There is often confusion regarding provisional tax. What is it? Do I need to pay it? Why do I need to pay it? When is it due?
As most of us know, Pay-As-You-Earn (PAYE) tax is withheld from your salary monthly and paid over to SARS. But what happens if you earn other income, are self-employed, have a side hustle or are a registered company? How do you declare this income and ensure that SARS gets their cut?
This is where provisional tax comes in.
If you earn any income other than a regular monthly salary, you are required to register as a provisional taxpayer. There are two exceptions to this – if your only other income is from interest and it is less than R23,800 per year or if your taxable income is less than the threshold. Companies are automatically regarded as provisional taxpayers, except where specifically excluded.
Individuals and companies with a February year end are required to submit their provisional tax returns in August and February of the current financial year. Companies with an alternative year end are required to submit their provisional tax returns six months after (financial) year end and on year end. Basically, the returns are due every six months.
It’s important to remember that the first provisional tax return is only an estimate. In fact, you need to declare the income before the end of the period, so there could be uncertainty over what your actual earnings will be, especially if your income is irregular and inconsistent. Fortunately, SARS does know this, and they don’t expect you to be 100% accurate. However, SARS expects you to give as close to an accurate figure as possible and you can be penalised if you declare an estimated income that is much lower than your actual income, which we’ll get to later.
The first provisional tax return can be worked out in two ways. It can be based on the previous year’s assessed taxable income with relevant increases or it can be based on the current year’s projected earnings. Half of the year’s calculated tax less any PAYE withheld will be payable to SARS for the first period.
The second provisional tax return is calculated by using the current financial year’s earnings. The tax calculated, less the first provisional tax paid and any PAYE withheld, is then payable to SARS.
To avoid penalties and interest, provisional taxpayers with taxable income of less than R1 million must have declared 90% of their taxable income per final income tax return. While those with a taxable income of more than R1 million must have declared 80% of their taxable income per final income tax return.
Once final figures are available, an optional third provisional payment can be made seven months after the February financial year end, six months in any other case, to ensure all tax due for the financial year has been paid to SARS.
In a nutshell, provisional taxpayers earn income other than a salary and are required to submit provisional tax returns and pay income tax to SARS every six months.