The South African Revenue Service (SARS) is considering adjusting the rules for provisional tax to ensure that people who pay little or none of this tax but who are considered to be provisional taxpayers are exempt from registering for the tax.
This is according to the Budget Review, which cites dormant companies as an example. All companies are required to register for provisional tax, but dormant companies obviously have no income to declare.
The Budget Review also notes that there are anomalies in the law that require taxpayers who are technically exempt from provisional tax to register as provisional taxpayers. To rectify this, SARS plans to amend its definition of a provisional taxpayer.
Currently, individual taxpayers under the age of 65 need to register as provisional taxpayers if they earn income that exceeds R20 000 from sources other than a regular salary or pension. These sources include rental income, taxable interest income, taxable dividends (usually from foreign companies), royalties, a taxable capital gain and any income you were paid by an employer from which Pay As You Earn tax was not deducted.
The onus is on you to register as a provisional taxpayer and pay your provisional tax by the due dates. Failure to do so can result in interest being levied, and claiming you were not aware of your obligations will not get you off the hook.
Provisional tax is a system of early tax collection designed to ensure that if you earn a certain amount of untaxed income, you pay tax on it during the tax year and that SARS does not have to wait until the end of the tax year to get its dues from you.
SARS is aware that you may not know what you will earn for the year ahead. As a result, you are expected to make a reasonable estimate. To prevent taxpayers abusing these estimates, SARS has some rules about how you should estimate your income for the year (see "How to estimate your income for provisional tax").
Remember that you are entitled each year to earn a certain amount of interest income without paying tax.
There are exceptions to the general rule on who needs to register as a provisional taxpayer:
- If you expect to earn less than the tax threshold (the amount you are allowed to earn without paying any tax at all), your interest, taxable dividends or rental income can exceed R20 000 for the tax year; and
- If you are over the age of 65, and your income consists exclusively of remuneration, interest, dividends or rental income and is less than R120 000 a year, you do not have to register as a provisional taxpayer.
If you qualify as a provisional taxpayer, you must apply in writing to be registered as a provisional taxpayer within 30 days of becoming liable for the tax.
It is best to register as soon as you are aware of a payment that makes you a provisional taxpayer so you are ready to file a return by the next due date and pay what you owe.
Interest and penalties
If you do not register as a provisional taxpayer and then file your income tax return at the end of the tax year - possibly six months after the end of February - as much as a year could have passed after your first provisional tax return should have been submitted. You could find SARS adding interest to what you owe dating back to that time.
Interest is levied at the official interest rate of 10.5 percent.
In addition, you could be charged a penalty for failing to submit estimates of your taxable income. The penalty starts at R250 a month for taxable income of less than R250 000. The penalty is based on the estimate you should have submitted.
If you fail to remedy your non-compliance within 30 days of the date by which you are, say, due to submit a return, the penalty will increase automatically by the same amount each month, but it is capped after three years. You may also be liable for a penalty equal to 10 percent of the tax you should have paid.
HOW TO ESTIMATE YOUR INCOME FOR PROVISIONAL TAX
You must estimate your income for the year ahead with a reasonable degree of accuracy.
The tax laws were amended recently to provide for two different levels of accuracy with which provisional taxpayers must comply:
- Taxpayers who earn R1 million or less a year
are expected to estimate their tax in their second provisional tax return and pay tax accordingly, using either the "basic amount" or income estimated to within 90 percent of the actual amount they later declare for the year. The "basic amount" is the income assessed in your most recent tax return, excluding certain irregular types of income, such as lump sum withdrawals and capital gains.
If your last tax assessment was more than a year ago, the basic amount must be increased by eight percent a year.
Failing to estimate your income within these limits will result in an automatic penalty equal to 20 percent of the difference between the estimate and the actual amount you earn for the tax year. The South African Revenue Service (SARS) can waive the penalty if you did not deliberately or negligently understate your income.
- Taxpayers who earn more than R1 million a year
are expected to estimate their income in their second provisional tax return to within 80 percent of the amount they will actually declare for the year. Although they can consider the "basic amount" when estimating their income, they cannot rely on it in the current year's second provisional tax return to avoid a penalty. Should your income for the year differ by more than 20 percent from what you declared in your second return, SARS can impose a penalty.
DATES TO REMEMBER
Individuals who pay provisional tax must remember these dates:
- August 31
, which is the due date for your first provisional tax return. You must estimate your full income and the full tax you will have to pay on it for the current tax year, and then pay half the tax by August 31 and the other half by the end of February.
If you earn income that makes you a provisional taxpayer, as well as remuneration on which your employer is levying Pay As You Earn, you must declare that remuneration and the employee's tax you have paid to August 31.
The provisional tax return is based on your taxable income - that is, your income after exemptions and deductions.
- February 28
(or February 29 in the case of a leap year), which is the due date for your second provisional tax return.
By February 28 or 29, you should have a better idea of your income for the tax year that ends on either of those dates.
- September 30
. If your previous estimates were out and you want to avoid paying interest and penalties, you need to submit a third return and make the relevant payment. If you are sure your estimate has the accuracy required by the South African Revenue Service, you do not need to submit a third provisional tax return by September 30.