What you need to know about provisional tax to avoid penalties

 ·17 Aug 2019
Online tax

The deadline for the first provisional tax return is Friday 30 August and taxpayers are reminded that not only do they have to submit their return by this deadline, they also have to make the payment on the same day.

“Late submissions, late payments and missed deadlines will attract harsh penalties and interest,” said Marc Sevitz, co-founder of TaxTim.

Provisional tax is a payment mechanism which is intended to assist businesses and individuals to meet their normal tax liabilities. Provisional tax payments are based on the estimated taxable income for the year. The first payment is due at the end of August 2019 and the second is due at the end of February 2020, with a possible third top-up payment in September 2020.

Who is a provisional taxpayer?

Provisional tax payers receive income, other than a salary or remuneration from an employer, stated Sevitz. They run their own businesses, such as freelancers, sole proprietors and independent contractors. Taxpayers who are employed, but receive rental income or interest income from investments, may be obliged to register as a provisional taxpayer if certan conditions are met.

The system and how it works

“If you are self-employed and earn taxable income above the annual threshold of R79,000 for the current tax year, you must be registered as a provisional taxpayer. If you are employed and also earn additional freelance income you will be a provisional taxpayer. If your additional income consists only of rental and/or interest income which exceeds R30,000 per year, you will be a provisional taxpayer,” Sevitz said.

The period and payments

The first period for 2020 includes the six months from the start of the new tax year (March 2019). If you make your first payment after the deadline, the South African Revenue Service (SARS) will automatically levy a penalty of 10% of your tax due. SARS also charges interest at 10.25% of the tax due.

“If you fail to submit a return, SARS may estimate your tax liability based on prior returns. SARS may also ask you to justify your estimates and can increase it if they are not satisfied with the taxpayer’s calculation. It is important to keep any supporting calculations,” the tax expert said.

What to remember

Many taxpayers only enter the turnover – the estimated gross income for the current tax year – and estimated taxable income – turnover minus estimated expenses for the current tax year – for the six months.

“Taxpayers must estimate their earnings for the 12 months and since they know what they have earned in the first six months, it is possible to simply double the amount if they think their earnings will be consistent for the rest of the year. The second provisional tax payment in February is the most important one, since taxpayers will be subjected to harsh under-estimation penalties if they got it wrong,” said  Sevitz.

What you need

TaxTim advises provisional taxpayers who have to file their first return by the end of this month to have their supporting documents ready should SARS request them.

These documents include:

  • the income statement for the business which will reflect the income and expenses for the first six months of the tax year; payslips for the period;
  • a schedule of your rental income and expenses for the period;
  • statements from financial institutions where you hold investments that reflect the interest or capital gains earned on the investments; and
  • invoices for the expenses claimed.

Even if you owe no tax but are a provisional taxpayer, you should still submit a provisional (nil) return to ensure an unbroken filing history with SARS, Sevitz said.

Read: As a South African citizen you are potentially liable to pay tax even if you’re not living in the country

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