Provisional Income Tax: The Implications for South African Taxpayers

What is Provisional Tax?

Most business owners are familiar with the concept of provisional tax, but many are still unsure about its implications. Provisional tax forms a part of income taxes and is a payment method rather than its own separate tax. As the name suggests, provisional tax payments are made in advance, that is to say before the end of an entity’s financial year. Taxpayers are required to make at least two provisional payments during the year of assessment. A third payment is optional at the end of the tax year, which is made before the issuing of the assessment by SARS. Provisional tax payments are calculated based on the organisation’s estimated taxable income for that period. It is important for these estimates to be as accurate as possible and the South African Revenue Service (SARS) provides taxpayers with guidelines on these calculations.

Why Do I Need to Pay Provisional Income Tax?

SARS has implemented provisional tax payments to help taxpayers maintain an even cash flow by avoiding a large tax debt at the end of the year of assessment. By making payments in advance the tax liability is spread over the entire financial year, instead of being held liable for the entire amount in one payment. The total of the first two provisional payments is deducted from the entity’s tax liability at the close of the tax season and SARS will refund taxpayers if these payments exceeded the total liability.

Any individual that receives an income other than a salary is considered a provisional taxpayer. Employees that earn remuneration are therefore not-provisional taxpayers as long as they have no other sources of income. If a person receives income from alternative sources such as rental properties, investments or freelance services, they might be liable for provisional tax payments.

Penalties for Non-Compliance

SARS has been known to institute penalties against a number of transgressions related to the payment of provisional taxes.

Late Payment Penalty

Payments that are made after the due date carry a penalty of 10% that will be applied on top of the total tax owed. This can be applied to just one or both of the payment periods, with SARS also having the authority to impose an interest penalty at their prescribed rate which currently stands at 10% per annum.

Under-Estimation Penalty

Provisional taxes are unique in that they require taxpayers to estimate their taxable income. SARS imposes considerable fines on entities who underestimate their taxable income. This is done in an effort to discourage taxpayers from reporting inaccurate figures. A penalty could be imposed if the estimated income for a period is significantly less than the actual income.

Late Submission Penalty

It is pertinent that taxpayers submit their provisional taxes on time to avoid late submission penalties. If your submissions are made even one day after the deadline you could be liable for a penalty. SARS views late submissions as a ‘nil’ return, which means that your estimate of taxable income equates to zero. You could then be liable for a 20% under-estimation penalty if your actual taxable income is not in fact zero.

Provisional Income Tax Submission Deadlines

Your first provisional tax payment is due within six months of the start of the entity’s year of assessment. For entities with their year of assessment starting in March 2022, this date will be 31 August 2022. Taxpayers are required to make the second provisional payment on or before the last working day of the year of assessment, which would be the last business day of February 2023. The third provisional tax payment is voluntary and can be made within six months of the end of the year of assessment.

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