Provisional Taxes, the who, what, when and why?!
Did you know that if you receive an income other than a general traditional salary (paid to you by an employer), it is most likely that you would have to register and submit as a provisional tax payer!
Do you own a business and are not sure what provisional taxes are and where to begin?
What exactly is a provisional tax payer, and how do you know if you have to submit and register as one?
Well, you have come to the right blog to answer your questions!
What is provisional tax?
Provisional tax is not a separate tax from income tax. It is a method of paying your income tax in advance, to ensure that the taxpayer or company does not remain with a large tax debt at year end when they submit their annual income tax return. Provisional tax allows the income tax payments to be spread over the relevant year. As an individual, provisional tax registration and submission needs to happen when you earn anything that is considered to be non-salary income/income from an unregistered employer.
What is considered to be non-salary income/income from an unregistered employer?
This income can be a number of things, the easiest example of this is rental income for any properties that you may own as an investment (must earn more than R 30 000 per year). It can also be any other income that you get that is above and beyond your general salary such as a side business that you may have that generates some income but is not your main salary. Basically, when you earn anything above and beyond your basic salary (remuneration) from an employer, you will need to register for provisional tax.
It is important to note that receiving income, such as the below, you do not have to register as a provisional taxpayer:
- If your income does not exceed the tax threshold for the tax year (R 78 150 for individuals younger than 65. R 121 000 for individuals 65 or older, but younger than 75.); or
- If you receive interest, local dividends or foreign dividends that will be R 30 000 or less for the tax year; or
- You have income in a tax free savings account.
It is important to note that Companies automatically fall into the provisional tax system. However, there is no longer an automatic registration or de-registration process from SARS. The onus is on the taxpayer to determine if he or she is liable for provisional tax as well as the registration if needed.
But why do you have to pay provisional tax?
Well, it is simple, provisional tax helps you manage your income tax liability for the year. You pay in installments during the year instead of a lump sum at the end of the year. (Let’s also be honest with ourselves here, it is a method for SARS to not only ensure payment of annual income tax, even if the income tax return is submitted late, but also to manage THEIR cash flow.)
Remember though, if you earn more than R1m, the penalty could be up to 20% of the amount by which your estimated provisional tax falls short of 80% of your assessed income tax for the year.
Also to note, avoid late payments, SARS is efficient at applying late payment penalties of 10% of the total tax payable, even if you are only a day late.
So when should you submit and or pay your provisional tax?
- The first provisional tax payment must be made within six months of the start of the year of assessment. For years of assessment starting March, this will be 31 August of that year.
- The second payment must be made no later than the last working day of the year of assessment. This will be 28/29 February.
- The third payment is voluntary and may be made:
o within six months of the year of assessment, in any other case.
If you have any questions or want to know more about provisional tax, please contact us, we would be than happy to assist!
References: sars.gov & taxtim.com