Wednesday, November 19, 2008

Provisional Tax changes for Feb 2009


A provisional taxpayer is someone (or company, CC or trust) who (or which) earns income other than a salary. SARS collects tax on salaries by means of the Pay as You Earn (PAYE) system, which was copied from the UK tax system years ago. But other income escapes the PAYE system, so SARS devised the provisional system, where you pay provisional tax every 6 months on estimated income for the past 6 months.

You are then supposed to pay any shortfall by means of a 3rd provisional tax payment by 31st August each year. Currently if you don’t pay this, you simply pay interest on any tax you should have paid, but there are no penalties.

The one factor in favour of the taxpayer is that this estimate is currently based on your last tax assessment (which could be some years in the past, if you are in arrears or if SARS is taking its time in assessing you).

It was therefore possible for a taxpayer to defer his or her actual tax liability, which was the problem the current provisional system sought to address.

SARS has plans to make this estimating process more accurate by imposing a penalty of 20% on the tax due on any difference between the estimate made and 80% of the actual taxable income assessed by SARS after you submit your tax return. So you have a 20% leeway in your estimate.

In a nutshell, this means that you will have to keep very accurate records of income and expenditure, right up to mid February, and then you will have to sit down and work out what your taxable income is likely to be for that tax year, even if the tax year has not yet ended. You won’t be able to take your time between March and September to make your estimates and pay any outstanding provisional tax by way of the 3rd provisional tax payment.

The fear is that if this legislation is passed, the accountants and tax advisors, who usually take many months to produce the annual financial statements and tax returns, will be swamped by clients wanting them to produce accurate figures of income and deductions before the tax year has ended - -a clearly impossible task.

The only way is to prepare records beforehand, say up to end December, and to extrapolate figures for January and February.

SARS’s actions do not accord with its own timeframe in issuing returns and processing them, and could well be in conflict with the Taxpayers’ Charter.

Clive Hill
Financial Services

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