Filing a provisional return is more PT, not more tax
You can be a provisional taxpayer even if you are a salaried employee
If you earn income that isn’t taxed, you may need to register as a provisional taxpayer, which means more work for you — as in more deadlines, rules and potential pitfalls — but it doesn’t mean you pay an additional tax.
Grant Edmond, an accountant at Colourful Accounting, says taxpayers often mistakenly think of provisional tax as “another” tax.
Provisional tax is not a separate tax from income tax, the SA Revenue Service (Sars) says on its website. It’s a method of paying income tax in advance when you earn money from which tax is not deducted by an employer and paid over to Sars, as is the case when you earn a salary.
“Salaried employees pay PAYE on a monthly basis and are generally not provisional taxpayers. All companies are provisional taxpayers. This is because they do not pay income tax when they receive money from their customers; the tax on this income is paid to Sars ... as provisional tax,” writes accountant Daniel Baines in his book How To Get a Sars Refund.
If you’re earning income from a property that you let, interest income from investments or other income from freelance work or a small business you run, you may earn enough that Sars would like to get the tax during the tax year.
You can be a provisional taxpayer even if you are a salaried employee, if you earn enough additional income from which no tax is deducted during the year.
You need to know what the limits are because one pitfall of the provisional tax system is the failure to register as a provisional taxpayer when you need to and the penalties you may incur for omitting to do so.
A key number is R30,000 — if you earn less than this amount of taxable rental income, interest income or dividends, you don’t need to register as a provisional taxpayer. You can just declare these amounts on your regular annual income tax return. And if you earn more than this amount but you earn less than the tax threshold (R79,000 a year for people under the age of 65), you also don’t need to register as a provisional taxpayer, Baines says.
You must register if you earn any amount from a small business or from freelancing, or if you earn above the threshold and your taxable rent, interest or dividends exceed R30,000, he says.
You can make a top-up payment if your other two estimates were too low. Though this does not reduce any under-estimate penalty, it will reduce the interest owingGrant Edmond, an accountant at Colourful Accounting
You have to calculate your combined income streams to determine whether you have reached the threshold of R30,000 for taxable income, Baines explains.
“If you earn total interest to the sum of R50,000 in one tax year, you first subtract the interest exemption of R23,800 (assuming you’re younger than 65); this will give you a figure of R26,200. Your taxable interest income is, therefore, R26,200 (below R30,000), so you will not be required to submit provisional tax returns. The tax liability on this interest amount received will be payable when you file your income tax return, as it has not yet been paid — the interest amount of R26,200 is taxed at your normal tax rate.”
As Sars doesn’t want to wait until you fill in your return and are assessed before it receives the tax you owe on this income, so it asks you to declare these earnings twice a year on a provisional tax return — known as an IRP6.
Online tax practitioner TaxTim explains that this helps you to have an even cash flow and avoid paying one large, potentially crippling chunk of tax when you are assessed. Instead you pay provisional tax twice a year — at the end of August and the end of February the following year. You may again potentially pay more tax or get a refund when you are assessed.
At the end of the tax season (a January 31 deadline for provisional taxpayers), when you file your regular annual tax return — your ITR12 — the tax you paid in August and February will be credited against any tax Sars calculates you owe based on its assessment. You may have to pay in more, but if you have paid too much, you may be due a refund by Sars.
Edmond says taxpayers get confused about the deadlines that apply to provisional tax and forget that they need to file twice a year.
You need to file your first provisional tax return six months after the start of the tax year (August 31). You need to declare what you expect to earn for the year using what you have actually earned in the first six months of the year, together with a forecast for the remaining six months of the year. Tax is calculated on what you expect to earn in the year and half of it is payable with your first provisional tax return (less any tax your employer has already deducted and paid to Sars), Edmond says.
Your second provisional tax return must be filed by the end of the tax period (February 28), and again you estimate your taxable income for 12 months. The second provisional tax payment is still an estimate because the return is usually filed a few days or weeks before the tax year end, where not all financial information is accurately available. The final assessment is done when you submit your annual tax return, which must be filed before the end of January — a few days away for those who haven’t yet filed.
Another big pitfall for provisional taxpayers is underestimating your earnings, because this attracts a penalty, which can be as high as 20% of the amount you did not declare.
When you declare your income for provisional tax, you are declaring what you expect to earn for the current tax year and you may not know exactly how much you will earn, especially if you receive irregular income from freelance work, a small business or investments.
Sars therefore allows some margin for error, depending on how much you earn.
If you earn less than R1m a year, Sars expects your estimated income to be at least 90% of what you do finally earn and it may not be less than the income you declared the last time you submitted a tax return (this is known as “the basic amount”).
If you earn more than R1m a year, Sars expects your estimated income to be at least 80% of what you do finally earn.
If you do declare less than these amounts, Sars will penalise you and the penalty will depend on how far out your estimates of your income were.
The penalties can be harsh, so Sars gives you a third opportunity to fix your provisional tax estimate by filing a third provisional tax return. This must be done within six months of the end of the tax year. Edmond says you can make a top-up payment if your other two estimates were too low. Though this does not reduce any underestimate penalty, it will reduce the interest owing.