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SAICA proposes changes to provisional tax laws

Jonathan CoetzeeThe South African Institute of Chartered Accountants (SAICA) has proposed amendments to the South African tax laws pertaining to provisional tax. Areas of concern include underestimation penalties, retirement lump sums and severance benefits.

The current structure of provisional tax allows for underestimation penalties to be calculated on taxable income regardless of actual tax paid, resulting in penalties irrespective of whether the actual tax paid by a provisional taxpayer is correct or even an over-payment. This scenario applies to all provisional taxpayers. An example of where this is problematic is late bonus payments.

Retirement lump sums and severance benefits
In the case of retirement lump sums and severance benefits, the tax rates differ from that of other taxable income. However, income tax legislation does not recognise this difference for provisional tax purposes.

The amount of the most recently assessed taxable income serves as the amount which may be used by taxpayers for their first estimation of taxable income. (Taxpayers with a taxable income below R1 million may also use this amount for the second estimation). This amount allows the taxpayer to deduct lump sums which accrued, and were included, in the taxable income of the previous year of assessment. No similar provision applies when these amounts accrue in the current year of assessment, therefore no deductions may be made.

Although these lump sums have to be included in taxable income, the provisional tax return (IRP6) does not cater for the fact that these amounts are taxed in accordance with different rates (i.e. lower rates in most cases). When the taxpayer includes such lump sum, the system automatically calculates the tax due for purposes of the provisional payment, and the taxpayer ends up having to pay more tax than is technically correct.

If, on the other hand, a lower estimate is used to calculate the “correct” tax amount, SARS may levy penalties for the underestimation of assessed income. In this case, although the taxable income may be underestimated, the lump sum has indeed been correctly taxed and the tax payer will pay the actual amount of tax due.

SAICA has proposed that the law is amended to exclude both retirement lump sums and severance benefits from the estimated taxable income for provisional tax purposes.

This article has been taken in part from SAICA News of 16 February 2012.

For more information, contact Jonathan Coetzee of Tenk Loubser & Associates, tel. 021 852 0382 or e-mail jonathanc@exceedsw.co.za