What is Provisional Tax?
Provisional tax is not a separate tax, but forms part of your assessed tax. It is a method of paying tax due to SARS bi-annually, to ensure that the taxpayer is not liable to pay a large amount of tax on income not subject to PAYE at year end. It allows a taxpayer to make advanced payments during the year of assessment, which are based on the taxpayer’s estimated taxable income. The final tax liability is calculated upon assessment and provisional payments made are off-set against the liability for normal tax for that year of assessment.
When should a Taxpayer pay Provisional Tax?
Provisional tax is payable on all additional income other than your normal salary income, which is subject to PAYE withholding. Therefore when a person receives income which is not subject to tax, he or she is liable to pay provisional tax to SARS during the applicable year of assessment.
When is a person exempt from Provisional Tax on Additional Income?
An individual is exempt from the payment of provisional tax if the individual does not carry on any business and the individual’s taxable income –
- Will not exceed the tax threshold for the relevant tax year; or
- From interest, foreign dividends and income from rental property it should be less than the indicated amount on the tax tables for the applicable tax year. For the 2016/17 year of assessment the amount is set at R30 000.
When during the year should provisional tax be paid to SARS?
There are three provisional tax payments dates throughout the year with the third payment being optional.
- First Provisional Payment
The first provisional tax payment must be made within six months of the start of the year of assessment, which for individual taxpayers are 31 August. This tax payment will take all taxable income for the period March to August of the relevant tax year into account. Even though this payment covers only the first six months of the tax year, the estimated taxable income should be annualised in order to ensure that the correct tax bracket is used. Once the estimated tax for the full year has been calculated the tax liability will be divided by two to only reflect the liability payable for the first six months of the year.
The example as set out below illustrates this principle:
A 54 year old taxpayer earns an estimated taxable income of R100 000 for the period March 2016 to August 2016. The taxpayer does not have a medical aid or any other tax deductible items to be considered. The income is not subject to PAYE or any other tax. Calculate the first provisional payment due to SARS at 31 August 2016.
|Income for the period March 2016 to August 2016||100 000|
|Income for the full tax year (March 2016 to February 2017)||200 000|
|Tax due for the full year
(((200 000 – 188 001) x 26%) + 33 840) – 13 500
|Tax payable for the first provisional tax payment (2017/01)||11 729.87|
- Second Provisional Period
The second provisional payment must be made to SARS no later than the last working day of the year of assessment ending 28 February for individual taxpayers.
This payment is calculated on the full income for the year of assessment and the tax thereon is calculated according to the relevant tax bracket as per the SARS tax tables for that year. The first provisional payment made (at the end of August) as well as any PAYE should be taken into account when calculating the second provisional payment due to SARS to illustrate the final liability due.
- Third Provisional Period
The third provisional payment is considered to be a voluntary payment and may be made within seven months of the year of assessment and should therefore reach SARS no later than 30 September. The third provisional payment must be accompanied by the submission on the annual tax return for that year.
What penalties can be levied on provisional returns?
- Penalties for late submission;
- Penalties for late payments; and
- Penalties based on the underestimation of your liability.
How to avoid provisional tax penalties?
- Provisional tax returns should be submitted on or by the last business day of August (first provisional return) and February (second provisional return) each year.
- Provisional payments should reflect in SARS’ provisional bank account no later than the last working day of August (first provisional return) and February (second provisional return).
- The estimated taxable income declared on the second provisional tax return should be between 80% – 90% of the actual taxable income for the year.