Provisional tax What you need to know

Provisional tax is a system used to pay income tax on a current basis, rather than in a lump sum at the end of the tax year. This system helps spread the tax burden throughout the year and prevents taxpayers from facing large tax bills and penalties. Here's a simplified guide to understanding who needs to pay provisional tax, how it’s calculated, and the related processes. Provisional Tax is not a separate tax: It’s an advance payment of your annual income tax liability.

Who Is a Provisional Taxpayer?

Provisional taxpayers include:

1. Individuals who earn income other than from regular remuneration or allowances and whose employer is not registered for employee tax.

2. Companies are always considered provisional taxpayers.

3. Individuals notified by the South African Revenue Service (SARS) that they must pay provisional tax.

Exemptions from Provisional Tax

Certain entities and individuals are exempt from paying provisional tax:

• Public Benefit Organisations (PBOs) approved by SARS.

• Recreational clubs approved by SARS.

• Bodies Corporate, share block companies, and associations as specified in tax regulations.

• Individuals who do not run a business and have taxable income below certain thresholds:

• • The total taxable income is below the tax threshold.
  • Income from interest, dividends, rental from fixed property, and non-registered employer remuneration does not exceed R30,000.

• Non-resident owners or charterers of ships and aircraft with specific payment obligations.

• Small business funding entities and deceased estates.

Payment Schedule: Typically, provisional taxpayers make two payments each year:

1. The first payment is due halfway through the tax year.

2. The second payment is due at the end of the tax year.

   Additional Payment- Top -up : After the year-end, taxpayers can make an optional third or top-up payment to adjust for any shortfalls and avoid interest charges.

Calculating Provisional Tax

Provisional tax payments are based on your estimated taxable income, including capital gains for that year. The tax rates used for calculating provisional payments are those prescribed by the tax tables for the relevant year, set annually by Parliament.

How Provisional Tax Works

1. First and Second Payments: These are based on estimates of your taxable income for the year.

2. Third Payment: This is optional and based on the actual taxable income for the year, used to cover any shortfall from the first two payments.

Provisional tax payments are final, meaning they cannot be refunded or reallocated to different periods or taxpayers. At the end of the year, any excess payments may be refunded, and any shortfall must be paid to SARS. Interest may be charged on late payments or refunds.

Provisional Tax Returns (IRP6)

IRP6 Forms: Must be completed for all types of taxpayers—individuals, trusts, and companies. Even if no tax is due, you must still submit an IRP6 return.

Failure to Submit: If you fail to submit your provisional tax return, SARS may estimate your taxable income and determine the amount due, which you must then pay.

Estimates of Taxable Income Individuals: When submitting estimates, exclude retirement fund benefits and severance benefits. SARS may require you to justify your estimates. If unsatisfied, they may adjust the estimate.

Companies: Must submit an estimate of their total taxable income. The basic amount for the estimate is the income assessed in the previous year, adjusted for taxable capital gains.

Examples:

• If the notice of assessment for the previous year is issued more than 14 days before your provisional tax estimate is due, use that assessment to determine your basic amount.

• If the estimate is made more than 18 months after the end of the last assessed year, increase the basic amount by 8% for each year beyond 18 months.

By understanding who needs to pay, how to calculate it, and the required forms, you can better navigate your tax responsibilities. For further details, contact Tax A Sured Pty Ltd for guidance.