Provisional tax is a method of paying income tax liability in advance, to ensure that the taxpayer does not have a large tax debt on assessment at the end of the year. Provisional tax allows the tax liability to be spread over the relevant year of assessment. It requires the taxpayers to pay at least two amounts in advance, which are based on estimated taxable income during the year of assessment. The first provisional tax payment is due and payable six months from the beginning of the year of assessment, and the second provisional tax payment at the end of the year of assessment.

It is important to note that provisional tax is not a separate tax from income tax, and that it merely constitutes an advance payment of normal tax liability.

Estimated Taxable Income

The question you might be asking yourself is “how can I pay my tax in advance before I know exactly how much income I have made for the year?” This is where estimated taxable income comes in. Provisional tax is paid based on your estimated taxable income for the year. If you have monthly management accounts for your business, then this exercise becomes very easy as these can be used during this process.

Calculating your estimated taxable income is a technical process and to prevent people from thumb-sucking these figures, and reporting lower numbers, SARS imposes rather hefty under-estimation penalties.

If your taxable income for the year is R1 million or less, you are at risk of a 20% under-estimation penalty if your estimate in your second provisional tax return turns out to be less than 90% of your actual annual taxable income. If your taxable income is more than R1 million, you need to ensure that your estimate of taxable income on your second provisional tax return is no less than 80% of your actual taxable income.

In addition to the 20% under-estimation penalty SARS is likely to also charge 10% interest on the underpaid tax amount.

In order to avoid under-estimation penalties and interest, never simply guess a number for SARS. Apply effective estimation measures and, where possible, use your previous year as a base point.

Late Submissions

Another way to waste your money is by submitting your provisional tax returns late and/or making payments after the deadline. Even a day late is considered late enough to apply a penalty by SARS. If you file your provisional tax return after the deadline, SARS considers you to have submitted a ‘nil’ return – or one where your estimate of taxable income is equal to zero. Unless your actual taxable income is, in fact, zero, this will result in the 20% under-estimation penalty being imposed.

Here are some tips:

• Never make a nil or zero declaration on your provisional tax returns when your business has been operational during the year and there is a possibility of tax liability on final tax assessment.
• Avoid thumb-sucked or baseless taxable income estimates.
• Always start by submitting provisional tax returns prior to submitting income tax returns, even if you have already missed the deadline for the provisional tax return submission. Otherwise you may inevitably trigger an underestimation penalty.

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