Finance Minister Pravin Gordhan stated in the 2016 Budget that South Africa has built one of the most effective tax authorities in the world. He emphasised that the electronic filing platforms and the normal tax collection mechanisms make personal tax revenue collections easier.
This year’s Budget provided further proposals with regard to provisional tax as a tax collection mechanism.
Who is a provisional taxpayer?
An individual who earns income other than remuneration or an allowance or advance payable by his/her employer, is required to submit provisional tax returns. In addition, where SARS notifies a taxpayer that he/she is a provisional taxpayer, he/she will be required to file provisional tax returns.
An individual is exempt from the payment of provisional tax if he/she does not carry on any business and his/her taxable income
* Does not exceed the applicable annual tax threshold; or
* Includes interest, dividends, foreign dividends, and/or rental from the letting of fixed property, which does not exceed R30 000 per year.
In terms of current practice, should the Commissioner determine that a taxpayer should be a provisional taxpayer, SARS alerts that taxpayer of his or her provisional tax status through individual notice. This is often the case where employees who receive remuneration from foreign employers and have no PAYE withheld from that remuneration – on assessment, due to the large tax payments due on assessment, SARS will notify the taxpayer of his/her provisional status. However; in terms of the current provisions dealing with provisional taxpayers in the Fourth Schedule to the Income Tax Act[1], a taxpayer who receives remuneration as the only source of income, should not be regarded as a provisional taxpayer.
What is being proposed?
This year’s Budget highlights three key proposals relating to the provisional tax collection mechanism:
* Notification of employees of foreign employers of their provisional tax status through a public notice as opposed to individual notices, which is currently required;
* Removal of the exclusion of lump sum payments not subject to the lump-sum tax tables from the underestimation penalty calculation where provisional tax is underpaid; and underpayment penalties do not currently apply to second provisional tax payments as long as they are submitted before the due date of the following provisional payment. This date will move forward to the assessment date for that tax year.
What is the potential impact?
Proposal 1 – Presenting the notification by way of a public notice may detract taxpayers from claiming ignorance with regard to their provisional tax status. The Commissioner is placing the ball squarely back in the taxpayers’ court. Furthermore, the proposal will see the provisional tax collection mechanism extend to taxpayers who receive foreign remuneration, not subjected to PAYE, as their only source of income.
Proposal 2 – Certain lump sum payments made to employees (i.e. in terms of the relinquishment or termination of office), may not be subject to tax in accordance with special tables. In situations where taxpayers do not pay the required amount of provisional tax, the current legislation dealing with the calculation of the penalty in respect of the underpayment of provisional tax, excludes these lump sums. It is proposed that the legislation will be amended to remove the exclusion relating to lump sum amounts not subject to the lump-sum tax tables, when calculating the penalty. It will therefore be incumbent upon the provisional taxpayer to ensure that the appropriate amount of tax is paid in respect of lump sum payments, not subjected to tax in accordance with special tables.
Proposal 3 – Current legislation requires that a provisional taxpayer submit an estimate of taxable income for the second provisional tax period, before the due date of the subsequent provisional tax payment, being the third provisional tax payment. The second provisional tax period ends 28/29 February each year and the subsequent provisional tax payment follows on or before 30 September of the same year. In this regard, the taxpayer has an opportunity to make a top-up payment seven months after the end of the tax year by way of a third provisional tax payment on or before 30 September.
It is proposed that the window period be amended to close on the date of assessment for the relevant tax year. This implies, if a provisional taxpayer submits his or her annual tax return in January the following year, he or she has an opportunity to settle the tax liability upon date of receipt of the notice of assessment, as opposed to seven months after the end of the tax year in September. However, taxpayers who submit their tax returns early, will be required to pay the additional provisional tax earlier.