Pharsyde is doing a series of blog posts designed specifically to raise awareness with regards to statutory submissions. Business ownership overs a wide-range and long list of responsibilities and it is not uncommon for a small business owner to be unaware of the extent of his legal requirements. These posts cover the common statutory submissions: what they are, why they exist and when they are due. If you need more detail about a specific submission or help in getting it right, please give us a shout – we would be happy to go through them in detail with you.
Like PAYE, Provisional Tax is not actually a tax in and of itself, it is a way for the government to collect income tax.
As with individuals, businesses only do one Income Tax return a year. In order to avoid a big tax bill that you cannot pay, the government set up Provisional Tax. The returns and payments are due twice a year and they are set against your final income tax bill when it is submitted.
Your provisional tax returns are basically guesses – but they have to be well-informed guesses. The first return is due six months into your financial year. If you have a traditional February year-end, then your first provisional tax return is due by the end of August.
In August, you are supposed to collect your financial information for March to August and use it to project your income and expenses for the whole year. You will fill this projected income and net income into your provisional tax return and you calculate your tax due for the whole year (for most businesses it will be 28% of your net income). Since the year is only halfway, it will then halve the tax due – and this is the amount you have to pay in August.
Then, in February you repeat the process. But in February, you have already completed 11 months of your financial year – so your guess will be a LOT more accurate than it was in August. Once again you use your accounting records to estimate income and expenses for the whole year and once again you place these figures on your provisional return and calculate the tax due. The amount you paid in August is then deducted from this tax figure and the difference is due to SARS by the end of February.
When you submit your final income tax return for the year a couple of months later, these two payments are set against your actual tax due and you only have to pay any difference that arose between your guess and the final figures.
In order to prevent provisional tax fraud, SARS has implemented a penalty for businesses that understate their provisional tax. So when your final tax return has been submitted, if your provisional tax payments come to less than 80% of your actual tax figure, SARS will charge you a 20% understatement penalty.
It is therefore better to over-state your provisional tax, rather than understate it.
What does this mean for you?
Have a good look at your CIPC registration documents for your business and see what your financial year-end is. 90% of businesses are registered with the traditional February year-end. If you are one of these, then mark August and February in your calendar to be sure that your provisional returns go in on time. If you do not have the traditional February year-end, then your due dates are the month of your year-end and six months after that (for example, a company with an April year-end has provisional returns due in October and April).
In terms of making provision for payment, most businesses have to pay 28% of their profits in income tax. If you are able to do so, then it is highly recommended that you take 28% of your monthly profit and move it into a separate savings account so that when your deadlines roll around you already have the cash on hand to make your tax payments. The SARS guide for provisional tax can be found here.
Want some help with taxes and cashflow management? Book some time with us, we’d love to help.