If you are a provisional taxpayer, these are some of the dangers you need to avoid
The deadline for the second provisional tax return is the end of February
Provisional taxpayers have until February 28 to file their second provisional tax returns, and there are certain pitfalls to avoid if you don't want a nasty surprise.
If you earn your income from a source other than traditional remuneration from an employer, you are probably a provisional taxpayer.
Provisional tax is not a separate tax from income tax, the SA Revenue Service (Sars) says on its website. Instead, it enables the taxman to collect your ordinary income tax during the tax year and avoid a large tax debt on assessment, the Sars says.
The taxman requires that as a provisional taxpayer, you make at least two payments in advance during the tax year, which are based on your estimated taxable income. Sars makes provision for an optional third payment at the end of the tax year, before your return has been assessed.
Online tax practitioner TaxTim says there are instances where you, as a salary earner, may be liable for provisional tax. On its website TaxTim says "if you earn non-salary income, for example rental income from a property, interest income from investments or other income from a trade or a small business you run, you will be a provisional taxpayer, even if you also earn a salary".
In its Budget 2018 Tax Guide, Sars says you do not need to pay provisional tax if your taxable income from a business will not exceed the tax threshold, currently R78,150 for the year for those under the age of 65; or you earn R30,000 or less from interest, dividends, foreign dividends, rental from the letting of fixed property and remuneration from an unregistered employer.
Marc Sevitz, the chartered accountant who co-founded TaxTim, says the payment due at the end of February is "backward looking".
"You need to square up with Sars. Your first provisional return was forward looking and you needed to estimate your income, now once you are probably sure, or almost sure what your income was, Sars expects you to settle," he says.
Sevitz says that "dealing with Sars can definitely trip you up".
TaxTim has compiled a few important pointers for provisional taxpayers to ensure you stay on the right side of the taxman.
• Do not offset losses: If you run a business or rental property that is running at a loss, you must not offset this loss against your other taxable income when calculating your estimated taxable income for your provisional return.
"This is because Sars may opt to ‘ring-fence’ the loss and therefore not allow it to be deducted from current income, so it’s always best to err on the side of caution and assume this is the route that Sars will follow," says Sevitz, as TaxTim.
• If you receive a salary but don’t pay PAYE, you are a provisional taxpayer. If you are employed but PAYE (pay as you earn) tax isn't deducted from your salary, then you are a provisional taxpayer, unless you earn below the tax threshold.
"An example where this may happen is if you work for a foreign employer who is not registered with Sars. Many taxpayers in this case simply declare their foreign salary annually on their tax return — however, if you haven’t paid provisional tax during the year, Sars will penalise you."
• Avoid a penalty for underestimating your tax liability: if you underestimate your earnings, you may face a penalty. If you earn R1-million or less, the penalty could be up to 20% of the amount by which your estimated provisional tax in your first and second returns fall short of 90% of the income tax you are found to be liable for when your return is assessed at the end of the tax year.
If you earn more than R1m, the penalty could be up to 20% of the amount by which your estimated provisional tax falls short of 80% of your assessed income tax.
• Avoid late payments: Sars is efficient at applying late payment penalties of "10% of the total tax payable even if you are only a day late", warns TaxTim. Sars will also add interest. Always check and mark the due dates.
• A late submission is treated as a 'nil' return: if you file your provisional tax return (IRP6) more than four months after the prescribed deadline, the revenue service will have considered that you entered a "nil" return.
"Unless your actual taxable income is, in fact, zero, this will result in the 20% under-estimation penalty being imposed."
• Submit a nil return rather than no return: even if you have earned nothing but are a provisional taxpayer, you should still submit a provisional (nil) return to ensure an unbroken filing history with Sars.
• Make a third ‘top-up’ payment to avoid interest: TaxTim explains that if you have realised after the tax year-end that you have underpaid your tax for the preceding year, it would be advisable to make a voluntary third payment by the end of September.
"Many people don’t do this and opt to rather pay the balance due a few months later when they submit their tax return," TaxTim says. However, the problem with this is you are charged interest on underpaid provisional tax on your tax assessment.
• Don’t overlook investment income and capital gains: too often, explains TaxTim, taxpayers do not consider their capital gains and interest until they declare them in their annual tax return and by then, it is usually too late to avoid the underestimation penalty on their second provisional payment.
• Keep your supporting calculations and documents: Sars may ask you to justify your estimate. If the revenue service is not satisfied they will increase the estimate and this is not subject to an appeal.
• Look at the calendar and take note of weekends or public holidays: if the due date for submission is a weekend day or public holiday, then file on the last working day prior to this date.
The second provisional return for 2019 is due on Thursday February 28.