How do the penalties on provisional tax work?

Suppose the taxpayer fails to timeously make payment of the provisional tax liability (for the first or second provisional tax period). In that case, SARS will impose a penalty – which is calculated at 10% of the provisional tax liability not paid – and levy interest.

SARS can also impose an underestimation penalty where a taxpayer’s actual taxable income for the relevant year of assessment is more than the estimate of taxable income declared by the taxpayer at the second provisional tax period.  The calculation of the underestimation penalty depends on whether the taxpayer’s actual taxable income is less or more than R1 million for the year of assessment.

Actual taxable income is equal to or less than R1 million

An underestimation penalty will be levied if: 

  • a taxpayer’s actual taxable income for the year in question is equal to or less than R1 million; and
  • their estimate for the second provisional tax period is less than 90% of their actual taxable income; and 
  • their estimate was less than the “basic amount” applicable for the second period.

The amount of the penalty is calculated as 20% of the difference between:

  • The lesser of:
    • The amount of normal tax payable on 90% of the actual taxable income, after taking into account of a rebate deductible in the determination of normal tax payable;
    • The basis amount;
  • And the total amount of tax paid by the taxpayer by the end of the year of assessment.

For instance, Taxpayer A’s basic amount is R500 000 for the 2021 year of assessment, and he estimated his taxable income for the second provisional tax period to be R400 000, but his actual taxable income for the 2021 year of assessment was R600 000. The estimate for the second period of R400 000 is less than 90% of the actual taxable income for the 2021 year of assessment which is R540 000, and the estimate for the second period of R400 000 less than the basic amount of R500 000. Accordingly, an underestimation penalty will be levied.

Actual taxable income is more than R1 million

An underestimation penalty will be levied if: 

  • a taxpayer’s actual taxable income for the year in question is more than R1 million; and
  • their estimate for the second provisional tax period is less than 80% of their actual taxable income.

The amount of the penalty is calculated as 20% of the difference between:

  • The amount of normal tax payable on 80% of the actual taxable income, after taking into account of a rebate deductible in the determination of normal tax payable; and
  • the total amount of tax paid by the taxpayer by the end of the year of assessment.

For instance, Taxpayer A estimated his taxable income for the second provisional tax period of the 2021 year of assessment to be R400 000, but his actual taxable income for the 2021 year of assessment was R1 million. The estimate for the second period of R400 000 is less than 80% of the actual taxable income for the 2021 year of assessment which is R800 000. Accordingly, an underestimation penalty will be levied.

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