Provisional taxpayers are heading for their first important date of the new tax year – they must submit their estimated taxable income for the year to the South African Revenue Service (Sars) at the end of August.
They must also pay the portion of the tax liability that is due at that point.
Failure to submit a return or make a payment in time may result in penalties and interest being levied on the non-submission and late payment.
There are however still some misconceptions about who is and who isn’t a provisional taxpayer, and what the obligations are when one falls into this category.
Jackie Arendse, professor of taxation and The Tax Faculty presenter, says there is no such thing as “registering” or “deregistering” as a provisional taxpayer. The section in the Income Tax Act that required people to register was deleted in 2016.
“It is now incumbent on the taxpayer to determine whether they are provisional taxpayers or not. When Sars is completing the final assessment of a taxpayer they look back to establish if a person was liable for provisional tax or not.”
Several taxpayers got a nasty surprise at the end of January this year when Sars did exactly that.
Many who submitted their annual returns at the end of January were penalised because they were not provisional taxpayers. Their deadline, as non-provisional taxpayers, was in November last year.
The golden rule for individuals and trusts is that when they earn income other than remuneration, subject to some exclusions, they are potentially provisional taxpayers, says Arendse.
The deadline for non-provisional taxpayers to file their annual tax return is 24 October and for provisional taxpayers it is 23 January 2023.
The position on trusts
The submission deadlines for trusts are creating confusion this year, says Carmen Westermeyer, facilitator of The Tax Faculty’s monthly tax discussion. Trusts have historically always fallen into the category of provisional taxpayer, allowing them 12 months (as with companies) to complete their tax returns.
Sars has made it quite clear, in the way it has written the regulations this year, that it wants trusts to be subject to the same provisional and non-provisional tax deadlines as individuals, says Westermeyer.
She says Sars views vested trusts, where all the income vests in the beneficiaries, as non-provisional taxpayers. Therefore they will be subject to the 24 October deadline. In addition, any discretionary trust, where all the income has been distributed to a beneficiary, is also viewed as non-provisional and is subject to the October deadline.
“In my experience this means that 90% of trusts must file their annual returns by October. Sars has also confirmed that they only [assess] whether you have filed correctly once you have submitted your return,” says Westermeyer.
“That is when the penalties and interest will ramp up.
“I just want to give an advance warning notice,” she says. “Trusts will have to look at either an October or January deadline – and more likely October.”
Arendse also warns that individual taxpayers should carefully consider whether they are provisional or non-provisional taxpayers, and do so timeously.
“It doesn’t matter whether you have been a provisional taxpayer for the last 20 years. You must look at the definition and decide every year, because your circumstance might have changed.”
Provisional taxpayers must submit their first provisional tax return for the 2023 year of assessment by the end of August this year. They must calculate their estimated taxable income for 2023 (March 2022 to February 2023) and make the first payment.
They can use the basic amount, which is the last assessed taxable income. The rule states that the estimated taxable income may not be less that the basic amount, unless the circumstances justify a lower estimate.
Arendse says with the second provisional tax return, due at the end of February 2023, there are two rules, depending on whether the taxpayer’s final assessed taxable income is above or below R1 million.
If it does not exceed R1 million the second estimate must not be less than the lower of the basic amount or 90% of the final assessed taxable income. If it exceeds R1 million the second estimate cannot be less than 80% of the final assessed taxable income.
She adds that the second estimate is far more important than the first one. If it is lower than what the rules prescribe, it may result in understatement penalties.
“Sars may request a taxpayer to justify an estimate, particularly when it is below the basic amount with the first estimate.
“You must take that correspondence from Sars very seriously,” warns Arendse.
If Sars is not satisfied with the response, it can increase the estimate. This revised estimate is not subject to the objection and appeal process. “Your only remedy then is to take the decision on review before a high court.”
Arendse advises taxpayers whose estimates are challenged to explain their estimate as if they are compiling an objection letter.
“Provide Sars with a fully rounded and reasoned justification on how you arrived at your estimate.”
Who is a provisional taxpayer:
* Any person other than a company who earns income by way of:
(i) remuneration from an employer that is not registered as an employer; or
(ii) any amount other than remuneration or an allowance or advance subject to certain exclusions;
* Any company, excluding:
PBOs [public benefit organisations], recreational clubs, body corporates, share block companies or associations of persons exempt under s 10(1)(e); non-resident ship-owners; small business funding entities.
* Any person notified by the Sars commissioner.
Who is not a provisional taxpayer?
* An individual who derives no income from carrying on a business if:
- Taxable income for the year of assessment will not exceed the tax threshold (2022/3: R91 250 for those under 65 years; R141 250 for those over 65; R157 900 for those over 75); or
- Taxable income for the year of assessment from all of the following does not exceed R30 000: Interest (local and foreign), dividends (local and foreign), rental from the letting fixed property, remuneration from an unregistered employer, deceased estates.