your taxes eventually.
Deferment is an option for companies, trusts, and individuals:
- That conduct a trade
- Whose gross income does not exceed R100 million during the year of assessment ending between 1 April 2020 and 31 March 2021
- Whose gross income for the year of assessment does not include more than 10% (cumulative) of income derived from interest, dividends, foreign dividends, rental from letting fixed property as well as any remuneration received from an employee
- That are fully tax compliant in all aspects of the tax types they are supposed to be registered for
This means that as an individual, it’s only applicable to you if you are a sole proprietor, you derive 90% or more of your total gross income from that business, the total gross income is less than R 100 mill, and you are fully tax compliant.
If you meet all these criteria and are having cash flow problems, you are welcome to contact us for assistance on activating the deferment. Do remember, however, that it’s not a tax rebate and you will have to pay your taxes eventually.
Our door is always open
We hope that this overview of provisional tax has proved useful. If you have any questions at all, please do drop us a line or give us a ring. Your tax compliance is of utmost importance to us.
“Guide for Provisional Tax – 2021” as issued by SARS
Income Tax Act, No.58 of 1962 as amended.
BCom (Hons) in Taxation
Registered Tax Practitioner with SAIT and SARS