Seasoned provisional taxpayers – those people who earn income from sources other than, or in addition to a regular ol' salary or traditional payment from an employer - are all too familiar with the process of estimating taxable income and submitting provisional tax returns. Not once - but twice a year!
Yes, it's a bit painful (although TaxTim makes it super easy) but entirely necessary if you don't want to be lumped with penalties from SARS. And who needs that? No-one.
So let's have a look at the most common penalties provisional tax payers face and how to avoid them.
1. Late Payment Penalty
Late payments are subject to a penalty of 10% of the total tax amount payable, and will be levied for either, or both payment period (August and February). Not only that, SARS will lump on interest at their prescribed rate of 9.25% per annum.
SARS is exceptionally quick to slap on this fine - even if you're only a day late - so be sure to have an alert on your calendar (or sign up to receive our email reminders) so that you never miss the payment deadlines of end August and end February.
2. Under-Estimation Penalty
A unique aspect of provisional tax is the need to estimate your annual taxable income. To prevent people from thumb-sucking these figures, and reporting lower numbers, SARS imposes rather hefty under-estimation penalties.
This penalty could be levied if your if your actual taxable income, i.e. your total income less tax deductions, calculated in your final tax return (ITR12) is more than the estimated income submitted on your second provisional return (IRP6).
The penalty amount is different for taxpayers whose taxable income is more than R1m than those earning less than R1m. So let's have a look at each in more detail.
If your taxable income for the year is R1m or less, you're at risk for an under-estimation penalty if your estimate in your second provisional return turns out to be less than 90% of your actual annual taxable income on your ITR12, and is also less than your 'basic' amount. Your 'basic' amount is your taxable income on your most recent, previous assessment.
The penalty amount will be calculated at 20% of the difference between the normal tax payable on your estimate and the lesser of:
John is a provisional taxpayer and he's required to submit his second provisional tax return for the 2015 year of assessment, i.e. for the period 1 March 2014 to 28 February 2015.
John’s 'basic' amount per his 2014 Tax Assessment (ITA34) is R300,000. Because John has recently gone on an overseas holiday, his cash flow is tight in February and he hasn't budgeted properly for the tax payment he will need to make. He thinks it would be a good idea to understate his taxable income a bit in order to reduce his tax bill in February. He completes and submits his second provisional return in February 2015 with a taxable income amount of R200,000.
In August 2015, John goes on to complete his 2015 tax return (ITR12) and receives his Tax Assessment (ITA34) which puts his actual taxable income at R255, 000 for the year.
His estimate of R200,000 was less than 90% of actual taxable income (90% X R255,000 = R229,500) and also less than his 'basic' of R300,000. Unfortunately, John wasn't aware of the rules around provisional tax estimates and by trying to reduce his tax burden in the short term, he's being penalised by SARS.
His penalty is calculated as follows:
Tax on 90% of actual taxable income (R229,500) = R32,430
Tax on 'basic' (R300,000) = R51,421
The lesser amount of tax is R32,430, so SARS will use this amount in the penalty calculation.
Total tax paid (first plus second provisional tax payments) = R25,055 (Use our handy income tax calculator to work out your tax obligation)
Calculation of penalty = R32,430 – R25,055 = R7,375
If your taxable income is more than R1m, you need to ensure that your estimate of taxable income on your second provisional return is no less than 80% of your actual taxable income. SARS don't consider the 'basic' amount when taxpayer's taxable income is more than R1m.
The penalty will be calculated at 20% of the difference between the normal tax payable for your estimate and tax calculated on 80% your actual taxable income.
Let's work this out with the help of another example.
Richard is a provisional taxpayer and as such he's required to submit his second provisional tax return in February 2015.
He's been distracted and busy as he's setting up a new branch for his business and his accountant, who normally prepares his provisional return, has taken leave. To add to his stress, he hasn’t had the time to review the February management accounts for his business yet either. He's under pressure and so decides to give a rough estimate of his taxable income, erring on the lower side, with the intention of topping up the underpayment when he files his annual tax return.
He imagines a taxable income of R1,200,000 is a reasonable estimate, so he adds it to his second provisional return and submits in February 2015.
Come August 2015, he completes his Income Tax Return (ITR12) and receives his Tax Assessment (ITA34), which reflects his actual taxable income of R1,600,000 for the year - and a penalty of R6,400.
Because Richard was not aware of the risk of under-estimating his actual taxable income, his estimate of R1,200,000 was less than 80% of his actual taxable income of R1,600,000. (80% X R1,600,000 = R1,280,000). SARS has calculated his penalty as follows:
Tax on 80% of actual taxable income (R1,280,000) = R425,246
Total tax paid (first plus second provisional tax payments) = R393,246 (Use our handy income tax calculator to work out your tax obligation)
Calculation of penalty = R425,246 – R393,246 = R32,000
Penalty amount = 20% of R32,000 = R6,400
Bear in mind that, in either instance, SARS can also lump on 9.25% interest on the underpaid tax amount, adding to monetary waste. In order to avoid these pointless under-estimation penalties, never simply guess a number for SARS. Apply effective estimation measures and, where possible, use your previous year as a base point. SARS can ask you to justify your estimations, so it's a good idea to keep proper records of your calculations and input data.
3. Late Submission Penalty
SARS doesn't mess around when it comes to late submissions of tax returns and / or payments. Even a day late is considered late enough to apply a penalty. 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. This rule came about for tax years starting 1 March 2015.
4. Late Payment and Under-Estimation Penalty
What would happen if you've been penalised for a late payment on one of your provisional tax payments, and then your annual assessment shows that you've under-estimated your taxable income too?
Fortunately SARS won't demand the full amounts of both penalties applicable, but you're still in for an additional charge. In this case, the under-estimation penalty will be reduced by the late payment penalty already applied.
Let's look at John again as an example.
We'll pretend his second provisional payment of R12,000 was late by a few days. SARS applied the 10% late payment penalty, adding R1,200 to John's statement.
His end of year assessment shows he's under-estimated his taxable income and is liable for a penalty of R1,475.
Considering the late penalty has already been applied though, SARS will deduct this amount from his under-estimation penalty, therefore (R1,475 – R1,200) = R275 will be added to his penalties for the year.
These rules and penalties may seem harsh, but they exist to deter taxpayer's from deliberately postponing or intentionally underpaying their tax.
But sometimes things happen outside of your control. Perhaps your bank experienced downtime on the 28th February and caused your payment to reach SARS late!
If you have a valid and genuine reason for paying or submitting late, and you can provide evidence to back up your case to SARS, it's likely that they'll reverse your penalty – or at least part thereof.
Our parting advice to avoid expensive penalties is to ensure that you're not leaving your tax returns – provisional or annual – until the last minute. Eliminate the need for guesstimations by keeping a record of plausible projections of your annual income, and have reminders on email or your calendar to notify you about important tax dates.