The due date for provisional taxpayers' first payment for the current tax year falls on August 29, the last working day this month.
Seasoned provisional taxpayers will be accustomed to the delicate balancing act required to ensure they do not pay too much or too little tax at this stage.
If they pay too much, the taxman only starts to pay interest - at 12 percent six months after the end of the tax year. If they pay too little, they could be liable for interest, which starts from the day the payment was due, at 15 percent annualised. Interest received is taxable but interest paid is not tax deductible.
Provisional taxpayers make two or three payments each tax year. The first payment for the 1998 tax year is due this month. The second is due at the end of February 1998. A third provisional tax payment can also be made at the end of September 1998. No extensions are granted to provisional taxpayers they can arrange terms of payment but will pay interest on outstanding sums.
The guideline for how much is due for a first provisional tax payment is usually spelt out in the IRP6 forms which were sent out in mid-July, Beric Croome, a tax partner at Kessel Feinstein, says.
The payment due is based on the taxpayer's last assessed income, and this is called "the basic amount". This is unlikely to be for the tax year ended February 1997 since assessments for provisional taxpayers are quite slow. The basic amount could be the income for the 1996 or even the 1995 tax year.
The first provisional payment is calculated by applying the income tax rates for the 1998 tax year to the basic amount, dividing the amount by two and deducting any PAYE already paid in the 1998 tax year.
The delay provides a bit of an arbitrage opportunity because in most cases, owing to inflation, a taxpayer's income rises each year, so the amount due as a first payment is likely to be less than half what will be due for the full year.
If you are an exception and expect your income in the current year will be less than shown in the last assessment, and intend to pay less than half the amount shown in your IRP6, you must write to the Receiver of Revenue setting out good reasons why you are paying less.
The second provisional payment is normally be based on the basic amount. If it is not and results in an underpayment, a penalty equivalent to 20 percent of the underpayment could be levied, and over and above that interest at 15 percent is charged on the outstanding amount. A third payment can be made in September based on actual income to eliminate any shortfalls.
Though taxpayers may attempt to weigh up the merits of withholding taxes and paying penalties and interest against the returns they can make from other forms of investment, Paul Wood, senior manager at Price Waterhouse, said there was little opportunity to speculate. For example, a taxpayer with an investment returning 20 percent before tax is only making 11 percent after tax using a 45 percent tax rate. This compares to 15 percent interest charged on outstanding amounts by the taxman. Unless a taxpayer was able to find a very high-yielding source of tax-exempt income he would lose out by withholding taxes. Besides, it is unethical to withhold your taxes.
Both Wood and Croome urged provisional taxpayers to keep money aside for their tax liabilities. They said the most popular short-term investment was to put the money in an access bond.
The advantage of an access bond for short-term savers is that it is tax-free. Not only are mortgage holders saving the 20 percent (or possibly two or three percentage points less) than is levied on outstanding home loans, but they are also saving the tax that would be levied on interest from other short-term investments.
Who are provisional taxpayers?
* Anyone who earns more than R1 000 taxable income a year which is not remuneration;
* Directors of private companies;
* Members of close corporations;
* Those notified by Inland Revenue that they are provisional taxpayers;
* All companies and all close corporations;
* Last year those who are, or will be, over 65 on the last day of assessment of the tax year were exempted from provisional tax if their income is not more than R50 000.