TaxNewsFlash-Africa

June 24, 2009
No. 2009-06

South Africa: Changes to Provisional Tax Compliance

While the South African Revenue Service has allowed for a “transitional arrangement” for second provisional tax payments (due on, or before, 28 February 2009, essentially applying the previous dispensation), new provisions applied from 1 March 2009.

Beginning 1 March 2009, in order to avoid interest and penalties of provisional tax, a provisional taxpayer must determine the estimates of income earned and expenses incurred well in advance of the tax year-end. Accurately estimating gross income and deductible expenses could, however, become extremely challenging for taxpayers.

Previous Dispensation

Previously, additional taxes were imposed by the South African Revenue Service if the final or last estimate of taxable income submitted by a taxpayer (in the form of a second provisional tax payment) was less than:

90% of the taxpayer’s actual taxable income for the year and
The basic amount

The “basic amount” is deemed to be, inter alia, the taxpayer’s taxable income less any capital gain of the latest preceding year assessed.

Legislative Amendments

In 2008, South Africa’s Parliament approved Revenue Laws Second Amendment Bill (2008), which provides a change to the second provisional tax payments process and the imposition of additional tax on under-estimates relating to these payments.

Under the legislative amendments, which were effective 1 March 2009, additional taxes will now be imposed on a taxpayer solely if the estimate for the second provisional tax period is less than 80% of the final taxable income for the income tax year in question (as opposed to less than 90% of the taxpayer’s taxable income and less than the basic amount).

According to a South African Revenue Service media release:

... the amendment … was aimed at creating more certainty and accuracy in provisional tax payments to the benefit of both taxpayers and the fiscus.

Text of the release is available on the South African Revenue Service Web site: http://www.sars.gov.za/home.asp?PID=4232&ToolID=2&ItemID=40000

The obvious benefit to a taxpayer is the reduction of the percentage accuracy required in terms of estimated taxable income relative to actual taxable income (from 90% to 80%).

The benefit to the tax authority is the removal of a taxpayer’s option to use the basic amount to determine the second provisional tax payments.

In terms of income tax reporting and collection, shifting the burden of care, accuracy and administration of second provisional tax payments to the taxpayer is in line with the general position of the South African Revenue Service over the last few years. According to the tax authority’s media release, doing away with the basic amount in estimating second provisional tax payments will significantly reduce the number of times that the tax authority will have to call on a taxpayer to justify the second provisional tax estimate.

The downside for a taxpayer is that, without the basic amount option, more careful consideration and attention must be paid to calculating taxable income to determine that the second provisional tax payment falls within the 80% range. Provisional taxpayers will have to deal with the administrative consequences of the new rules or face (1) additional tax, (2) interest, and/or (3) penalties.

Additional Tax

The new provisions provide for the imposition of additional tax for the underestimation of taxable income. Additional tax will be levied at a rate of 20% of the difference between:

Normal tax calculated in respect of the estimate of taxable income made (as part of the second provisional tax payment) and
Normal tax calculated on 80% of the actual taxable income.

What remains unchanged is the discretion of the South African Revenue Service to waive any additional tax (or part thereof) if it is satisfied that a taxpayer’s estimate was not “deliberately or negligently understated and was seriously calculated.”

Interest on Late and Underpayment of Provisional Tax

Apart from interest on late payment of provisional tax, interest for the underpayment of provisional tax is also levied, with effect from the “effective date.”

The effective date in relation to a taxpayer with a February year-end is 30 September and for any other taxpayer, the date falling six months after the last day of that taxpayer’s tax year. (Similarly, interest will accrue to a taxpayer from the effective date on any overpayment of tax.)

Penalties for Non-compliance

Section 75B was recently introduced into the Income Tax Act to allow for the levy of administrative penalties.

Penalty for non-compliance: For not registering as a provisional taxpayer or late submission of a provisional tax return, a monthly penalty is levied for each month of non-compliance depending on the level of the provisional taxpayer’s taxable income, with the penalty ranging from R250 to R16,000 per month (limited to 35 months).

Penalty for late payments: Section 75B provides for a 10% penalty on any provisional tax amount paid late. A similar penalty was charged under the previous dispensation.

For more information, contact a tax professional with KPMG in South Africa:

Roné la Grange, +27 (0) 11 647 5721, rone.lagrange@kpmg.co.za

Marianna Djonis, +27 (0) 11 647 7129, marianna.djonis@kpmg.co.za

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