Understanding Provisional Tax
It is tax season, and “provisional tax” is probably something you have heard mentioned a few times. So many of our clients are unsure what this tax is and whether it applies to them.
Today we are going to give you a simplified explanation of provisional tax and guide you in understanding whether the month end deadline applies to you.
Provisional tax is an important aspect of the South African tax system, designed to help individuals and businesses meet their tax obligations throughout the financial year.
Provisional tax is a method used by SARS to collect income tax from individuals and businesses ahead of them submitting their final income tax returns for a particular year. Think of it as a method of paying your tax, rather than as a tax in itself. Provisional tax is not a separate tax, it is merely a method used to collect the actual income tax due to SARS for the year.
To make it a little simpler to understand, here is a practical example. As a salaried individual, you would have PAYE deducted off your salary each month, but sole proprietors and companies do not have this monthly deduction paid to SARS. Provisional tax is this tax payment, made twice a year, ahead of the filing of the income tax return for that particular year. The purpose of paying the tax over in 2 “instalments” is to ease the cash flow burden for the taxpayer, and to allow SARS to collect this money ahead of the income tax return submissions (which can be done up to 12 months after the financial year end for a company).
To determine whether you are a provisional taxpayer, pop along to our previous blog post regarding individual taxpayer classifications.
Over and above the individuals who qualify as provisional taxpayers, the following entities are also provisional taxpayers:
- Companies and CC’s –
All registered companies and close corporations operating in South Africa. - Trusts –
Trusts that generate taxable income.
Provisional tax is calculated by taking the tax due for the full year of assessment and paying 50% of this estimated tax at the end of August each year, and the remaining balance of the (updated) estimate at the end of February each year (these dates are for an entity with a February year-end).
A few of the acronyms used:
P1 – First provisional tax payment due (payment 1)
P2 – Second provisional tax payment due (payment 2)
P3 – An additional (top-up) payment which may be made up to 7 months after the year end date.
Non-payment / late payment of provisional tax will result in penalties (and interest) being charged to the defaulting taxpayer. SARS may also impose penalties for under estimations of provisional tax where the taxpayer’s estimate is below a certain threshold. The accuracy in these calculations really is so important.
All provisional taxpayers with February year ends need to submit their 2024 P2 returns and make the necessary payments by 29 February 2024, if you need some assistance reach out to us or to any registered tax practitioner to help you submit the return on time.
Just a tip from our years of experience in doing these submissions, please don’t leave the return submission or the payment to the very last day. Any SARS or banking related glitches will cause you so much unnecessary stress!
Happy (provisional) tax season to all!
Yours in simplifying finance,
