Provisional Tax – Basic Amount for First Provisional Payment

Ettiene Retief, Head of Tax Committee, SAIPA: In the past the taxpayer has become accustomed to SARS merely accepting the ‘basic amount’ as a basis for the first provisional tax estimate. However, SARS has recently started challenging the first provisional tax estimates made by taxpayers.

In terms of paragraphs 19(1)(a) and (b) of the Fourth Schedule of the Income Tax Act,

 (a)         “Every provisional taxpayer (other than a company or a person contemplated in paragraph 18) shall, during every period within which provisional tax is or may be payable by him as provided in this Part, or any extension of such period granted in terms of paragraph 25 (2), submit to the Commissioner, in such form as the Commissioner may prescribe, an estimate of the total taxable income which will be derived by the taxpayer in respect of the year of assessment in respect of which provisional tax is or may be payable by him.

(b)          Every company which is a provisional taxpayer shall, during every period within which provisional tax is or may be payable by it as provided in this Part or any extension of such period granted in terms of paragraph 25 (2), submit to the Commissioner, in such form as the Commissioner may prescribe, an estimate of the total taxable income which will be derived by the company in respect of the year of assessment in respect of which provisional tax is or may be payable by the company.”

In terms of paragraph 19(3) of the Fourth Schedule of the Income Tax Act

“The Commissioner may call upon any provisional taxpayer to justify any estimate made by him in terms of sub-paragraph (1), or to furnish particulars of his income and expenditure or any other particulars that may be required, and, if the Commissioner is dissatisfied with the said estimate, he may increase the amount thereof to such amount as he considers reasonable, and the estimate as increased shall be final and conclusive.”

Paragraph 19(1) provides that every provisional taxpayer shall submit an estimate of the total taxable income. The ‘basic amount’ generally applies in terms of the penalty provisions for under estimating the taxable income when comparing the second provisional tax estimate submitted against the final assessed taxable income. Furthermore, paragraph 19(1)(c) provides that a provisional taxpayer is obligated to submit an estimate of taxable income, which cannot be less than the ‘basic amount’, other than when prior consent is received from the Commissioner. This means that the first provisional tax estimate cannot be lower than the ‘basic amount’, but such ‘basic amount’ is not a ceiling to limit the first provisional tax estimate.

In a recent SARS response it was expressed that ‘the basic amount is a historic figure of taxable income, such amount may not reconcile to the estimate of taxable income for the year of assessment in respect of which provisional tax is payable. Accordingly, the use of the basic amount for estimates of taxable income is not considered acceptable. The only exception would be in instance where the taxpayer has made an estimate of taxable income for the period in question and such estimate is in line with the basic amount.’

SARS may request the provisional taxpayer to justify the estimate made for provisional tax purposes in terms of paragraph 19(3). SARS professes that paragraph 19(3) is not intended to punish or burden taxpayers, but to ensure that taxpayers do not deliberately underestimate their taxable income. If a notification in terms of paragraph 19(3) is issued by SARS, the taxpayer will be obligated to show that a reasonable estimate of taxable income was made, and not merely an election to use the ‘basic amount’.

In terms of paragraph 19(3) the Commissioner may increase the estimate submitted by the taxpayer to an amount he considers to be reasonable. Also, this increase in estimate shall be ‘final and conclusive’. Therefore, not subject to objection or appeal.

It should be noted that paragraph 19(3) provides that ‘the Commissioner may call upon any provisional taxpayer to justify any estimate made by him’, and as such the notice issued by SARS in terms of paragraph 19(3) should be addressed to the provisional taxpayer! SARS has in the past issued a notice to justify estimates submitted to the holding company of a group, expecting justification for all estimates made by the group and subsidiary companies. This is not correct, and SARS should individually address these notices to give proper effect to paragraph 19(3).

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