With the tax year-end only a few days away, provisional taxpayers must remember to make their second provisional tax payment. Danielle Luwes, Tax Director at Hobbs Sinclair Advisory, explains what is possibly the most mis-understood taxation in South Africa.

Provisional tax mandates that taxpayers with non-salary income make advance tax payments throughout the year, thereby avoiding a lump-sum tax bill at the end of the financial year.

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

Who is a provisional taxpayer?

To state it simply, anyone who receives income other than remuneration, is a provisional taxpayer, provided that certain requirements are met.

More technically, a provisional taxpayer is defined as:

• A natural person who derives income other than remuneration, allowances or advances. This also includes individuals who receive remuneration from an employer not registered for employees’ tax (for example, an embassy is not obligated to register as an employer for employees’ tax purposes).
• A company.
• Certain trusts.
• A person who has been notified by SARS that they are a provisional taxpayer.

Common examples of provisional taxpayers include (but are not limited to):

• Freelancers, consultants, and business owners.
• Investors earning rental income, interest, dividends above the exemption threshold.
• Companies and certain trusts.

Who is not a provisional taxpayer?

You are not a provisional taxpayer if you don’t 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.

The following are also not provisional taxpayers:

• Deceased estates.
• Approved public benefit organisations.
• Approved recreational clubs.
• Body corporates and share block companies.
• Small business funding entities.
• Associations approved by the Commissioner under section 30B (2).

Key deadlines and payment structure

Provisional tax is payable in two mandatory instalments, with an optional third payment to avoid interest charges. The deadlines are as follows:

Missing these deadlines can result in penalties. SARS imposes a 10% late-payment penalty along with interest on outstanding amounts, which can be a costly mistake for businesses and individuals alike.

Provisional tax is based on your estimate of what your actual taxable income for the financial year will be. Taxpayers must calculate their estimated tax liability as accurately as possible and make payments accordingly.

Here’s how to do this:

1. Estimate total taxable income for the year, including salary, business profits, rental income, investment returns and any other applicable income.
2. Deduct allowable expenses and tax exemptions.
3. Apply the relevant tax rate to calculate total tax due.
4. Subtract any PAYE already deducted (if applicable) to determine the provisional tax payable.

Make sure you don’t underestimate your taxable income, because SARS may impose 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 [the lower of these amounts apply] for income under R1 million.

If you underestimate your income, SARS enforces a 20% penalty on the resulting shortfall.

SARS can request a recalculated estimate if they believe the estimated income is too low or possibly inaccurate. If your declared income is substantially lower than in previous years, make sure that you can justify your estimate, otherwise you could be liable for penalties.

Plan for your provisional tax liability

To avoid any penalties, it’s a good idea to proactively plan by having an 18-month tax forecast prepared so that you have sufficient cash flow for meeting your tax liabilities. You can make a top-up payment in September to correct any shortfalls and avoid unnecessary penalties.

You should ensure that your payments reach SARS by the due date to avoid penalties:

• Late payments attract a 10% penalty.
• SARS charges interest (currently 11.5% per annum) on unpaid amounts. The interest rate on outstanding taxes can be found on the SARS website)
• Payments via SARS eFiling should be arranged in advance to avoid delays.

Provisional tax is an essential part of tax compliance for business owners, freelancers 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 your estimated income throughout the year can help you avoid an unexpected tax shock when it comes time to file your return. It’s always a good idea to consult a tax professional to help you ensure that you are compliant with the law and to optimise your tax efficiency.

This post was based on a press release issued on behalf of Hobbs Sinclair Advisory.