WHAT IS PROVISIONAL TAX AND WHEN DO I QUALIFY FOR IT?
During 2021, many South Africans were forced to start their own businesses to put food on the table, while others changed from traditional employees to contracted remote workers. Whether they retained a reduced salary or wholly embraced the responsibility of being an entrepreneur, it is important for these individuals to understand how the South African Revenue Service (“SARS”) expects them to conduct their tax affairs.
Provisional tax explained
According to the SARS website, provisional tax is not a separate tax. It is a method of paying income tax in “instalments” to lessen the tax burden at the end of the tax period. SARS selects you as a provisional taxpayer when you earn any income other than a remuneration (as defined on the Fourth Schedule of the Income Tax Act No. 58 of 1962), provided that the income is above the threshold.
Where you earned a traditional income, your employer would have paid employee’s tax in the form of Pay-As-You-Earn (“PAYE”). If you busied yourself with a side hustle during the 2021 income year, like online teaching or private jewellery design work, you earned a non-salaried income from an additional revenue stream, which means you may be subject to provisional tax.
How does provisional tax work?
Provisional taxpayers are required to make three provisional payments. The first provisional payment is due on the last day of August (within six months from the beginning of the tax period), and the second payment is due on the last day of the tax period (last business day of February). While the first two payments are mandatory, the third payment is optional and should be submitted after the end of the tax period (before SARS issues an assessment).
For first two submissions you estimate a taxable income and the final tax liability due to SARS. This is then spread over the relevant year of assessment by paying tax in advance for the first two tax returns. The third and final submission, if it is required, can be viewed as a corrective measure, where differences are corrected or overpayments are calculated prior to finalising your tax for the income year. Following the final submission, you will either owe SARS a small amount, or, SARS would need to reimburse an overpayment in tax monies to you.
Submitting your provisional tax
The aim of provisional tax is not for SARS to claim additional revenue from taxpayers, but rather to help them regulate their tax commitments in increments. Tax can become complex when an income is generated from multiple sources, which is why care should be taken when submitting your returns.
While you can still make use of e-Filing for your provisional tax returns, it is best to discuss your circumstances and your earnings with a tax consultant who understands the intricacies of the tax laws for entrepreneurs. They can advise where your tax exposure can be limited or reduced, while maintaining individual tax compliance.