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COVID-19 relief may complicate provisional tax for some

20 August 2020 Tax Consulting SA

The first period for provisional tax ends on 31st August. Provisional taxpayers must therefore have submitted their initial IRP6 return and settled any payments due by that date.

“In addition, COVID-19 relief allowances make the calculation of estimated tax all the more complicated,” warns Thamsanqa Msiza, Head of Individual Tax Returns at Tax Consulting SA. He advises those who wish to take advantage of this relief to act promptly to beat the deadline.

If not, they could incur stiff penalties on late submissions and interest on outstanding amounts. The same applies for underestimation of their taxable income. They should review the following to ensure they remain compliant.

Check your registration
Typically, anyone who earns income above the tax threshold from sources other than employment must register with SARS as a provisional taxpayer and pay provisional tax, even if they are employed full-time. Companies are automatically provisional taxpayers.

However, some parties are excluded if they meet certain conditions so it’s best to check personally or through a tax professional familiar with current requirements. To be safe, they should also check their registration status directly with SARS.

Understand COVID-19 relief
While many provisional taxpayers qualify for COVID-19 relief, some do not, such as those whose tax affairs are non-compliant. The ones who do qualify may defer a portion of their first and second period tax payments, offering an immediate relief to cash strapped taxpayers

Normally, they would pay 50% of their total tax liability in the first period and the balance in the second period. In the 2020/21 year, they can pay just 15% of their total tax liability in the first period, 65% in the second, and the remaining 35% in a third payment period. Provided all amounts are paid off by the end of the third period, they will not be subjected to penalties or interest.

“It’s important to understand that the tax obligation is only deferred and must be settled within the allowed timeframe,” says Msiza.

Check your calculation
This standard advice is doubly important with COVID-19 relief. Provisional taxpayers should note that the tax calculated is for the first half of the year, not the entire year. However, the percentage of payment due is calculated against the entire year and not the current period.

“For those with sophisticated streams of income, the shift in percentages could lead to a gross miscalculation, resulting in unnecessary losses,” says Darren Britz, Head of Legal at Tax Consulting SA. Such parties should not attempt to make last-minute submissions without the assistance of a qualified tax professional.

Check your income
Even those with firm control of their finances may misunderstand how certain income is viewed under law. For example, cryptocurrency is not immune to taxation and will be treated in accordance with how it is acquired or disposed of. Paid as income, it is taxed as income; won in a competition, it is taxed as a windfall; disposed of as an asset, it may attract capital gains tax; and so on.

“However, there are other complex financial instruments and arrangements whose resultant value may manifest as provisional tax,” says Britz. Again, he encourages those earners to approach their tax practitioner or tax attorney to avoid being penalised for evasion.

“With only a few days until the deadline, they must act now,” he concludes.

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