Provisional tax is a payment system that requires companies to pay income tax in advance, based on an estimated taxable income for the current financial year. The purpose is to ensure companies pay their income tax on time and in a manageable way throughout the year, rather than in one large lump sum at year-end.
Any company earning income that is not subject to employee tax (PAYE) must register for provisional tax and make two payments per financial year. This includes most actively trading companies.
Provisional tax is based on an estimate of taxable income for the current financial year. The estimate must not be less than the basic amount, which is derived from the taxable income assessed for the latest preceding year of assessment. If the estimate is made more than 18 months after the end of the preceding year, the basic amount must be increased by 8% per year.
Let’s say ABC (Pty) Ltd had taxable income of R300,000 in its most recent year of assessment. The company is now estimating provisional tax for the current year.
Step 1 — Establish the basic amount: R300,000 (from prior year assessment).
Step 2 — Apply the 8% uplift (if applicable): If the estimate is made more than 18 months after the previous assessment: R300,000 × 1.08 = R324,000.
Step 3 — Calculate tax at 27% corporate rate: R324,000 × 27% = R87,480.
Step 4 — Split into two payments: R87,480 ÷ 2 = R43,740 per payment (first payment due end of August, second due end of February).
Important: These are minimum estimates based on the basic amount. If the company expects to earn more than R324,000, it should estimate higher to avoid penalties.
Under-estimation of provisional tax carries a 20% penalty on the shortfall when:
Illustration: If a company estimates taxable income of R300,000 but actual income is R450,000, the estimate is 33% below actual. The shortfall in tax is (R450,000 − R300,000) × 27% = R40,500. The 20% penalty on that shortfall = R8,100. This penalty applies on top of any interest charged.
Accurate records are essential for making reliable provisional tax estimates. Keep records of all income received, expenses incurred, and deductions claimed. The provisional tax return must include a statement of estimated taxable income, signed by a director or authorised representative.
Provisional tax preparation can be complex. Working with a registered tax practitioner ensures your estimates are accurate and your submissions are made on time, avoiding penalties and interest. Contact DigMe Solutions to discuss your provisional tax obligations.