Guide to provisional tax for individuals and companies
As we approach the new income tax year, you’ll need to start thinking about preparing for provisional tax payments. Here’s what you need to know:
Provisional tax for individuals
According to SARS, provisional tax isn’t a separate form of tax, but rather a way of paying your tax in advance. Provisional taxpayers make two payments in advance of filing their tax returns (due in August and February), which are based on their estimated taxable income.
In this way, SARS collects tax on your revenue streams earlier than they would if they had to wait for you to file your tax return at the end of the tax period. The benefit for provisional taxpayers is that you can better manage your tax payments and ensure you don’t have a large tax debt on assessment.
If you’re employed full-time – and you receive no other revenue such as rental income, interest and investment income, freelance/business income, or other taxable income – your employer withholds Pay As You Earn (PAYE) from your salary and pays it over to SARS. In this case, you’re not liable for provisional tax.
Provisional tax for companies
Corporate Income Tax (CIT) is imposed on companies resident or managed in South Africa – whether they derive their income from within or outside the country. And, every business liable for taxation is required to register with SARS as a taxpayer.
For the year of assessment this applies to every company or other juristic person that’s a resident when:
- It derives a gross income of more than R1m
- It holds assets with a cost of more than R1m or had liabilities of more than R1m at any time during the year of assessment
- It derives any capital gain or capital loss of more than R1m from the disposal of an asset to which the Eight Schedule of the Income Tax Act applies, or
- It had taxable income, taxable turnover, an assessed loss or an assessed capital loss.
In any of these cases, a tax return must be submitted.
In addition to annual returns, every company (excluding body corporates, share block companies, and public benefit companies) is required to submit provisional tax returns (IRP6). The first of these must be submitted six months from the start of the year, while the second is due at year-end. Both must contain an estimate of the total taxable income earned or to be earned for the full year. Payment of the tax must accompany the return. A third “top-up” payment may be made six months after year-end.
For the years of assessment ending on 31 March 2023 and later, the CIT rate is 27% (previously 28%).
Top tip: Tax exemption
Companies automatically fall into the provisional tax system. There is no longer a registration or deregistration process to be a provisional taxpayer. The onus is on you to determine if you’re liable for provisional tax and to request and submit an IRP6 return via eFiling.
Companies: How the reduced assessed loss rules affect your tax rate
Effective for the years ending on or after 31 March 2023 – or the year of assessment from 1 April 2022 onwards – the new tax rule applies to assessed losses generated before and after 1 April 2022.
Previously, companies could offset 100% of any assessed loss carried forward from a previous tax year against all their taxable income for the current year. They could also carry over any remaining assessed loss balance to future years, indefinitely but subject to the company continuing to trade.
In other words, companies only became liable for income tax once they earned a taxable profit and the balance of the assessed loss was exhausted.
The new rules
However, under the new rules assessed losses brought forward from a previous assessment year can only be offset against either a gross income of R1m or more or against a maximum of 80% of taxable income for the current year.
What this means is that income tax will now always be levied on 20% of the taxable income for the year where the taxable income in the current year exceeds R1m, irrespective of the brought forward assessed loss balance.
Therefore, companies with a taxable income below R1m will not be affected by the new rules and companies will not lose the balance of the assessed loss not used in a year. The balance can be carried forward to the next tax year.
However, if a company does not trade for a full year of assessment and no income is earned from such trade, the assessed loss may be lost.