We have seen that SARS has become stricter with their implementation and adherence to the income tax legislation over the past few years. Tax compliance has become the latest buzz word, as has become evident from the recent Nugent Commission Inquiry.
Sentinel would like to bring to your attention a very important aspect of income tax (namely provisional tax), which could be applicable to you. If not handled correctly, this could lead to possible penalties and interest, which we all would like to avoid.
This letter serves as a broad overview of provisional taxes and an introduction and explanation of the principles of it for a natural person and should not be used as a binding or comprehensive document, as each person’s situation can be different.
What is provisional tax: Provisional tax is not a separate tax from your income tax, but merely a mechanism by SARS to pay your normal income tax liability in advance. This happens in at least two instalments during each tax year, for that tax year. Therefore, provisional tax is an advance payment of a taxpayer’s normal tax liability (similar to PAYE) and this is done to ease the cashflow burden of a large tax liability on assessment.
Who is it for: A provisional taxpayer is someone who earns “other income” besides remuneration from an employer (including salary, pension and annuity income) such as:
- rental income,
- taxable local and foreign interest,
- taxable foreign dividends,
- taxable trust distribution / attribution consisting of the above
- remuneration from an employer not registered for PAYE, or
- other trading / business income.
A person who earns income from carrying on a business will never be exempt from provisional tax, irrespective if they make a profit or a loss or at what level their total income is.
For persons who don’t carry on a business and receive the afore mentioned “other income” the following exemptions apply:
- If that person’s total taxable income (employer income plus “other income”) will not be more than the tax threshold for 2019 tax year:
- taxpayers below age of 65 – R78 150;
- age 65 to below 75 – R121 000 and
- age 75 and over – R135 300; or
- the taxable “other income” of that person (consisting of interest, foreign dividends, rental from letting of fixed property and remuneration from an unregistered employer) will not exceed R30 000 cumulative during that year of assessment;
This means that if the sum of all the above-mentioned types of taxable “other income” exceed R 30 000 in a tax year and your total taxable income is above the tax thresholds, you are a provisional taxpayer.
When are the payments to be made: A provisional taxpayer is generally required to make two compulsory provisional tax payments: one six months into the current year of assessment (31 August 2018 – called period 2019/01) and the other at the end of the year of assessment (28 February 2019 – called period 2019/02). Taxpayers may make an additional voluntary payment, generally known as the third or top-up payment (30 September 2019 – period 2019/03), for the purpose of avoiding or reducing possible interest that could arise should their first two provisional payments be inadequate. A late or under-payment will result in penalty and interest, even if it’s just one day late.
How is it calculated and submitted to SARS: Provisional tax payments are calculated on estimated taxable income, including current taxable capital gains, for that particular year of assessment. This estimated taxable income amount is submitted to SARS on an IRP6 return (the detail is not reflected on the return, but SARS can call for a detailed calculation if they choose to do so). An IRP6 return must be submitted for both the first and second period, even if the amount of the provisional tax payment is nil. Non-submission can lead to various penalties.
What about Capital gain: Taxpayers realise capital gain by disposal of an asset such as selling a property or shares etc. Incurring taxable capital gain as such doesn’t make you a provisional taxpayer (although this can change in the future). However, if you are a provisional taxpayer, you will have to include the taxable capital gains realised in that tax year in your estimated taxable income.
Who’s responsible: The onus is on each taxpayer to determine if they are liable for provisional tax submission, and subsequently to request and submit an IRP6 return via e-filing. This needs to be determined each year, during the relevant tax year.
SARS will only determine on assessment of each year’s final tax return if they view you as a provisional taxpayer for that year or not. Meaning your provisional taxpayer status could change a few times during future years, depending on your circumstances.
What if I’m not sure: In some cases, it’s difficult to determine with certainty if you will exceed the exemption threshold in a certain year. In that case our advice is to rather view yourself as a provisional taxpayer, do the calculation and submit the IRP6 returns. The other alternative is to not submit and run the risk of possible penalty and interest, should SARS then deem you to have a been a provisional taxpayer for that year of assessment.
Variable transactions: There are certain transactions or types of income which can fluctuate your taxable income and push you either just over or just under the exemption thresholds. Usually these are rental income and interest as type of income. Transactions would usually be the disposal of an asset (like a property / shares, or even lumpsum withdrawals of retirement funds) which results in a capital amount which usually earns interest. Also, when a deposit has been paid for the purchase of a property it earns interest and could just push you over the exemption threshold of R 30 000.
Trust distributions / attributions: Usually the income distributed / attributed to beneficiaries of a trust are determined after year end, when the annual financial statements are drawn up. Final tax planning is done at this stage while looking at various aspects of the trust (incl. loans subject to S7c) and the beneficiaries. It can happen that the taxable income allocated to beneficiaries now exceed the exemption threshold. Thus, we advise that beneficiaries of a trust which generates income to also rather view themselves as provisional taxpayers, do the calculation and submit the IRP6 returns.
Calculations and payments: Twice a year (for each period being 01 and 02) we will send out communication to all our provisional tax clients to request information for the estimated taxable income calculation. Subsequently we will send you the calculation and relevant payment instruction for your approval.
Now what: There is no longer a registration or deregistration process to be a provisional taxpayer. If you now are a provisional taxpayer, please inform us timeously, so that we can activate your provisional tax type on e-filing in time for the 2019/02 provisional tax return submission due 28 February 2019. We will then update our system to classify you as a provisional taxpayer and as such you will receive periodic communication from us in that regard.
Your tax, your responsibility: The responsibility is on you to inform us of any changes in your provisional tax status – to inform us of variable or unusual transactions and provide us with the relevant information timeously.
You are not alone: We are here to assist and help you in any way we can. If you are unsure, pop us an e-mail or a call and let us assist you.
Sources: “Guide for Provisional Tax – 2019” as issued by SARS, the SARS website and the Income Tax Act, No.58 of 1962 as amended.