The South African Institute of Chartered Accountants (SAICA) has proposed that the finance minister introduce some changes for provisional taxpayers in his budget speech next week.
The challenge with the current structure of provisional tax is on the underestimate penalty, which is driven off the taxable income numbers without regard to the actual tax paid.
According to Muneer Hassan, project director of tax at SAICA, this results in penalties which apply irrespective of whether the actual tax paid by the taxpayer is correct, or even if it’s an over payment. This applies to all provisional taxpayers and the late bonus payments are probably the best example.
“By way of illustration”, explains Hassan, “A taxpayer estimates taxable income of R1-million and pays provisional tax to ensure that the R1-million is fully taxed.
“If a late bonus payment, of say, an extra R400 000 — is received, the fact that this R400 000 might be fully taxed at 40% through the Pay As You Earn system does not save the taxpayer from the provisional tax penalty,” he says, adding that “this is patently unfair because the full tax was in fact collected by the South African Revenue Service (Sars)”.
SAICA therefore proposes that the calculation of the underestimated penalty be amended to take into account the actual tax already paid by the taxpayer.
Some of the other areas of concern are retirement lump sums and severance benefits, which are subject to tax at rates that differ from the rate at which other taxable income is taxed. The current income tax legislation does not recognise this difference when the recipient is a provisional taxpayer.
Taxable income
The basic amount, which is the most recent assessed taxable income and which may be used by all taxpayers for their first estimate of taxable income, and by taxpayers with less than R1-million taxable income, for the second estimate allows the taxpayer to deduct these lump sums if they accrued and were included in the taxable income previously assessed. There is no similar provision where these amounts accrued in the current year of assessment.
However, the challenge is that all these lump sums must also be included in taxable income. The provisional tax return (the IRP6) does not cater for the fact that these amounts are taxed in accordance with different rates (in most cases lower rates).
Hassan says: “If the taxpayer includes the lump sum, as he or she should in the estimate, the system automatically calculates the tax due for purposes of the provisional payment, and the taxpayer ends up having to pay more tax than required.”
If a lower estimate is used to calculate the “correct” tax amount, Sars may levy penalties on assessment for underestimation of income. Sars levies the penalty because the taxable income was underestimated but the lump sum was in fact already correctly taxed and the tax itself was not underpaid, Hassan explains.
“SAICA proposes that the law is amended to exclude from the estimated taxable income, for purposes of provisional tax, both kinds of retirement fund, lump sum benefits and also severance benefits,” Hassan concludes. — I-Net Bridge