As Benjamin Franklin said, "in this world, nothing can be said to be certain except death and taxes." While we here at Finvoke cannot really argue with the inevitability of taxes, the complexities of provisional tax submissions can leave many of us scratching our heads and reaching for the nearest bottle of Panados. Are you tired of struggling with filing your provisional tax returns? Do you find yourself with more questions than answers causing you to just give up and pay the fine or worse...no submissions at all? We know how confusing it can be to file provisional tax returns and that is why we have created this guide for some clarity on whether you need to submit provisional taxes or not, and to provide some guidance with your submissions.
What is provisional tax?
Provisional tax is not a separate tax. It's a tool used to pay taxes during the year instead of having a large amount due to SARS when you submit your income tax return (individuals) or corporate income tax returns (companies).
Essentially, provisional tax allows for the tax liability to be spread over the relevant year of assessment. Taxpayers must pay at least two estimated taxable income-based amounts in advance during the assessment year and may pay an optional third amount before the end of the tax year. During the assessment, the provisional payments will be offset against the liability for normal tax for the applicable year of assessment.
Who needs to pay for it?
If you earn a salary or remuneration on which PAYE is deducted, you're a non-provisional taxpayer who doesn't have to worry about filling provisional tax returns. Your contributions to SARS are deducted from your payslip, and all you have to do is submit an income tax return (ITR12) for each tax year.
But, if you earn income other than a salary or remuneration, you may be a provisional taxpayer, even if you also earn a salary. Prime examples include sole proprietors or individuals with side hustles.
If this is the case, you will need to declare your estimated taxable income on your provisional tax returns (IRP6) and pay the applicable tax.
There are some exemptions; if you only receive interest less than R23 800 and you are under 65, or you receive interest of less than R34 500 and you are 65 and older, or you receive exempt amounts from tax-free savings accounts, and no other income, you are not a provisional taxpayer.
Also, if you are a sole proprietor, the taxable income from running your business needs to exceed the tax threshold in order to be a provisional taxpayer. But remember, all of your taxable income needs to be taken into account in determining whether you exceed the tax threshold. For example, if you earn a salary and have a side hustle, the taxable income from your side hustle needs to be added to your salary to determine whether you exceed the tax threshold.
The tax thresholds for the 2024 year of assessment are as follows:
- R95 750 if you are younger than 65
- R148 217 if you are 65 and older and younger than 75
- R165 689 if you are 75 and older
Companies are automatically liable to pay provisional taxes.
When do I need to pay provisional tax?
To determine when provisional tax payments are due, we will look at an example of when you're an individual or a company with a year-end of February. In this case:
- your first provisional tax payment should be made within 6 months from when your year ends which will be 31 August 2023,
- your second provisional tax payment must be made by latest on the last business day of February 2024, and
- a third voluntary payment may be made on the last business day of September for individuals and companies with a February year-end, or within six months of year-end for companies in any other case.
How are provisional taxes calculated?
Provisional taxes are calculated and submitted on an IRP6 found on eFiling. When you request the return, you need to select the period for which you are doing the return.
The amount payable for the first period is based on an estimated tax liability for the full year, divided in half. If you are an individual, some of the information will be pre-populated and some of the calculations are automated. The general calculation is as follows:
Estimated gross income for the full year - estimated business expenses for the full year = estimated taxable income. Estimated taxable income x applicable tax rates = total estimated tax for the full year.
If you are an individual, then you will also be able to deduct from this your rebates, medical scheme fees, and additional medical expenses.
After taking all of the above into calculation, you will get your tax for the full year. As this is the first-period payment, the estimated tax liability will be divided in two. SARS automatically does this on the IRP6. From this, individuals can then also deduct employees' taxes they paid for the first 6 months as well as any foreign tax credits for the first 6 months.
The final amount declared and payable will then reflect on your IRP6, and the submission and payment can be made.
The exact same process is followed as with the first-period calculation. The tax payable is calculated for the full year. However, the employee tax and foreign tax credit deductions available to individuals are now for the full year, and not only the first 6 months as with the first period.
Furthermore, the first provisional tax payment is also deducted from the total amount payable.
Third period (voluntary)
Same calculation as with the second period, only the 1st and 2nd provisional tax payments are deducted from the liability amount.
Other amounts could also come into play, like penalties and interest on late payments and unusual amounts, however, it would be best to consult with a professional in these circumstances.
Tip - SARS is loaded as a public beneficiary on most banking apps. So when you wish to make a payment, and you do not have your banking details loaded for payment directly from eFiling, just go to your banking app -> make payment to a public beneficiary -> select SARS -> choose Sars-Prov -> pay the amount per the IRP6 and add the reference number per the IRP6 to the recipient reference. Adding this reference is crucial in order for SARS to know to which account to allocate the payment.
In order to ensure that you don't get into trouble with SARS, it is important that you pay your taxes on time.
Failing to submit or pay your taxes on time will incur penalties. It is also important to try and keep your estimation as accurate as possible because SARS could also impose under-estimation penalties.
Late payments are no joke—they attract a penalty of 10% on the total tax amount and can be levied for either or both payment periods (August and February). On top of that, SARS will add on interest at their prescribed rate.
So always try to pay on time and avoid running into trouble. Also, it's important to keep in mind that if your payment deadline falls over a weekend or on a public holiday, you must make it at the latest on the last working day before the weekend or public holiday to avoid any late payment penalties.
Calculating provisional tax involves estimating your annual taxable income. To prevent wild guesses or intentionally low numbers, SARS hits you with some heavy fines if you underestimate.
These penalties are imposed if your actual taxable income, as calculated in your final tax returns ends up being higher than the estimated income you provided on your second provisional return.
Now, here's the interesting part: The penalty amount differs for taxpayers earning more than R1 million compared to those earning less. So it is important to keep the following in mind:
- For taxable income of R1 million or less, an under-estimation penalty comes into play when your second provisional return is less than 90% of your actual annual taxable income and is less than your "basic amount" (basic amount is the taxable income on your most recent income tax assessment)
- For taxable income of R1 million or more, an under-estimation penalty comes into play when your second provisional return is less than 80% of your actual annual taxable income. Here the basic amount is not considered.
The above is just an FYI for you to keep in mind when submitting your provisional taxes. Calculating the penalty amount can be quite technical and is more of a "we'll cross that bridge when we get there" type scenario.
If you want to keep your business running smoothly and your nose clean, it is important that you pay your taxes on time. Provisional taxes can seem more intimidating than they really are, and eFiling is quite user-friendly. Remember, at Finvoke, we're not just about numbers and google sheets. We're here to partner with you on your financial journey, helping you reach your goals. If you have any questions about your provisional taxes or anything else related to your eFiling, or SARS in general, reach out to us at email@example.com