Provisional Tax 101-GWM Chartered Accountants

Provisional Tax 101-GWM Chartered Accountants

Written by Wilna Meyer
Published on 1 Febuary 2021

What is Provisional Tax?

Provisional tax is not a separate tax from income tax. It is a method of paying the income tax liability in advance, to ensure that the taxpayer does not remain with a large tax debt on assessment.

Who must pay Provisional Tax?

Any person who receives income (or to whom income accrues) other than a salary, is a provisional taxpayer. A Company or Close Corporation is also automatically a provisional taxpayer.

Natural persons, excluding sole proprietors, are exempt from provisional tax:

  • If you only receive interest of less than R23 800 if you are under 65
  • If you only receive interest of less than R34 500 if you are 65 and older
  • If you have income from a tax free savings account.
  • If your taxable income does not exceed the tax threshold (2021 tax year: for taxpayers younger than 65 - R83 100;  Between 65 and 75 - R128 650 and older than 75  - R143 850)
  • If the taxable income derived from interest, foreign dividends, rental from letting immovable property and remuneration from a foreign employer (not registered for PAYE) does not exceed R30 000.

Body corporates, deceased estates, PBO’s, recreational clubs, shareblocks and small business funding entities are exempt from provisional tax.

How do you calculate Provisional Tax?

First Payment

The estimate of taxable income may not be less than the basic amount without the consent of SARS.

Second Payment

A two-tier system applies depending on the taxpayer’s taxable income:

  • Actual taxable income of R1 million or less
To avoid any penalty the basic amount may be used. If a lower estimate is used, this must be within 90% of the taxable income finally assessed.
  • Actual taxable income exceeds R1 million
To avoid any penalty the estimate must be within 80% of the taxable income, excluding retirement fund lump sums, finally assessed.

What if your calculation is incorrect?

If the above requirements are not met, a penalty of 20% is levied on the difference between the estimated tax and 90% of the actual tax (where the taxable income is R1 million or less), or 80% of the actual tax (where the taxable income exceeds R1 million), less the PAYE and provisional tax paid in the year of assessment.

The penalty may be waived if the taxpayer can prove that due care has been taken in seriously calculating the estimate.

Where the return is not submitted within four months of the due date, the estimate of taxable income is deemed to be nil.

When should you pay?

  • The first provisional tax payment must be made within six months of the start of the year of assessment. For individuals that is 31 August.
  • The second payment must be made no later than the last working day of the year of assessment. For Individuals that is end of February.
  • the third payment is voluntary and may be made within six months of the year of assessment.

Remember that, by submitting the return and payment timeously and accurately, you can ensure a hassle-free, smooth submission. Insufficient payment and/or underestimation of taxable income may lead to you being charged with penalties and interest. We strongly recommend you enlist the services of a professional tax practitioner to ensure your estimations are correct.

Contact us if you need any assistance with your provisional tax.