understanding provisional tax

Companies and certain individuals are deemed to be provisional taxpayers. Allow us to break down the key information around the concept of provisional tax through possible questions that you could ask yourself:

1. What is Provisional Tax?

As the word provisional suggests, this tax is a provision of the normal tax liability one may incur at tax year-end. To curb the tax liability from being exorbitant, SARS introduced a method of paying the income tax liability in advance, to ensure that taxpayers do not have a large debt on assessment. It requires the taxpayer to pay at least two amounts in advance. However, there are uncommon instances where the taxpayer has to make an additional third payment. On assessment, the provisional payments will be set-off against the liability for normal tax for the applicable year of assessment.

2. Who is a Provisional Taxpayer?

Any person who receives income (or to whom income accrues) other than ordinary remuneration, is regarded as a provisional taxpayer. As a result, most salary earners are, subsequently, not provisional taxpayers. By virtue, most businesses, with very limited exceptions, are regarded as provisional taxpayers; including freelancers, sole proprietors, and consultants, should be registered for provisional tax.

3. When should Provisional Tax be paid?

The first provisional tax payment (IRP6/1) must be made within six months of the start of the year of assessment ending 31 August or six months after the approved financial year end date.

The second provisional tax payment (IRP6/2) must be made no later than the last working day of the year assessment ending 28/29 February.

The third provisional tax payment is voluntary and may be made within seven months of the year of assessment where the year of assessment ends in February, that is, 30 September.

4. What happens if an incorrect amount is paid, or the payment is late, or the submission of the provisional tax is late?
There are two instances applicable, either an overpayment or an underpayment.

• An overpayment of the provisional tax will lead to SARS refunding you the surplus upon the completion and submission of the normal income tax return. This refund will be inclusive of interest income.
• An underpayment of the provisional tax will lead to a penalty of the difference between the provisional tax and the normal income tax return. This penalty is dependent on the taxable amount.

Late payments have an immediate 10% penalty imposed on the amount due to SARS, whilst the whole amount is further subject to interest at the SARS prescribed rate.

Late submissions of the provisional tax returns are subject to an under-declaration penalty. This is due to SARS assuming the submission will be RNil.

The Accounting Village provides comprehensive tax services and advice for all taxpayers. If you would like more information on Provisional Tax and dealing with Provisional Tax please contact us here.