The provisional tax regime operates as a continuous cash flow mechanism in favour of Government whereby tax on income earned is paid over provisionally in anticipation of the final tax liability to be calculated when a person is finally assessed to income tax. Where a person is required to be registered for provisional tax, estimates of taxable income are required to be submitted to SARS bi-annually (and provisional taxes paid accordingly), being after the first 6 months of the start of the person’s tax year, and again on the last day of that tax year.
Quite a number of our clients are not registered for provisional tax, nor are they required to be so registered. Typically, provisional tax registration is required only to the extent that income will be earned that is not in the form of remuneration (and which will therefore already be subject to pay-as-you-earn, whereby tax is already “pre-paid” on the taxpayer’s behalf on a monthly basis). Individuals therefore only earning a salary (and perhaps other immaterial taxable receipts) during a year, will not be required to register as provisional taxpayers.
What happens quite often in practice though is that these non-provisional taxpayer individuals may sell a significant asset during a tax year (typically in the form of immovable property), and thereby realising significant taxable capital gains. In such a scenario, these individuals too would need to register for and pay provisional tax for the tax year under consideration. Unfortunately though, many taxpayers are completely unaware of this requirement, thereby exposing themselves to onerous penalties as relates to the underestimation of provisional tax for failure to submit the requisite returns. Where no provisional tax return has been entered by the individual concerned, SARS may deem a Rnil estimate to have been returned by the taxpayer for provisional tax purposes. As a result, SARS will consider the taxpayer to have underestimated its taxable income for the relevant year of assessment, and impose a penalty of up to 18% (or 20% or 90%) of the taxable income for the relevant year of assessment. Considering that this once-off event will likely involve a substantial asset having been realised (with a significant attendant tax cost), the penalty involved may also be quite substantial.
It is possible to request SARS to remit the penalty levied on underestimation, either in terms of the relevant provisions of the Tax Administration Act, or in terms of the Fourth Schedule to the Income Tax Act. In our experience though, SARS is reluctant to provide relief to taxpayers, and any remittance request often amounts to an involved and drawn out process. It is therefore preferable for taxpayers to be aware of the potential provisional tax consequences linked to a disposal of significant assets, and to discuss this with their tax practitioners before entering into significant transactions so that the necessary tax filing obligations can be observed in time.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
 Paragraph 20(2C) of the Fourth Schedule to the Income Tax Act, 58 of 1962
 Paragraph 20(1)(a) or (b) of the Fourth Schedule to the Income Tax Act
 Paragraph 217(3) of Act 28 of 2011
 Paragraph 20(2)