Provisional tax is a system designed to help taxpayers manage their tax liabilities by spreading the payments over the tax year. This approach not only ensures a smoother cash flow for taxpayers but also aids the South African Revenue Service (SARS) in maintaining a steady inflow of tax revenue. This article delves into the intricacies of provisional tax, who needs to pay it, how payments are structured, and the penalties for non-compliance, providing a comprehensive guide for individuals and businesses alike.

What is Provisional Tax?

Provisional tax is not a separate tax but a method of paying the income tax liability in advance during the year of assessment. It helps taxpayers avoid a large final tax payment on assessment by making smaller, more manageable payments throughout the year. This system is particularly useful for individuals and businesses with non-salaried income, as it prevents the accumulation of a large tax debt.

Who is Required to Pay Provisional Tax?

Provisional tax applies to:

• All Companies: Regardless of their income sources, all companies in South Africa are required to pay provisional tax.

• Individuals Earning Non-Salaried Income: This includes income from business activities, rental income, interest, dividends, and other sources that are not classified as remuneration or section 8(1) allowances.

• Employees of Foreign Employers: Individuals working in South Africa for a foreign employer that is not registered as an employer in South Africa are also required to pay provisional tax.

Exemptions from Provisional Tax

Certain individuals and entities are exempt from paying provisional tax:

• Non-Business Income Earners: Individuals who do not earn income from carrying on a business and whose taxable income is below the specified threshold.

• Passive Income Threshold: Individuals whose passive taxable income (interest, dividends, and rentals) does not exceed R30,000.

• Public Benefit Organisations (PBOs): These organisations are also exempt from provisional tax.

• Deceased Estates.

It is important to note that receiving the following exempt income does not make you a provisional taxpayer:

• If you receive interest of less than R23 800 if you are under 65; or

• If you receive interest of less than R34 500 if you are 65 and older or;

• You receive exempt amount from a tax free savings account.

Payment Structure

Provisional tax payments are made in two main instalments during the tax year, with an optional third payment to avoid interest on underpayments:

1. First Payment: The first provisional tax payment must be made within six months of the start of the year of assessment. For years of assessment starting March, this will be 31 August, if it is a business day, or the last business day before that date if it falls on a Saturday, Sunday or public holiday.

2. Second Payment: The second payment must be made no later than the last working day of the year of assessment. This will be last business day of February.

3. Third Payment: An optional payment to top up the amount already paid, due seven months after the end of the tax year if the year ends on 28 February, or six months after the year-end in other cases.

Calculation of Payments

The calculation of provisional tax payments is based on the "basic amount," which is the taxable income assessed in the latest tax year. Adjustments are made for capital gains, lump sums, and other specific income types, with an 8% annual escalation applied if the latest assessment is more than 18 months old.

Detailed formats of calculations are provided by SARS. Please refer to the following link: GEN-PT-01-G01-Guide-for-Provisional-Tax-External-Guide

Forms used to capture provisional tax calculations

An IRP6 return must be completed for provisional tax purposes.

The IRP6 return can be completed for all types of taxpayers:

• Individuals

• Trusts

• Companies

A provisional taxpayer is required to request and submit a return (IRP6) for both the first and second periods, even if the provisional tax calculation results in no tax being due (R0).

Failure to submit a provisional tax return (IRP6)

Failure to submit a provisional tax return (IRP6) may lead the Commissioner to estimate the taxable income and determine the amount payable for the period in question.

How Should Provisional Tax Be Paid?

To pay provisional tax, follow these steps:

1. Register for SARS eFiling: This online facility allows you to request, submit, and pay your IRP6 return. You can register once for all tax types using the client information system.

2. Existing eFilers: If you are already registered, simply add provisional tax to your profile to access and file your IRP6 return online. 

Penalties for Non-Compliance

SARS imposes penalties for underpayment and late payment of provisional tax to ensure compliance:

• Under-estimate Penalties:

• For taxable income up to R1 million, penalties are based on the lesser of 90% of the actual taxable income or the basic amount.

• For taxable income exceeding R1 million, penalties are based on 80% of the actual taxable income.

• The penalty amount is calculated as 20% of the underpaid amount.

• Late Payment Penalties: A 10% penalty is levied on the amount not paid by the due date.

• Offsetting Penalties: In the second payment, late payment penalties and under-estimate penalties can be offset against each other, effectively capping the overall penalty to 20% (10% of late payment penalty and 10% of under-estimate penalty).

Practical Tips for Managing Provisional Tax

1. Accurate Estimates: Ensure accurate estimation of taxable income to avoid penalties. Consider all income sources and potential deductions.

2. Timely Payments: Adhere to the payment deadlines to avoid late payment penalties.

3. Regular Reviews: Regularly review your income and tax position to adjust your provisional tax payments if necessary.

4. Professional Advice: Seek professional advice from tax consultants or accountants to ensure compliance and optimal tax management.

Conclusion

Provisional tax is a critical component of South Africa's tax system, ensuring that taxpayers manage their tax liabilities more effectively and helping SARS maintain a steady flow of revenue. Understanding who needs to pay provisional tax, how to calculate and make payments, and the penalties for non-compliance is essential for individuals and businesses alike. By staying informed and proactive, taxpayers can avoid the pitfalls of underpayment and late payment, ensuring a smoother financial journey throughout the tax year.