It is that time again when no matter where you look, what you listen to or where you go, you cannot escape the might of the SARS advertising campaign calling for the submission of provisional tax returns. While this is an effective reminder for most of us, you may be one of those people who is caught with a sinking feeling in their stomach, thinking what on earth is provisional tax and should I be paying it? Fear not, for we are about to demystify this.
How do I know if I need to submit and pay Provisional Tax?
If you are earning a salary and you do not have money coming in from other sources, then you can breathe a sigh of relief. You are not required to register as a provisional tax payer. If, however, you own a company, you should already know that you fall into the provisional tax system, but for everyone else, read closely.
- If you earn an income that is not from remuneration (i.e. a salary) or an allowance or advance. OR
- If you have a company that is not a public benefit organisation or a recreational club. OR
- If you have been notified by the Commissioner that you are a provisional taxpayer.
Answering yes to any of the above points means that you may be required to pay provisional tax. If you answered yes to the third point then we suggest you register as soon as possible.
When earning an income not from remuneration, you are only required to register and pay provisional tax if your income exceeds the tax thresholds for that year. For instance, in this year of 2010/2011 assessment, if you are under the age of 65 and earn less than R57000 per year or are over the age of 65 and earn less than R88528, then you are not required to register.
It is also worth noting that if you are over the age of 65, do not run a business and receive remuneration, pension, interest dividends or rental income that does not exceed R120 000 per year, you also are not required to register.
For CC members and directors of private companies, you may believe or have heard that you are required to register for provisional tax. In fact as of 2007 you were no longer required to register.
What is the idea behind Provisional Tax?
Believe it or not, provisional tax was created to make it easier for you to meet your tax payments. If you find that you have an irregular income then provisional tax is even more of a blessing. Instead of being blindsided by a large tax payment once a year, provisional tax allows you to pay two compulsory tax payments per year and even a voluntary third payment if necessary. This makes it much easier to stay on top of your tax obligations opposed to perhaps finding yourself in a situation where one large tax payment is not possible due to a number of reasons such as cash flow problems or insufficient savings.
How does Provisional Tax work?
In a nutshell, provisional tax requires that you estimate your earnings for the year of assessment. This assessment year will usually run from 1 March to 28 February. Once you have calculated the total tax that you will owe SARS for the year, you will pay half in the first six months of the assessment year (i.e. before 31 August) and the final half no later than the last day of the assessment year (i.e. before 28/29 February). Provisional tax payments are therefore made on a six-monthly basis.
Payments can be made with the IRP6 form that can be requested from SARS via the e-Filing website.
Why should I use a tax consultant?
Now that you have read some of the facts about provisional tax, you should know whether or not you qualify. Once you qualify, provisional tax returns must be made on a timely basis even if the return is nil for that period. You can either choose to submit the returns yourself using the e-filing service or enlist the services of an accountant or tax consultant.
As the provisional tax estimations are compared to your income tax at the end of the financial year, it is of the utmost importance to make these provisional tax estimations as accurate as possible to avoid penalties and interest imposed by SARS. Tax Consultants should also have a thorough knowledge of the South African tax system which means that they can provide guidance with respect to business expenses that you can and cannot claim for. This coupled with the peace of mind that your tax return is going to be accurate, professionally handled and submitted on time allows you to concentrate on what you do best.
Hope this article helped to answer some of the questions you had about Provisional Tax.
Until next time
Professional Accountant (S.A.)