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South Africa: Overview of Provisional Tax Estimate Rules
Provisional taxpayers are required to make two compulsory provisional tax payments during the year. In addition, provision for a third voluntary payment is also made.
Every provisional taxpayer is required to submit an “estimate” to the South African Revenue Services of the total taxable income which will be derived by the taxpayer in the year of assessment in respect of which provisional tax is payable as part of the taxpayer’s provisional tax filing obligations.
20% Deviation Allowed
Beginning 1 March 2009, additional tax is imposed when a provisional taxpayer submits an estimate for its second provisional tax payment that is less than 80% of the amount of actual taxable income for the year. In such an event, the taxpayer must pay additional tax equal to 20% of the difference between:
- The amount of normal tax calculated in respect of the estimate of taxable income made (as part of the second provisional tax payment); and
- The amount of normal tax calculated on 80% of actual taxable income.
Each taxpayer must accordingly estimate the amount of taxable income for the year of assessment and pay the provisional tax due on such estimate.
However, because additional tax is only levied in circumstances when the estimate of taxable income submitted is less than 80% of the actual taxable income for the year, certain taxpayers are under the impression that they are entitled to disclose an amount equal to 80% of actual estimated taxable income as part of their provisional tax return filing.
While this has a cash flow benefit for the taxpayer—i.e., if the estimate of taxable income is R100, a company would need to pay R28; however, if the company only discloses R80, the provisional tax payment to be made is only R22.40 with the balance only being payable at a later stage—there is a greater risk that the taxpayer may have underestimated its taxable income for the year (which is in fact less than 80% of taxable income and accordingly subject to the additional tax).
Furthermore, in the event that the taxable income estimate is significantly underestimated, it would be difficult for the taxpayer to contest the additional tax and interest on the underpayment. Moreover, such disclosure is not in accordance with the law, which requires a taxpayer to submit an “estimate”. The “estimate” of the taxpayer’s total taxable income required to be submitted is a bona fide approximate calculation of the taxpayer’s liability for tax for the particular year of assessment, based on the application by the taxpayer of his mind regarding the matter.
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Proposed Method to Estimate Taxable Income
Because a provisional taxpayer may no longer make use of the “basic amount” in determining the second provisional tax estimate, this has posed a problem for many taxpayers in that they are often unable to make an accurate estimate of taxable income at year end due to the nature of their businesses and other complexities. Accordingly, the changes to the law have been the subject of recent debate.
In response, National Treasury has issued for comment draft legislation that is intended to address the difficulty that certain taxpayers face as a result of the new provisional tax rules. These amendments propose to give South African Revenue Services the right to prescribe how taxpayers are required to calculate their second provisional tax payments.
To the extent that the taxpayer has adopted the prescribed method to determine its estimated income, and such method has resulted in an estimate that is less than 80% of the final determined taxable income, the South African Revenue Services must then remit any additional tax payable. Such prescribed method has not yet been issued by the tax authorities and there appears to be uncertainty as to whether the prescribed method will provide relief to all taxpayers or just “smaller” taxpayers. According to some, it would be unfortunate if only smaller taxpayers qualify for this treatment because the difficulty to estimate income by year-end is not limited to smaller taxpayers.
Interest on Late and Underpayment of Provisional Tax
Interest on the underpayment of provisional tax is levied from the date that is six months (seven months in the case of a taxpayer with a February year end) after the last day of the taxpayer’s year of assessment.
Currently, the interest levied is simple interest. However, going forward, the South African Revenue Services is proposing that interest be compounded daily. This proposal would not only apply to underpayment of provisional tax but also to late payment of provisional tax and all other tax types.
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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
Zelda Van Schalkwyk, +27 (0) 11 647 8209,
zelda.vanschalkwyk@kpmg.co.za
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