The first period for provisional tax will end on 31 August and provisional taxpayers must have submitted their initial IRP6 return and settled any payments due by that date.
Provisional tax is paid by people who earn income other than a traditional salary paid by an employer.
If you earn non-salary income, such as rental income from a property, interest income from investments or other income from a trade or small business you run, you will be a provisional taxpayer – even if you also earn a salary.
Covid-19 relief allowances make the calculation of estimated tax all the more complicated, said Thamsanqa Msiza, head of Individual Tax Returns at Tax Consulting SA.
He advises those who wish to take advantage of this relief to act promptly to beat the deadline. If not, they could incur stiff penalties on late submissions and interest on outstanding amounts, he said.
Msiza said that the same applies for underestimation of their taxable income and he warned that taxpayers should review the following to ensure they remain compliant.
Check your registration
Typically, anyone who earns income above the tax threshold from sources other than employment must register with SARS as a provisional taxpayer and pay provisional tax, even if they are employed full-time. Companies are automatically provisional taxpayers, said Msiza.
“However, some parties are excluded if they meet certain conditions so it’s best to check personally or through a tax professional familiar with current requirements. To be safe, they should also check their registration status directly with SARS.”
Understand Covid-19 relief
While many provisional taxpayers qualify for Covid-19 relief, some do not – such as those whose tax affairs are non-compliant, said Msiza.
“The ones who do qualify may defer a portion of their first and second-period tax payments, offering immediate relief to cash strapped taxpayers Normally, they would pay 50% of their total tax liability in the first period and the balance in the second period,” he said.
In the 2020/21 year, they can pay just 15% of their total tax liability in the first period, 65% in the second, and the remaining 35% in a third payment period.
Msiza said that provided all amounts are paid off by the end of the third period, they will not be subjected to penalties or interest.
“It’s important to understand that the tax obligation is only deferred and must be settled within the allowed timeframe,” he said.
Check your calculation
This standard advice is doubly important with Covid-19 relief.
Provisional taxpayers should note that the tax calculated is for the first half of the year, not the entire year.
However, the percentage of payment due is calculated against the entire year and not the current period.
“For those with sophisticated streams of income, the shift in percentages could lead to a gross miscalculation, resulting in unnecessary losses,” said Darren Britz, head of Legal at Tax Consulting SA.
Check your income
Even those with firm control of their finances may misunderstand how certain income is viewed under law, said Britz.
He highlighted cryptocurrency is not immune to taxation and will be treated in accordance with how it is acquired or disposed of.
“However, there are other complex financial instruments and arrangements whose resultant value may manifest as provisional tax,” says Britz. Again, he encourages those earners to approach their tax practitioner or tax attorney to avoid being penalised for evasion.
“With only a few days until the deadline, they must act now,” he said.