Tax season is here again, and it’s time to get your ducks in a row with the South African Revenue Service (SARS). It’s also a good time to check whether you qualify to register as a provisional taxpayer, and whether that would benefit you.

What is provisional tax and who should pay it?

If you have a job with a salary, part of it will be deducted as pay-as-you-earn (PAYE) tax every month, so your employer can pay your income tax directly to SARS. However, if you’re a freelancer, contract worker or self-employed entrepreneur, you don’t earn a salary, so you don’t qualify for PAYE. You must declare your income and pay tax on it to SARS every year. The same applies to people who earn a monthly salary but make additional income, whether through side hustles or investments. The extra income must be declared on your tax return every year, and you must pay tax on it in addition to your PAYE contributions.

Provisional tax is not a separate tax category, but merely a different way to pay your normal income tax liability during the tax year. It is designed to help you settle your income tax in advance (think of it as a prepayment), to ensure that you don’t get saddled with a large tax debt on assessment. It is also a way for SARS to keep a constant flow of income tax coming in. Anyone who receives income that is not a PAYE-taxed salary qualifies to be a provisional taxpayer, including:

• business owners,
• freelancers, independent contractors, and those running a sole proprietor business in their own name, and
• anyone who receives income of more than R30,000 in the tax year in the form of interest, dividends, foreign dividends, rental income or any other payments.
   

Exemptions

In any of the following categories, you are exempt from paying provisional tax:

•  You receive interest of less than R23,800 a year and are younger than 65.
• You receive interest of less than R34,500 a year and are 65 or older.
•  You receive an exempt amount from a tax-free savings account.

How does provisional tax work?

A provisional taxpayer is generally required to make 2 tax payments in the year – the first at 6 months into the year of assessment (usually August), and the second at the end of the year of assessment (28 or 29 February). You can also make an additional payment, known as a top-up payment, to avoid penalties or liabilities should your first 2 provisional payments be short. This payment is voluntary and is submitted between July and January.

For newly registered companies, the first provisional tax payment is within 6 months of the company’s year of assessment. The provisional tax payments are worked out according to estimated taxable income, including any current capital gains. You can submit your estimates via SARS eFiling or through your tax consultant on an IRP6 return.

Provisional tax payments cannot be refunded or reallocated to different time periods or different taxpayers. Your estimates of how much tax to pay in your provisional tax payment windows will be assessed in the relevant year, and any PAYE withheld from your income during the year will be included and offset against your liability for normal tax at the end of the year of assessment.

Any excess over the estimate will be refunded to you, but you will have to pay any shortfall to SARS, with interest. If you’re unsure about filing your own returns as a provisional taxpayer, consult a professional tax adviser. 

What is the benefit of submitting provisional tax returns?

The key benefit for you is that by splitting your income tax payments to SARS into 2 or more instalments, you aren’t faced with a hefty lump-sum payment once a year. It’s more affordable than trying to pay your full tax liability all at once after your annual assessment, when a delay in doing so will attract penalties and interest. 

Who does not need pay provisional tax?

If you fall into any of the following categories excluded by SARS, you won’t need to register for provisional tax, although you may be liable in other tax categories:

• Public benefit organisations that SARS has approved as tax-exempt. 
• Recreational clubs. 
• Body corporates and share block companies.
• Anyone who doesn’t earn income from any business, or whose taxable income does not exceed the tax threshold.
• Directors of private companies and close corporations – they are not automatically considered provisional taxpayers unless they have other business income. If you are in this category and have no other income, you are still liable for personal tax.

Provisional tax provides some leeway and flexibility should you earn your own income or run your own business, but it’s important to capture your accounting information regularly and accurately, especially records of all income and expenditure. SARS can review any of this information at any time, and if your records aren’t in order, you could face additional interest and penalties.

For more advice on whether or not to register as a provisional taxpayer, or how to optimise your tax liabilities and do your returns, consult a Nedbank financial adviser.