/ 14 February 2011

Provisional taxpayers unfairly taxed

The South African Institute of Chartered Accountants (SAICA) is calling for amendments to provisional tax legislation because some taxpayers end up paying more than they should.

SAICA has lobbied for the retention of a basic amount for taxpayers making their second provisional tax payment. As things stand, taxpayers should have the basic amount increased by 8% every year where the return has not been assessed, but this isn’t the case — instead, taxable income is lifted by a massive 16%.

This is unaffordable, way above inflation and puts pressure on the livelihoods of provisional taxpayers, according to Muneer Hassan, SAICA’s project director of tax.

Even 8% is high, given that inflation is running at around 4%, so this is a huge burden to bear.

The inappropriately drafted legislation affects all provisional taxpayers whose annual taxable income sits at R1-million or less. This includes all companies, close corporations, most trusts, and individuals that are self-employed taxpayers. Individuals earning rental, dividend and/or interest income in excess of R20 000 per annum and below the age of 65 are also classified as provisional taxpayers.

Significantly, in instances where provisional taxpayers choose to go below the basic amount, provisional taxpayers expose themselves to penalties where the estimate does not fall within 90% of the tax due as finally determined by Sars.

To put the dilemma in context, Hassan says: “All provisional taxpayers with a February year-end, for the second provisional tax payment of 2011 due on 28 February 2011, will have their basic amount increased by 16% unless they have already received their 2010 assessment within 60 days from the end of February 2011.”

It’s highly unlikely that the taxpayer would have received the 2010 assessment as the due date for provisional taxpayers to have filed their 2010 tax returns was on or before January 31 2011.

“In light of this problem, we suggest that the Act be amended to ensure that in a ‘normal scenario’ — for example, where a taxpayer has only been assessed on the 2009 tax year then when submitting the 2011/01 or 2011/02 provisional tax return — the basic amount only be increased by 8%,” Hassan says.

Period 2011/01 refers to the first provisional tax return and the later refers to the second provisional tax return.

To effect the changes, a section of the relevant Act should be amended to reflect “from the end of such year to the beginning of the year of assessment in respect of which the estimate is made”, Hassan says.

This will result in the annual increments of 0% in the first year followed by 8% in the second year and 16% thereafter and so on. Compounding the problem is the fact that “the 8% annual increase is a fixed percentage in the Act” but that has to be aligned annually with inflation.

A second problem with the legislation is that the under-estimate penalty is linked to the taxable income numbers without regard to the actual tax paid. “Thus the penalty will apply even if the actual tax paid by the taxpayer is correct or even if it’s an over-payment. Late bonus payments are probably the best example,” says Hassan.

Hassan uses an example of a taxpayer who estimates taxable income at R1-million and pays provisional tax to ensure that such an amount is fully taxed. “If a late bonus payment, say, an extra R200 000 is received, the fact that this R200 000 might be fully taxed at 40% through the PAYE system does not save the taxpayer from the provisional tax penalty. This is grossly unfair because the full tax was in fact collected by Sars,” he argues.

If you have a business that’s seen a decline in revenue, you’ll know the threat of being doubly penalised, which is blatantly unfair.

SAICA will challenge the legislation when finance minister Pravin Gordhan tables this year’s budget on February 23.

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