Provisional tax penalties and how to avoid them

Posted on 23 of October, 2018 by in Tax

All individual taxpayers who earn income from sources other than remuneration from an employer, must submit provisional tax returns twice a year.

Let’s have a look at the most common penalties provisional tax payers face and how to avoid them.

Under estimation penalty

The major challenge with provisional tax is the need to estimate your annual taxable income.  To prevent taxpayers from thumb-sucking figures and reporting lower amounts for provisional tax purposes, SARS imposes  hefty under estimation penalties.

The prescribed penalty is different for taxpayers with a taxable income of less than R1 million and those with a taxable income of more than R1 million.

Taxable income of R1 million or less

If your taxable income for the year is R1 million or less, you are at risk of an under estimation penalty if –

  • Your estimate of your taxable income for your second provisional tax return is less than 90% of your actual annual taxable income ; and
  • Your estimate of your taxable income for your second provisional tax return is less than your “basic amount”.

Basic amount – your taxable income as per your most recent assessment.

We therefore recommend that  our clients be very sure of their figures before they  submit a provisional tax return based on a taxable income of less than at least their basic amount.

Taxable income greater than R1 million

If your taxable income for year is more than R1 million, you need to ensure that your estimate of your taxable income for the second provisional tax return is not less than 80% of your actual taxable income.

The “basic amount” is not applicable for taxpayers with a taxable income of more than R1 million.

Penalty:

20% of the difference between the tax payable as per your provisional tax return and the tax payable calculated on 80% of your actual final taxable income as per assessment.

This can be a significant amount !

Recommendation to avoid under estimation penalty

If you had any “unusual” or “out of the ordinary” business transactions, income, sales of property, share trading etc during the tax year, inform us when the transaction takes place so that we can make a note thereof and remember to take it into consideration when the estimated taxable income for the year is calculated.

Alternatively, contact us now, and inform us of such transactions.

These may include but is not limited to:

  • Sale of fixed property
  • Sale of shares
  • Sale of unit trusts / investments
  • Bonus / profit share
  • New business venture
  • Extremely profitable financial year in comparison to previous years

When reviewing your estimated taxable income, make sure that it is reasonable and that you have disclosed all relevant information us and that you have estimated your income and expenditure for the year with the necessary care, considering all contributing factors.

Late submission penalty

Even a day late is considered enough to apply a penalty.

SARS considers a late submission or non-submission of a provisional tax return as a Rnil return.  Therefore, unless your actual taxable income is in fact Rnil, it will result in a 20% under estimation penalty being imposed.

Late payment penalty 

A penalty equal to 10% of the provisional tax payable will be levied by SARS for late payment plus interest at the prescribed rate.  Even a day late is enough for SARS to levy the penalty and interest.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)