One of the more confusing tax types for clients entering the business or freelance environment, is Provisional Tax.
Year end tax, in its big picture scenario, is relatively simple to understand. Once the year end has closed, declare your income and expenses, and pay tax on the profits.
So, to try and simplify provisional tax in the bigger picture, I would explain it as estimates of what you think your tax would be at the end this tax year we are in.
Let’s imagine your business started on 1st of March 2018. Your first provisional tax return is due by 31st of August 2018 (1-2019).
Your second provisional tax return will be due 28 February 2019 (2-2019).
The tax year is then closed and your final 2019 tax return is due when tax season opens 1 July and you can finalize that 2019 return anytime before 31 January 2020.
So SARS does not want to receive your tax due for the year, as late as January 2020. They expect half on your first provisional (Aug 2018) and half on your second provisional (Feb 2019) and then on final assessment (when you file your return between July 2019 and Jan 2020) they would expect only a small difference being due. So at least 80% or 90% of your taxes due, need to be settled in the tax year, before it closes (dependent on your turnover).
So you are expected to have a pretty good idea of your ongoing income and deductions of your business to make an accurate estimate every 6 months. This is why we feel no matter how small your business, it’s important to have a good bookkeeping system in place.
So Provisional Tax is not a totally separate tax type on top of your Income Tax. It is, rather, an advance top up towards your year-end Income Tax.
One of the main advantages of Provisional Tax, is that you pay the tax closer to the time you actually made the profits. If there was no Provisional Tax system, you could make a healthy profit early on 2018, have cashflow difficulties in 2019, and then be assessed on those profits only in January 2020, when you may not have the profits or cashflow.
So, what if you don’t have the budget to pay the provisional tax, why not rather submit a lower return, and then worry about the tax on final assessment? This is pretty easy to do, as the provisional tax return only requires your turnover and estimate of profits. No details of calculations are required such as with your year-end return. But, on your final tax return when all declarations are required, and it shows your provisional tax returns were not sufficient, you can face high penalties for under-declaration of provisional tax. Note there are also 10% penalties on late provisional tax payments.
A lot of taxpayers get very confused and nervous about the provisional tax returns. It comes down to the fact that it’s not a final return based on final figures. It requires input about what you expect from the year and we all know how uncertain business can be. I always tell clients to base it on their best assumptions, and their past history. If there is a major and unexpected change in your business, as long as we have info to backup what was the intention at the time, we can appeal against penalties.
My recommendation for Provisional Tax would be ~
• Keep accurate bookkeeping records of your income and expenses so that profit and tax calculations are done on an ongoing basis, making it easier to forecast and budget your taxes
• Your first provisional return is a little more difficult as it’s so early in the tax year. If your circumstances are in line with the previous year, declare your income and profits + 10% on your last assessment.
• Make sure you are as accurate as you can be with your second return and keep notes of your calculations, in case you need to appeal penalties if it’s too low. You may have made an error or there was a last-minute unexpected change
• Get an accountant’s help sooner, rather than later, to avoid penalties or missing a deadline.
nhb.accountant offers freelance and sole proprietor packages, which include monthly review and tax calculations from R500, or full bookkeeping from R1,000.
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