The deadline for filing and paying provisional tax for individuals, trusts and companies with February year ends is around the corner.
The provisional tax payable should be based on the actual taxable income for the year of assessment ending on 29 February 2020.[1]
The fact that tax payable should be based on a period without adequate data have proven difficult in the past, and some taxpayers were surprised by some nasty penalties as a result of such an under estimation.
Paragraph 20 of the Fourth Schedule to the Income Tax Act No 58 of 1962, (the Act), provide for a penalty if the final provisional tax estimate for the year is understated.
This underestimation penalty is based on a two-tier system, and depending on your actual taxable income for the year, require you to either base your provisional tax calculation within 90 per cent of the actual taxable income, if such taxable income is less than R1 million, or on 80 per cent of the actual taxable income, if such taxable income is more than R1 million.
Most taxpayers are only able to determine the actual taxable income on a much later date, thus leaving them uncertain and grabbing for a magic eight ball. More often than not, taxpayer rely on the ‘basic amount’ as provided for in par 19 of the Fourth Schedule to the Act, as the starting point to determine the second provisional tax payment.
It is important to note that the ‘basic amount’ as provided for in terms of par 19(1)(d) of the Fourth Schedule to the Act only apply to the calculation of the first provisional tax payment.
However, all is not lost and taxpayers can take action now in order to place themselves in a better position when they need to challenge the underestimation penalty at the South African Revenue Services, (SARS).
Paragraph 20(2) of the Fourth Schedule to the Act provide that where the Commissioner for the South African Revenue Services, (the Commissioner), is satisfied that the amount of the estimate was seriously calculated with due regard to the factors having bearing thereon, and was not deliberately or negligently understated, he may remit such an understated penalty, or part thereof.
Serious provisional tax penalty
In ITC 1899,[2] the grounds for the objection against an understatement penalty were formulated as follows:
“The imposition of penalties for underestimation of provisional tax is unnecessary (sic) punitive in respect of taxpayers where taxable income exceeds R1m. A taxpayer cannot reasonably be expected to make an accurate estimate of taxable income before the financial statements have been finalised.
“Financial statements are only prepared after the financial year end. The world economy is in a state of turmoil which adds to the uncertainty of local trading conditions.”
After consideration, SARS rejected the grounds for the objection, and the understatement penalty was not remitted. Clearly SARS requires more substance when the actions of a taxpayer in terms of par 20(2) of the Fourth Schedule to the Act are considered.
There must be a “serious” calculation, and SARS must be satisfied that the understatements was not done deliberately of negligently done.
SARS Interpretation Note 1, Issue 3, (Interpretation Note), luckily provide some guidance as to what SARS considers to be a “serious” calculation, and what should be considered as action that is not “deliberate” and “negligent”.
SARS look to the grammatical meaning of the word “serious” and attach it to the word “calculate”. The end result is that SARS does not require a calculation, but a calculation that was done “seriously”.
The SARS Interpretation Note clarifies what is meant by a “serious” calculation as follow:
“Thus, the calculation must be one which has been carefully considered and is thoughtful, earnest and sincere.
“A taxpayer must therefore have sensibly (and by careful reasoning and judgment, in a mathematical manner, and using experience, common sense and all available information) determined the amount of the estimate before the Commissioner is able to reduce a penalty.”
Such a “serious” calculation will proof that the actions taken by the taxpayer were not deliberate and negligent. It cannot be stressed enough that a seriously calculated provisional tax estimate will ease any attempt to object against under estimated penalties later on.
It is important to remember to “save” the “reasoning” behind the calculation, as well as the actual calculation, for future use.
Most taxpayer do take the necessary time and effort to come to the provisional tax estimation, but are unable to find it when it is required at a later stage.
Even though the existence of “exceptional circumstances” might assist with an objection, such mitigating factors, as provided for in terms of s218 of the Tax Administration Act, (TAA), are not always available when taxpayer want to object to an understatement penalty.
The “seriousness” of a “serious” calculation should therefore never be under estimated, if you do not want to pay an underestimate penalty. (Pun intented)
We further advise that taxpayers should seek the advice of a qualified tax professional immediately with matters of this nature. In this regard, Mazars Port Elizabeth has a number of dispute specialists that can deal with these matters timeously and decisively.
Please email any queries you may have in this regard to PLZ.TaxConsulting@mazars.co.za.
[1] Please note that 29 February falls on a Saturday, and any submissions and payments should be done by Friday the 28th of February
[2] ITC 1899 (Case No IT 14027; 7 December 2017; (2017) 79SATC 315)