Provisional tax—sanctioned chaos
by Michael Stein
© 2009 M L Stein (mlstein@iafrica.com)
It is a sad fact that most of the people handling provisional tax, either for clients or for SARS, have never read the law on the subject, and are simply bungling through—often to the prejudice of the taxpayers concerned. I deal here with just one aspect of the subject—the obligations imposed on provisional taxpayers and the sanctions for failure to meet them. Much of what I have to say has been written about in one way or another before, but my involvement at a recent Bsp Seminars® seminar on provisional tax has opened my eyes to some critical new insights on the subject. Although I focus on corporate provisional taxpayers, the rules are virtually identical for their non-corporate counterparts.
Payments and estimates
The rule is that a ‘first’ provisional tax payment for a year of assessment must be made by a provisional taxpayer within the period of six months after the commencement of the year of assessment, and that a ‘second’ payment must be made by no later
than the last day of the year of assessment (par 23 of the Fourth Schedule to the Income Tax Act).Then there are quite separate rules requiring estimates to be submitted to SARS by provisional taxpayers that are not exempt from the tax. These estimates must be made during every period within which provisional tax is payable, the estimates required being estimates of the total taxable income that will be derived in the full year of assessment.
(Paragraph 19.)
First estimate
As for the first estimate for the year, unless the Commissioner, ‘having regard to the circumstances’, agrees to accept an estimate of a lower amount, it must not be less than the applicable ‘basic amount’ (par 19(1)(c)). (The latest amending bill allows for the inflation of the basic amount in certain circumstances.) What are the sanctions for failure to make the first estimate? The only sanction is a criminal one. A provisional taxpayer failing to submit an estimates guilty of an offence and liable upon conviction to a fine or to imprisonment for a period not exceeding twelve months (par 30(1)(m)).
First payment
A provisional taxpayer failing to pay an amount of provisional tax within the period allowed for payment(or an extension of this period allowed by the Commissioner) is liable to pay a penalty of 10% oft he amount unpaid. This rule is applied if the provisional taxpayer fails to pay the minimum amount required within the time set for payment, and is imposed on the shortfall. The Commissioner may remit this penalty in whole or in part in qualifying circumstances. (Paragraph 27.)
In addition, if an amount of provisional tax is not paid in full within the prescribed period, interest is payable on the amount unpaid for the period during which it remains unpaid, unless the Commissioner otherwise directs’ (s 89bis(2)).
Second estimate
Unlike the first estimate, the rule requiring a second estimate to be made does not say how much it must be. It simply calls for an estimate of the total taxable income that will be derived by the taxpayer during the year of assessment (par 19(1)). Nevertheless, the rules imposing sanctions are relevant in this context. First, there is the criminal sanction for failure to make a second estimate. As already noted, a person failing to submit an obligatory estimate (be it a first or second estimate) is guilty of an offence and liable upon conviction to a fine or to imprisonment for a period not exceeding twelve months (par 30(1)(m)).
Then additional tax is imposed for the failure by a provisional taxpayer liable for the payment of normal tax for the year of assessment to make a second estimate. The additional tax is 20% of the amount by which the normal tax payable on the taxable income for the year of assessment exceeds the sum of the provisional tax payments made for the year and the employees’ tax deducted or withheld from remuneration during the year. The Commissioner may remit this additional tax in whole or in part in qualifying circumstances. (Paragraph 20A.)
What is most significant is that the additional tax is payable if the provisional taxpayer fails to submit an estimate by the last day of the year of assessment. It has nothing to do with payment. In other words, this sanction may be avoided if the provisional taxpayer submits an estimate on time, even if it fails to make a payment with the estimate!
The other sanction takes the form of additional tax for an underestimate. It is imposed by a provision (par 20) that is being amended under the latest amending bill. When the amendment is passed, it will impose this additional tax in two different situations.
First, it will apply to a provisional taxpayer whose actual taxable income, as finally determined for the year of assessment, is more than R1 million, if its second estimate for the year is less than 80% of its actual taxable income for the year.
The Commissioner may, if he is not satisfied that the amount of the estimate was seriously calculated, with due regard to the factors having a bearing upon it, or was not deliberately or negligently understated, impose an amount by way of additional tax of up to 20% of the amount by which the normal tax calculated on the second estimate for the year falls short of 80% of the actual taxable income for the year.
And, secondly, it will apply to a provisional taxpayer with a taxable income not exceeding R1 million if its second estimate for the year of assessment less than 90% of its actual taxable income for the year of assessment and is also less than the basic amount applicable to the estimate. The Commissioner may impose an amount by way of additional tax equal to 20% of the difference between the normal tax calculated on the estimate and the lesser of the normal tax calculated on a taxable income equal to 90% of the actual taxable income, and the normal tax calculated on a taxable income equal to the basic amount.
The Commissioner may remit this additional tax in whole or in part in qualifying circumstances. (Again, the bill provides for the inflation of the basic amount.)
What is again significant is that this additional tax is payable only if the provisional taxpayer’s second estimate is less than the amounts allowed by par 20. It again has nothing to do with payment.
Thus, again, this sanction may be avoided if the company submits an adequate estimate on time, even if it fails to make a payment with the estimate! I stress, therefore, that both additional taxes may be avoided by the simple expedient of making a timely and adequate second estimate, even if the provisional taxpayer does not make a payment or makes a payment of less than that calculated on the required estimated taxable income.
Second payment
Although a failure to make a payment with the second estimate will not attract the two additional taxes, it will not go entirely unpunished. A provisional taxpayer failing to pay an amount of provisional tax within the period allowed for payment (or an extension of this period allowed by the Commissioner) is liable to pay a penalty of 10% of the amount not paid. Again, this rule is applied if the provisional taxpayer fails to pay the minimum amount required within the time set for making the payment, and is imposed on the shortfall. The Commissioner may remit this penalty in whole or in part in qualifying circumstances. (Paragraph 27.)
In addition, if an amount of provisional tax is not paid in full within the prescribed period, interest is payable on the amount unpaid for the period during which it remains unpaid, unless the Commissioner ‘otherwise directs’. This sanction applies to both the first and the second estimates. (Section
89bis(2).)
Failure to submit estimate
On top of these sanctions, the Commissioner may estimate the taxable income of a provisional taxpayer failing to submit an estimate at all—be it the first or second estimate. The Commissioner’s estimate is ‘final and conclusive’. He may also call upon a provisional taxpayer to justify an estimate and to furnish particulars of income and expenditure or any other particulars. If dissatisfied with the response, the Commissioner may increase the amount of the estimate to an amount that he considers reasonable. The increased estimate will also be ‘final and conclusive’.
Topping-up payments
Finally, interest is paid by a provisional taxpayer whose ‘credit amount’ for the year of assessment falls short of the tax assessed on the actual taxable income for the year. Under the current law (which is being extended to all taxpayers from a date yet to be fixed), this interest is payable by a corporate provisional taxpayer with a taxable income exceeding R20 000 for the year (and for other taxpayers with a taxable income for the year exceeding R50 000). The Commissioner may waive this interest in qualifying circumstances
The credit amount is made up of the obligatory provisional tax payments for the year, employees’ tax deducted by the taxpayer’s PAYE employer during the year, and foreign taxes qualifying for the foreign tax rebate provided by s 6quat. Also included are voluntary topping-up payments made by the provisional taxpayer under par 23A.
(Section 89quat.)
Since topping-up payments swell the provisional taxpayer’s credit amount, they may be paid so as to avoid this interest. They may be made at any time, but, if they are made after the ‘effective date’, they will be deemed to have been due on the effective date and will be treated as late payments for the purposes of the imposition of interest under a different provision (s 89bis). The effective date is the date falling six months after the end of the year of assessment, unless the year of assessment ends at the end of February, in which event it is 30 September of that year.
