Provisional Tax in Namibia: Avoid Penalties and Plan Smart
Do you earn income that isn’t automatically taxed? Provisional tax is designed to help taxpayers manage their income tax by paying it in instalments throughout the year, rather than in one lump sum. Business profits or freelance earnings are part of the categories that normally fall within the system provisional tax. The main goal of provisional tax is to align tax payments more closely with when income is earned, making it easier for taxpayers to budget and plan financially. It also helps the government maintain a steady flow of tax revenue throughout the year, aiding in effective budget management and the funding of public services.
Who is a Provisional Taxpayer?
Provisional tax registration in Namibia is mandatory for:
All companies and close corporations
Individuals if:
Any person earning taxable income more than N$ 50,000 per annum that is not received in the form of remuneration
Any directors of a private company (including members of close corporations) are also required to register as provisional taxpayers.
Any taxpayer who is registered as a farmer.
An individual who meets any of the above requirements should apply for registration as a provisional taxpayer with the Namibia Revenue Agency (NAMRA).
Payment Requirements
Provisional tax payments are due in two instalments:
The first payment must be submitted within six months from the start of the company's financial year, covering at least 40% of the estimated tax payable at year-end.
The second payment is due on or before the last day of the tax year, where at least 80% of the estimated tax payable must be settled.
Estimating the total income
To calculate the provisional tax due, taxpayers must first estimate their annual taxable income accurately to prevent penalties for underestimation. The estimation process involves the following steps:
Compile all sources of taxable income, including wages, business revenue, and other income streams.
Use the appropriate tax tables to determine the income tax that should be paid on this total.
Subtract any employees' tax (PAYE) already paid from the calculated tax amount.
Underestimation Penalty
Section 20 of the Income Tax Act, 1981 provides for an underestimation penalty when a provisional taxpayer’s income estimate falls short of the following thresholds:
When the first six-month estimate of a taxpayer’s income is less than 80% of what is ultimately determined to be 50% of their yearly taxable income. Effectively, this means that 40% of the actual taxable income
When the final annual income estimate is also less than 80% of the year’s determined taxable income. In both cases, the penalty can be up to 100% of the tax due, after accounting for any provisional and employees’ tax already paid for that period.
It is important to estimate the taxable income as accurately as possible when submitting returns.
Pitfalls, Penalties, and Interest
Failure to comply with provisional tax requirements can lead to significant penalties and interest:
Late Submission: NAD 100 per day penalty for overdue provisional tax returns.
Late Payment: 10% monthly penalty on unpaid taxes.
Underestimation of Tax: Up to 100% penalty on the underpaid amount.
Interest: Charged at a rate of 20% per annum on late payments.
Section 80: Payment of employees’ tax and provisional tax and interest on overdue payments of such taxes.
What to Do If You No Longer a Provisional Taxpayer
If you are no longer a provisional taxpayer, i.e. if you transition to salaried positions where your income is classified as remuneration subject to PAYE (Pay As You Earn), you need to notify the Inland Revenue Department to update your tax status. This is not automatic!
Upon changing from a provisional taxpayer to a salaried employee:
Inform the NAMRA about the change in income nature.
Ensure all outstanding provisional tax payments are settled to avoid penalties.
What should accountants do to assist clients?
Accountants are crucial in ensuring seamless filing of returns and managing clients’ tax affair to avoid underestimation penalties. Here are some practical tips for accountants to ensure their clients meet provisional tax requirements efficiently:
1. Regular Income Tracking and Reporting
Encourage clients to maintain accurate records of all income sources. Implement a robust system for tracking income and expenses, allowing for more precise estimations of taxable income throughout the year.
2. Frequent Financial Reviews
Schedule quarterly or bi-annual reviews of your client's financials. This will help catch any significant deviations in income or expenditure early, allowing for timely adjustments in tax estimates.
3. Use of Technology
Using accounting software that can integrate with other financial systems (like banking apps) to provide real-time data on your clients' financial status. This technology can help in making more accurate and timely tax estimations.
4. Educate Your Clients
Regularly inform your clients about the importance of accurate provisional tax estimations and the potential penalties for underestimation. Ensure they understand the criteria for each payment period and the consequences of non-compliance. See our template letter you can use below to send communicate to your clients.
5. Plan for Variability
For clients with variable income, such as those in freelancing or seasonal businesses, help them set aside a higher provision for tax during peak income periods to compensate for leaner times.
6. Document All Adjustments:
Keep detailed records of all calculations and the rationale behind each estimation. This documentation can be invaluable during audits or when justifying estimates to the tax authorities.
7. Anticipate Changes
Stay informed about any changes in tax legislation that may affect provisional tax calculations and keep your clients updated. This proactive approach can prevent compliance issues stemming from regulatory updates.
8. Deadline Reminders:
Set up a system of reminders for both yourself and your clients to ensure that all provisional tax filings and payments are made well before the deadlines.
9. Leverage Professional Judgment:
Use your expertise to make educated judgments on expected annual income, especially when dealing with complex cases involving capital gains, foreign income, or irregular earnings.
10. Collaborate with Clients:
Maintain open lines of communication with your clients. Encourage them to consult with you before making significant financial decisions that could impact their tax liabilities, such as selling assets or changing business structures.
Case study
Sara, a freelance graphic designer estimated her taxable income for the first six months of the year based on her actual income to be N$100,000.
However, towards the end of the year, she gets a lucrative contract raising her annual taxable income to N$300,000.
Based on the actual taxable income, her provisional tax payments should have been:
Actual Taxable Income for the Year: N$300,000
Expected Taxable Income for the First Six Months (50% of the Year): N$150,000 (50% of N$300,000)
80% of the mid-year taxable income threshold: N$120,000 (80% of N$150,000)
Sara's estimated taxable income declared for the first six months: N$100,000
Assessment:
Sara’s six-month income estimate is N$100,000, which is below the 80% threshold of N$120,000.
Therefore, she underestimates her income by N$20,000 (N$120,000 - N$100,000).
Penalties:
Since Sara’s estimate is less than 80% of the actual mid-year taxable income, she faces an underestimation penalty.
The penalty can be up to 100% of the tax payable on the underestimated amount. Assuming her tax rate is 20%, the initial tax due on the underestimated amount (N$20,000) would be N$4,000.
The underestimation penalty could therefore be up to N$4,000 (100% of N$4,000).
In practice, Sara would need to make additional payments to cover the underestimated amount plus any penalties and interest due. It’s crucial for provisional taxpayers like Sara to closely monitor their income and adjust their estimates accordingly to avoid such penalties. This example emphasises the importance of accurate income estimation when dealing with provisional taxes.
