Provisional Tax Explained
Provisional tax is not separate from income tax but rather a different method of fulfilling income tax obligations. This refers to paying one’s income tax liabilities in advance to ensure that large debt is not incurred during an annual assessment. Provisional tax allows taxpayers to spread their liability over the year of assessment by allowing at least two payments in advance, based on an estimate of the taxable income for the year of assessment.
Under this type of tax payment, taxpayers must make at least two payments in advance, with an option of a third payment after the tax year has ended, before SARS issues their assessment. During the final assessment, the provisionally made payments will be offset against the calculated liability of the year of assessment.
MMS Group manages a range of tax administration on behalf of our clients, including the calculation and payment of provisional tax. With our professional assistance, taxpayers do not have to worry about the accuracy of their calculations. We also ensure all processes are completed on time and according to SARS guidelines to ensure absolute compliance during annual submissions.
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Who qualifies as a provisional taxpayer?
A provisional taxpayer is a natural person who receives an income outside of their standard remuneration. Companies and employees who receive a salary from an employer not registered for employee’s tax also qualify for provisional tax. Most salary earners are not considered provisional taxpayers as they do not have additional sources of revenue.
According to SARS, you are not a provisional taxpayer if you:
- Receive interest of less than R23 800 and are under 65.
- Receive interest of less than R34 500 and are 65 or older.
- Receive an exempt amount from a tax-free savings account.
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Fulfilling provisional tax payments
To accurately fulfil provisional tax obligations, taxpayers are required to register for SARS eFiling. The platform allows the online request of an IRP6 return which is needed to complete submissions and payments. The eFiling platform can also be used to register for all tax types through the client information system. Existing eFiling users who seek to manage their provisional tax returns through this system can simply add this tax type to their profile to access and file their IRP6 return.
When should payments be made?
- The first provisional tax payment is compulsory and should be made within the first six months of the assessment year. If this date falls on a Saturday, Sunday or public holiday, the payment should be made on the last business day before that date.
- The second provisional tax payment is compulsory and should be made before the last working day of the year of assessment.
- The third provisional tax payment is voluntary. Companies with a year-end in February should complete this payment before the last business day of September. In other instances, it should be completed within six months of the year of assessment.
Penalties for non-compliance
Taxpayers who earn an income from sources other than their basic salary are familiar with estimating their taxable income for provisional tax purposes. This can, however, still be tedious and time-consuming, with or without previous knowledge of the process. The penalties associated with incorrectly completing submissions often encourage provisional taxpayers to seek professional assistance in completing their returns.
Late Payments
Meeting the deadlines outlined for provisional tax payments is crucial in avoiding hefty penalties. Late payments can result in penalties of up to 10% applied to your total taxable amount and can be issued on either payment period. SARS is often quick to implement its fines and can allocate interest at its prescribed rate.
Underestimating Taxable Income
A unique part of provisional tax is the need to estimate your own taxable income for the year of assessment. To prevent individuals from submitting inaccurate payments and reporting lower numbers, SARS imposes fines on taxpayers who have underestimated their taxable income. The penalty can be levied if the taxable income calculated during the final return exceeds the estimated income submitted during your second period submission. The amount of this fine differs for each taxpayer, depending on their income tax bracket.
SARS regularly outlines the importance of meeting payment deadlines and maintaining absolute accuracy when submitting provisional tax returns. Due to the hefty fines associated with non-compliance, it may be in your best interests to seek professional assistance to meet your tax return obligations. MMS Group offers professional tax services to ensure this process is completed accurately and timeously. Please reach out to our experts for more information.