Frans van Eden writes:
For most readers, it is time to submit their provisional income tax returns. In this return, you have to provide an estimation of your taxable income for the next tax year. Your taxable income is your profit for the year, after all possible tax concessions have been deducted and all non-deductible expenses have been added back.
For the purpose of this article, I will focus on individuals and entities with financial years ending in February.
There are three preliminary income tax periods every year. For the 2018 tax year, these periods are:
- 2018/01: 31 August 2017.
- 2018/02: 28 February 2018.
- 2018/03: 28 September 2018 (last business day of the month).
Tax planning forces you to contemplate the following two aspects:
- Knowing when you have to pay how much income tax.
- Planning so that your organisation can use all tax concessions applicable to you (a topic I will write about next month).
Businesses and salaried persons
In the ideal world, the tax you pay to the receiver of revenue is used for basic services rendered to the country’s citizens. Any country’s economy consists of different participants contributing to the government budget, namely businesses and salaried persons.
Just like you have to plan your cash flow, the government has to plan its income. Salaried persons pay monthly taxes to the government and businesses must do a provisional tax payment twice a year, with a third (optional) “top-up” payment if you paid too little in your previous two payments.
First provisional payment
Your first payment of provisional tax is done six months into your new financial year. You have two options on which you can base your payment:
- A South African Revenue Services (SARS) estimate.
- Actual figures.
The SARS estimate is based on the last tax assessment issued by SARS. If the tax year for the assessment ended within 18 months prior to the deadline of the provisional return, you can use the taxable income on this assessment as your base amount for calculating your provisional tax.
If the assessment is older than 18 months, you have to let the taxable income escalate by 8% per annum. This means that you may still use the 2018/19 return as your basis for the 2016 tax year, but any assessment from an older tax year must be escalated by 8% per annum. For assessments of the 2015 tax year, you will therefore have to let the return escalate by 24%.
If you prefer working with actual figures, you should first calculate the profits for the six months ending 31 August 2017. If you do your calculations at the beginning of August, you will have to estimate the taxable income from August to February 2018. The closer you get to the end of August, the more accurately you will be able to determine the taxable income for August.
In businesses with a sustained income throughout the year, estimating profits until February 2018 is a simple enough exercise, as you can multiply the profit until the end of August by two. In businesses with seasonal turnovers, more accurate estimates are required.
Second provisional payment
The second payment of provisional tax is in February 2018, payable in the last month of your financial year. Again, it can be based on the SARS estimate or actual figures. It is important to keep in mind that fines and interest are payable if your final tax for the year differs significantly from your second provisional estimate.
To avoid fines and interest, you must ensure that your second provisional tax payment remains within the following limits: If your taxable income for the year is less than R1 million and you are using actual figures, your final taxable income for the year must be within 90% of your second provisional tax estimate.
In this case, the safest way to avoid fines and interest, is to accept the SARS estimate. The SARS estimate may be less than the tax payable if actual figures were used, but the difference can be made up with the third provisional tax payment in September 2018.
If your taxable income for the year is more than R1 million, everything changes. You have to work with actual figures and there is no protection if you rather accept a SARS estimate. Your final taxable income for the year must be within 80% of your second provisional estimate to avoid fines and interest on the underestimation of taxable income.
Third provisional payment
If you choose to use only a part (e.g. 80% of the taxable income for the year) as the basis of your calculations, you have to pay the difference with the third provisional tax period in September. The third provisional tax payment is optional (seven months after year-end for entities with a February year-end, but six months after year-end for any entity with a year-end other than February).
The Companies Act (Act 71 of 2008) stipulates that the financial statements of a company must be finalised six months after year-end – hence, your profit is finalised and you can determine your final tax liability with certainty. It means that if you paid too little tax for a year, you can pay the difference in September 2018. It is important to keep in mind that, if you paid too little tax and you choose not to make a third payment in September, the interest on the difference will accumulate until you pay the tax.
When your business’s profit can be determined with reasonable certainty, you can plan your tax well in advance. It is possible to determine your tax cash flow at least one year ahead with reasonable certainty and when you are sure about the amount of money you need and when, you can gradually start saving for it.
Once you have planned for your greatest expenses, such as tax, you will increase your business’s chances of success. Therefore, be prepared for future tax payments. – Frans van Eden
Frans van Eden is an accountant with a passion for business. For any information and advice, contact him on email firstname.lastname@example.org.