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South Africa's Provisional Tax Squeezing Taxpayers

Wednesday, February 16, 2011

The South African Institute of Chartered Accountants (SAICA) has said that, as it believes South Africa’s provisional tax system means that some taxpayers end up by paying more tax than necessary, amendments to the relevant legislation should be made by Finance Minister Pravin Gordhan when he announces the 2011 Budget on February 23.

As confirmed by the South African Revenue Service (SARS), the purpose of provisional tax is to allow a corporate or individual taxpayer to pay income tax during the tax year in which the income is earned. By paying the amounts due in terms of the provisional tax liability, the taxpayer will prevent large amounts of tax due on assessment, as the tax load is spread over the relevant year.

A first payment must be made within six months from the commencement of the year of assessment, and a second payment must be made no later than the last day of the year of assessment or approved financial year-end date. It is based on a ‘basic amount’ - an estimate of the total taxable income derived by the taxpayer in respect of the year of assessment for which the provisional tax is payable.

With the support of other professional bodies, in 2009 SAICA lobbied for the retention of a ‘safe harbour’ basic amount when making the second provisional tax payment. However, as pointed out in a Moneyweb article by SAICA's project director: tax, Muneer Hassan, while such a safe harbour was reinstated that year, the SARS calculation of a basic amount under the legislation now includes an 8% increase to the basic amount “for each year from the year last assessed.”

According to Hassan, given the interaction of tax payment and assessment dates, the basic amount calculated for most provisional taxpayers will actually be increased by 16%, rather than 8%. “All provisional taxpayers with a February year-end, for the second provisional tax payment of 2011 due on 28 February 2011 will have their basic amount increased by 16%,” he noted, "unless they have already received their 2010 assessment within 60 days from the end of February 2011.”

In his opinion, “the legislation is not an appropriate reflection of what was intended. The 16% increment is unaffordable, way above inflation and puts pressure on the livelihoods of people.” Provisional taxation affects a large number of taxpayers, including companies, most trusts, and individuals that are self-employed. Individuals earning rental, dividend and/or interest income may also be classified as provisional taxpayers.