What is Provisional Tax?
First and foremost, provisional tax is not a separate tax from income tax. It is a method of paying our relative income tax liability in advance, to ensure that the taxpayer does not remain with a large tax debt on assessment upon submission of their annual return.
Provisional tax allows the tax liability to be spread over the relevant year of assessment with the taxpayer having two provisional tax periods in which to pay in advance. The aim is to help taxpayers meet their liabilities in the form of two payments, instead of in the form of a single, large sum on assessment. This payment is based on your estimated taxable income calculated during the two provisional tax periods.
Who is obliged to pay provisional tax?
A person who receives (or to whom accrues) other than a salary, is a provisional taxpayer. An example of this are individuals who earn income from other sources during any year of assessment. These sources include rental income generated, interest income received or any other income from the carrying on of a trade. South African taxpayers who earn foreign income from providing services outside of South Africa via foreign employment have a high chance of qualifying as a provisional taxpayer due to their foreign employment income earned.
When should you register as a Provisional Taxpayer?
All companies fall into the Provisional Tax system. Companies are required to submit two provisional returns throughout the tax year of assessment. The following taxpayers will qualify as Provisional Taxpayers:
- You receive foreign employment income or a foreign employment salary from a foreign employer in which you may qualify for a S10(1)(o)(ii) foreign employment exemption.
- You are an independent contractor or a sole proprietor in which you generate income during the year of assessment.
- You receive a salary from employers who are not registered for PAYE.
- Your income generated does not constitute a salary. This includes income generated from rental properties, interest earned and any other form of income earned during the year of assessment.
- When SARS notifies you, by way of your statement of account in which they will determine whether you qualify as a provisional taxpayer.
Important Deadlines for Provisional Taxpayers:
There are two compulsory provisional tax periods per year in which a provisional taxpayer will need to make payment. These payment periods are the first and second provisional tax periods. The first provisional tax period covers the first 6-month period of the year (1 March to 31 August). The second provisional tax period covers the second 6-month period of the year (1 September to 28 February). It is of utmost importance for taxpayers to ensure that the above deadlines are met to ensure full tax compliance. The first provisional tax payment should be made no later than the 31st of August for the relevant year of assessment. The second provisional tax payment should be made no later than the 28th of February for the relevant year of assessment.
Failure to comply with the requirements of Provisional Tax:
Taxpayers who fail to register for provisional tax and who do not file their provisional returns will be penalised by SARS on their annual assessment. The penalty levied is due to the underpayment of your provisional tax and amounts to 20% of the tax liability due for the year of assessment. SARS has taken the stance that non-compliant taxpayers will be targeted, and they will ensure that all debts are collected.
Please feel free to contact us at tax@theaccountingco if you are unsure of whether you meet the requirements of a provisional taxpayer and we will be able to assist you.