Provisional taxpayers are required to submit two returns annually: one after six months from the start of the relevant year of assessment, and again one on the last day of the relevant tax year.[1] Since provisional taxpayers are taxpayers who earn income in a form other than salaried income (and from which PAYE is deducted every month), the fiscus relies on the provisional tax regime to ensure a steady cash flow throughout a tax year by requiring provisional taxpayers to file returns twice during the course of the year of assessment.

By virtue of returns being filed during the course of a tax year, provisional tax is paid over on estimates of provisional tax. Practically, it is difficult for provisional taxpayers to know exactly how much tax is actually required to be paid by them at that stage already, be it six months into a tax year or on the final day of the tax year. Therefore, it is quite possible that provisional taxpayers may, after the conclusion of a relevant tax year, realise that the estimates submitted were insufficient and would be less than the eventual tax that will ultimately be payable once a final tax calculation is performed. The Income Tax Act therefore provides for a so-called “top up” payment to be made by provisional taxpayers within 6 months after the end of the relevant year of assessment (or 7 months, if the taxpayer’s tax year ends on February).[2]

“Top up” or third payments of provisional tax provide provisional taxpayers with two distinct advantages. First, it allows for a cash flow benefit whereby taxpayers are able to manage their future cash flows by opting to make an additional payment towards taxes that will eventually in any event become due once an annual income tax return is ultimately submitted and assessed. Secondly, a third provisional tax payment also carries with it a significant concession in the form of an interest benefit. Whereas interest would ordinarily accrue in favour of the fiscus on underpaid provisional tax and calculated from the first day following the end of the year of assessment,[3] timely third payments of provisional tax are deemed to have been made on the last day of the year of assessment, in other words together with the second provisional tax payment.

Example: XYZ (Pty) Ltd’s 2017 tax year ends on 30 April 2017. It submitted Rnil provisional tax returns for both its first and second provisional tax estimates. Subsequently though, in finalising its 2017 year accounts, it is realised that XYZ (Pty) Ltd made a significant taxable capital gain of R10 million during the 2017 financial year and which it did not take into account previously in submitting its provisional tax estimates. If it were to pay the taxes due on this amount as a third provisional tax payment by 31 October 2017, no interest will be levied against it on the amount once an assessment for 2017 is issued. If however no third provisional tax payment is made, interest will levied on the underpaid amount with effect from 1 May 2017 upon the issuing of an assessment.

[1] Paragraphs 21 and 23 of the Fourth Schedule to the Income Tax Act, 58 of 1962

[2] Paragraph 23A of the Fourth Schedule to the Income Tax Act, 58 of 1962

[3] Section 89bis(2) of the Income Tax Act, 58 of 1962

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)