3rd Top Up Payment for Provisional Taxpayers: A Clarification
Many taxpayers mistakenly believe provisional tax can be paid when the third top-up payment is due. This misconception often leads to late payment penalties. In this article we aim to clarify the purpose of the third top-up payment for provisional tax.
Who is a Provisional Taxpayer
Before going any further, we need to clarify the concept of a provisional taxpayer. A provisional taxpayer is any individual who earns income that does not qualify as "remuneration." Notably, an independent consultant is not considered a provisional taxpayer, as there is no employer-employee relationship, and no remuneration is paid. Examples of remuneration include salaries, wages, leave pay, and bonuses. If an individual's sole source of income is remuneration, they are not classified as provisional taxpayers, as tax on remuneration is deducted at source via the PAYE system.
Note: There is no longer a registration or deregistration process to be a provisional taxpayer. The onus is on the taxpayer to determine if he or she is liable for provisional tax, and to request and submit an IRP6 return via eFiling.
Exempt Income and Provisional Tax Status
Receiving the following types of exempt income does not make an individual a provisional taxpayer:
Interest of less than R23,800 (if the individual is under 65)
Interest of less than R34,500 (if the individual is 65 or older)
Exempt income from a tax-free savings account
Exempt dividends, as per section 10(1)(i) of the Income Tax Act.
Any natural person is excluded from the payment of provisional tax who does not derive income from the carrying on of any business, if in that relevant year of assessment such person’s taxable income:
Does not exceed the tax threshold; or
From interest, dividends, foreign dividends, rental from letting fixed property and remuneration from an employer that is not registered for employees’ tax does not exceed R30 000.
Capital Gains and Provisional Tax
For taxpayers receiving capital gains upon disposing of an asset, the tax treatment depends on their provisional taxpayer status:
Non-Provisional Taxpayer
If an individual is not a provisional taxpayer, as their sole source of income is remuneration, any capital gain should only be reported when submitting the ITR12 tax return.
Provisional Taxpayer
If the individual is already classified as a provisional taxpayer, any capital gain must be accounted for in the period it arises. The IRP6 provisional tax return should include the taxable capital gain, incorporating the Annual Exclusion and the relevant inclusion rate when estimating taxable income.
Provisional Tax Payment Due Dates
First Period
The first provisional tax payment is due within six months from the start of the assessment year. For a tax year beginning on March 1 and ending on February 28/29, this means the payment must be made by August 31.
Second Period
The second provisional tax payment is due by the last day of the assessment year. For a tax year starting on March 1 and ending on February 28/29, this means the payment must be made by February 28/29.
Payment of Provisional Tax
Provisional tax payments must be made within the timeframe specified in the assessment notice issued by SARS. Below are examples of the applicable payment dates:
Example Payment Schedules
Tax Year Ending 28 February
First provisional tax payment: Due by 31 August of Year 1.
Second provisional tax payment: Due by 28 February of Year 2.
Third or voluntary payment: Due by 30 September of Year 2.*
Tax Year Ending 31 May
First provisional tax payment: Due by 30 November of Year 1.
Second provisional tax payment: Due by 31 May of Year 2.
Third or voluntary payment: Due by 30 November of Year 2.*
* The third or voluntary payment often causes confusion, leading to unintended interest charges on late payments. Some taxpayers mistakenly believe that the provisional tax due on 28 February (for a February year-end) or 31 May (for a May year-end) can instead be paid on 30 September of year 2 or 30 November of Year 2 respectively. This is incorrect. The third or voluntary payment option should not be used in this manner.
Calculation of estimates of taxable income
If a provisional taxpayer with a taxable income of up to R1 million, final estimate of taxable income must not be less than 90% of actual taxable to avoid understatement of income penalty.
If a provisional taxpayer with a taxable income above R1 million, the final estimate of taxable income must not be less than 80% of actual taxable to avoid understatement of income penalty.
Third or Voluntary Payment: An Illustrative Example
The third payment (top-up) is not meant to ensure that the total tax payment meets the 80% or 90% of the estimated income tax liability. Instead, the payment made in February (for individual taxpayers) or the second payment at the end of the tax year (for companies) must ensure this. It is important to understand this statement: “The third payment (made in September for individuals) is for ‘fine-tuning’”. I cannot think of a better word to explain this.
For Example:
Let's say your client (a company) estimated their taxable income in February 2023 to be R900 000 and paid the tax on this estimate, which equals R243 000 (900 000 x 27%).
However, after completing the AFS (which the company has a year to finalize), the actual taxable income turned out to be R970 000.
Given that the tax paid was based on the R900 000 estimate (tax paid = R243 000), no tax was paid on the additional R70 000 of taxable income.
Note that R900 000 /R970 000 x 100% = 92.78%. There is no understatement penalty because the estimate was more than 90% correct. But the third payment is required to cover the tax on the R18 900 (70 000 x 27%), and there will be no interest on the R70 000unless the payment is made after 30 September (depending on the tax year-end).
The point is that the third payment is not used to pay the tax on the R900 000 but on the amount exceeding R900 000– hence it is for fine-tuning!
The third payment (top-up) is required to cover the tax on the R70 000 and there will be no interest on the R70 000 unless the payment is made after 30 September. The amount to be paid as the third payment is R70 x 27% = R18 900
In summary, the third payment is not used to pay the tax on the R900 000 but only on the amount exceeding R900 000 which is R70 000– hence it is for fine-tuning!
Legislatively speaking, paragraphs 21 and 23 of the Fourth Schedule of the Income Tax Act govern the payment of provisional tax that accompanies the estimates for a provisional taxpayer’s first and second periods (the R900 000 in the above example), while paragraph 23A allows for voluntary, additional payments by those provisional taxpayers who might be liable for interest on the normal tax (the R70 000) due by them that is not paid by a certain date.
Since the actual taxable income is R970 000 and tax payable on this income equals R261 900, only R18 900 can be paid as a top-up payment. The full amount of tax R261 900 cannot be paid as a top-up payment.
Conclusion
A similar narrative can be used to explain the tax implications for individuals and the third top-up payment. However, for companies, adjustments would be made for any foreign tax rebates, while for individuals, modifications would account for primary, secondary, tertiary, and medical tax credits.
For more guidance refer to the SARS website:
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