Deadline looming for provisional taxpayers to pay up

The deadline for provisional taxpayers is looming. Friday, 28 February, is the last day for taxpayers to pay provisional tax to avoid penalties from Sars.

Provisional tax mandates that taxpayers with non-salary income can make advance tax payments throughout the year, thereby avoiding a lump sum tax bill at the end of the financial year, which falls on 28 February, Danielle Luwes, tax director at Hobbs Sinclair Advisory, says.

“Provisional tax is not a separate tax but rather a mechanism that allows taxpayers to pay their tax liability in advance. This system helps taxpayers as well as Sars by improving cash flow management and reducing the risk of underpayment.”

Who is a provisional taxpayer? Luwes says a provisional taxpayer is anyone who receives income other than remuneration, provided that certain requirements are met.

“Most salary earners are, therefore, not provisional taxpayers if they have no other sources of taxable income. However, it is important to note that receiving exempt income does not make you a provisional taxpayer if you receive interest of less than R23 800 and are under 65, if you receive interest of less than R34 500 and you are older than 65 or if you receive an exempt amount from a tax-free savings account.”

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Definition of a provisional taxpayer

Luwes says a provisional taxpayer is defined as:

• A natural person who gets income other than a salary, allowances or advances. This also includes individuals who receive a salary from an employer not registered for employees’ tax, such as an embassy that is not obligated to register as an employer for employees’ tax purposes.
• A company.
• Certain trusts.
• Someone notified by the Sars commissioner that they are a provisional taxpayer.

Common examples of provisional taxpayers include freelancers, consultants, business owners, investors earning rental income, interest, or dividends above the exemption threshold, companies, and certain trusts.

You are not a provisional taxpayer if you do not conduct any business and your taxable income does not exceed the tax threshold for the tax year or will be R30 000 or less for the tax year from interest, dividends, foreign dividends, rental from the letting of fixed properties and remuneration from an unregistered employer.

Deceased estates, approved public benefit organisations, approved recreational clubs, body corporates and share block companies, small business funding entities and associations approved by the commissioner under section 30B (2) of the Income Tax Act.

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How to pay provisional tax

Provisional tax must be paid in two mandatory instalments, with an optional third payment to avoid interest charges. The deadlines are:

Luwes warns that missing these deadlines can result in penalties, as Sars imposes a 10% late payment penalty and interest on outstanding amounts, which can be a costly mistake for businesses and individuals.

Provisional tax is based on an estimate of taxable income for the financial year. Taxpayers must calculate their estimated tax liability and make payments accordingly. Luwes says you can do this by:

• Estimating your total taxable income for the year, including salary, business profits, rental income, investment returns and any other applicable income.
• Deducting allowable expenses and tax exemptions.
• Applying the relevant tax rate to calculate total tax due.
• Subtracting any pay-as-you-earn (PAYE) tax already deducted (if applicable) to determine the provisional tax you have to pay.

“Sars can request a recalculated estimate if they believe the declared income is too low or inaccurate. Taxpayers should ensure their estimates are justifiable to avoid penalties,” Luwes says.

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Provisional taxpayers should watch out for these Sars penalties

She says underestimating their taxable income is a significant challenge for taxpayers, leading to inadequate provisional tax payments.

“Sars may impose additional penalties if the second provisional tax payment is less than 80% of the final assessed tax liability for income over R1 million or 90% of actual taxable income or the basic amount for income under R1 million with the lower of these amounts applying.

“In cases where taxpayers underestimate their income, Sars enforces a 20% penalty on the resulting shortfall.”

Luwes says you can avoid these penalties. “It is always better to proactively plan by having an 18-month tax forecast prepared to ensure sufficient cash flow for meeting your tax liabilities. Taxpayers can make a top-up payment in September to correct any shortfalls and avoid unnecessary penalties.”

She says taxpayers should ensure that their payments reach Sars by the due date to avoid penalties. Late payments attract a 10% penalty. Sars also charges interest (currently 11.5% per year) on unpaid amounts. It is also better to arrange payments via Sars eFiling in advance to avoid delays.

According to Luwes, provisional tax is an essential part of tax compliance for business owners and investors in South Africa.

“Understanding the deadlines, calculation methods and potential penalties can help taxpayers manage their obligations as cost-effectively as possible.

“Proper planning and regular reviews of estimated income throughout the year can save taxpayers from unexpected tax liabilities. Working with a tax professional ensures compliance and optimal tax efficiency.”