Tax obligations can be complex, especially for self-employed individuals and business owners. One particularly misunderstood aspect of tax is provisional tax. In this blog post, we will demystify provisional tax. Let us shed light on
- who should register for it
- why you should do it
- when to register, and
- how to navigate the process.
NB: Provisional Tax is a form of Income Tax, it is not a separate tax that you have to pay.
What is Provisional Tax?
Provisional tax is a system employed by the tax authority to collect income tax in advance. This is spread over two payment periods throughout the financial year (with the option to make a 3rd payment). It ensures that taxpayers do not face a hefty tax burden at year-end. This makes it easier to manage cash flows and financial planning.
A provisional taxpayer has to make TWO tax payments during the course of the year with the option to do a third payment. At the end of the year, the taxpayer is required to submit an income tax return. This tax return (ITR12 or ITR14) is then assessed by SARS and the two (or three) provisional tax payments that you paid during the year will be deducted from the total amount of tax owed for the year
So, while it may be a bit more admin, provisional tax ensures that you are keeping money aside throughout the year for your income tax return. Whereas an employee will have their employer deducting income tax in the form of PAYE from their salary each month, you won’t have that benefit if your income comes from rentals, investments, or any other non-salary sources.
Who has to register for Provisional Tax?
If you ONLY earn income from a salary/wage, and your employer is deducting monthly PAYE, then you are not a provisional taxpayer. You make your contributions monthly to SARS via PAYE and you only need to submit an ITR12 return at the end of the tax year. (Unsure how to complete your ITR12 tax return? This article will help you.
Anyone who receives income that IS NOT in the form of remuneration (salary/wage), subject to PAYE, is a provisional taxpayer and needs to register for provisional tax. This could be income from rentals, interest, distributions from a trust or income from a foreign source.
There are some cases where you may receive income but be exempt from paying provisional tax such as:
- If you receive interest of less than R23 800 if you are under 65; or
- If you receive interest of less than R34 500 if you are 65 and older or;
- You receive the exempt amount from a tax-free savings account.
The following are excluded from being provisional taxpayers:
- approved public benefit organisations or recreational clubs that have been approved by the Commissioner in terms of s30 or s30A;
- body corporates, share block companies or certain associations of persons that are exempt from tax;
- non-resident owner or charterer of ships or aircraft;
- natural person who does not earn any income from carrying on any business – provided that person’s taxable income will not be more than the tax threshold (for 2023 tax year: for taxpayers below age of 65 –R91 250; age 65 to below 75 – R141 250 and age 75 and over – R157 900); or the taxable income of that person (earned from interest, foreign dividends, rental from letting of fixed property and remuneration from unregistered employer) will not be more than R30 000;
- a small business funding entity;
- a deceased estate.
- any association that has been approved by the Commissioner under section 30B(2)
– sars.gov.za
NB: Companies and trusts automatically fall into the provisional taxpayer category, as do dormant trusts and companies. The onus is on the taxpayer to determine whether he or she is a provisional taxpayer (which, as mentioned above is quite easy to work out. If you receive any income that is not from remuneration and does not fall under the exclusions just mentioned, then you are a provisional taxpayer). The taxpayer then needs to request an IRP6 return via e-filing, complete the return and submit it.
When to register for Provisional Tax?
You should register for Provisional Tax as soon as you start earning income that is not subject to PAYE or any other form of tax withholding. The registration period coincides with the start of the financial year and extends throughout the year until the last provisional tax payment deadline, which is in the following year.
How to request and submit an IRP6 form
- First you need to be registered for SARS eFiling.
- Once you have logged in, click on Tuisblad
- On the left-hand side of the screen, click on User
- Then choose Tax Types
- Click on Manage Tax Types
- There you will see the option to Activate Provisional Tax Returns (IRP6)
How much Provisional Tax should I pay?
Determining the amount of Provisional Tax you should pay depends on your estimated taxable income for the year. The tax liability is calculated based on the estimated total income, less allowable deductions, and the applicable tax rates. It is best to get a qualified accountant to assist you with this calculation.
In very simplified terms: you will need to estimate your taxable income for the year and then work out how much tax you would owe on that amount. You would then pay half of that amount to SARS in the first half of the year. It is important to note that there may be penalties if this amount is less than the basic amount. Then you will do another estimate in the second half of the year and work out how much you would owe SARS for the year after deducting the first payment that you already made. Make sure you take into account deductions such as medical etc when doing your calculations.
Click here for a detailed breakdown of how to calculate each of your provisional payments.
When to pay provisional tax:
|
First payment |
Must be made within the first 6 months of the tax assessment period so you have until the last business day in August to make your payment in the case of an individual or trust. In the case of a company or CC this would depend on the financial year-end. |
|
Second payment |
Must be made in the last 6 months of the tax assessment period. This gives you until the last business day in February to make this payment in the case of an individual or trust. In the case of a company or CC this would depend on the financial year-end. |
|
Third payment (optional) |
This is a top-up payment in the case that the first 2 payments were not enough. This should be submitted by the last business day of the 7th month after year end. Please note this does not exempt the taxpayer from understatement penalties where the first 2 payments did not cover enough of the income tax debt. It could however alleviate some of the interest charges |
What does this mean for you?
If you receive income that is not in the form of remuneration (salary/wage) then you are a provisional taxpayer and need to register for provisional tax.
Registering and paying Provisional Tax is a legal requirement that you should not overlook. Navigating Provisional Tax can be overwhelming but with the correct understanding and planning, it becomes more manageable.
Should you find that this financial admin is taking up too much of your time, feel free to get in touch with us. We at aXia Consulting are Tax Specialists and will ensure that your returns are submitted on time and accurately. Should you require assistance in tax planning to ensure that your current structure is set up tax efficiently, we can assist
You can reach out to us at admin@axiaconsulting.co.za
At aXia Consulting, our tagline is “Adding Value”. We stay updated on financial regulations and changes to provide that knowledge to our clients. We hope that this post helped you prepare for filing your income tax return this year. Feel free to contact us here for all financial needs related to small to medium enterprises. With 50 years of combined expertise, we are here to help and take the burden off your shoulders.
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