Company Provisional Tax Explained
Provisional tax is not a separate tax from income tax, it's just a prepayment of your company’s income tax.
The goal is to spread your company’s income tax payment over the year in two instalments, one at the middle of the year and one at the end of the year. There is also a third optional payment made 7 months after the tax year-end if the previous payments were not enough.
Provisional tax estimates
Provisional tax is calculated using an estimated taxable income. This is because when we make provisional tax calculations, the tax year is not complete and therefore we don’t know what the actual taxable income for the company will be. It is important to make the best estimate possible because if you underestimate your provisional tax, there is a risk SARS will charge your company penalties.
There are two options when it comes to the taxable estimates you can use:
- Calculate your own estimate.
- Use what SARS calls “the basic amount”.
The basic amount is an estimate calculated by SARS based on your previous tax returns. SARS knows that these estimates can be difficult to calculate and if you do not have the knowledge or resources to do so they give you the option to use their estimate. Additionally, if you use their estimate you will not be charged penalties if your provisional tax was underestimated.
So if you want to pay the least amount of provisional tax without worrying about being charged penalties, you can use the basic amount SARS gives you. That way even if your taxable income turns out to be higher than expected, you will not be charged penalties for not paying enough provisional tax.
It is also important to consider that SARS only allows you to use the basic amount if your taxable income is below R1 million. If your taxable income is higher than that you must make an estimate yourself because protection from penalties will not apply to you.
It is important to consider the basic amount when doing any tax planning around provisional tax payments. From a cash flow perspective, it may be easier to use the basic amount rather than own estimates to ensure tax compliance and avoid penalties. Any additional amounts can be paid later in the year (third optional payment). It is far easier to avoid penalties than get rid of them afterward.
Did you know that Govchain will automatically notify you when company tax returns are due? Need help? Get assistance with company tax returns.