By Chris Herbst, Chartered Business Accountant in Practice (CBAP) with CIBA, General Tax Practitioner (GTP) with SAIT, Stellenbosch University. Team registered with SAIT, SAIPA and CIBA.
Provisional tax asks you to estimate your taxable income for the year before the year has ended. Paragraph 20 of the Fourth Schedule to the Income Tax Act 58 of 1962 is the rule that holds you to that estimate. Once SARS assesses your ITR12 and knows your actual taxable income, it compares that figure with the estimate on your second IRP6. If the estimate was too low by more than the Act allows, SARS levies the underestimation penalty. This guide explains the tests, how the penalty is worked out, how to avoid it and how to ask SARS to remit it.
What is the paragraph 20 underestimation penalty?
The paragraph 20 penalty is a 20% penalty on the provisional tax you did not pay because your second-period estimate of taxable income was too low. The SARS Guide for Provisional Tax (GEN-PT-01-G01) states that it is levied where actual taxable income is more than the taxable income estimated on the second provisional tax return, and that the penalty is deemed to be a percentage based penalty under Chapter 15 of the Tax Administration Act.
Which IRP6 does SARS test?
SARS tests the second IRP6 only, the one due by the end of February. The first IRP6 matters for interest and the late payment penalty, but the underestimation test looks at the final estimate for the year. Our guide to the second IRP6 payment for 2027 covers that return's dates.
Does it matter if SARS increased my estimate?
No. SARS Interpretation Note 1 (Issue 3) states that the penalty is still leviable even where SARS increased the estimate under paragraph 19(3), and that the estimate you submitted, not the increased one, is the figure tested.
What happens if I never submit the second IRP6?
You are deemed to have submitted an estimate of nil taxable income, unless you submit the second IRP6 within four months after the end of the year of assessment. A nil estimate fails the test by the full amount of your income, so the penalty is as large as the formula allows.
When does the underestimation penalty apply?
The penalty applies when your second estimate falls below a threshold that depends on whether your actual taxable income, as finally assessed, is above or below R1 million. The SARS guide and Interpretation Note 1 set out the two tests as follows.
- Penalty applies when: Income R1 million or less: Estimate below 90% of actual and below basic amount; Income above R1 million: Estimate below 80% of actual
- Tax compared: Income R1 million or less: Lesser of tax on 90% or on basic amount; Income above R1 million: Tax on 80% of actual
- Deducted from it: Income R1 million or less: PAYE and provisional tax paid by year end; Income above R1 million: PAYE and provisional tax paid by year end
- Penalty rate: Income R1 million or less: 20% of the difference; Income above R1 million: 20% of the difference
What is the test if my taxable income is R1 million or less?
For actual taxable income of R1 million or less, the penalty applies only if the second estimate is less than both 90% of actual taxable income and the basic amount. Interpretation Note 1 states that no penalty is levied if the second estimate was greater than the applicable basic amount.
What is the test if my taxable income is above R1 million?
Above R1 million there is one test: the second estimate must be at least 80% of actual taxable income. The basic amount gives no protection at this level, so an estimate based on last year's assessment fails whenever this year's income has grown by enough.
What is the basic amount?
The basic amount is your taxable income as assessed for the latest preceding year, excluding any taxable capital gain and certain retirement fund lump sums and severance benefits. The SARS guide states that the assessment counts only if it was issued at least 14 days before you submit the IRP6, and that the basic amount is increased by 8% if the estimate is made more than 18 months after the end of that preceding year.
Are lump sums and severance benefits included?
No. Retirement fund lump sum benefits, retirement fund lump sum withdrawal benefits, severance benefits and amounts under paragraph (d) of the definition of gross income are left out of the penalty calculation, as the Interpretation Note sets out.
How is the underestimation penalty calculated?
The penalty is 20% of the difference between the normal tax on the threshold figure and the employees' tax and provisional tax you paid by the end of the year of assessment. Normal tax here is after rebates. Work it in three steps.
- Find the threshold. Take 80% of actual taxable income above R1 million. At R1 million or less, take the lesser of the tax on 90% of actual taxable income and the tax on the basic amount.
- Subtract what you paid. Deduct the PAYE withheld and the provisional tax paid by the last day of the year of assessment.
- Apply 20%. The penalty is 20% of what is left, reduced by any paragraph 27 late payment penalty on the second payment.
What does a worked example look like?
The figures below are an illustration, chosen to keep the arithmetic clear, not taken from the tax tables. Assume actual taxable income of R800,000, a second estimate of R600,000 and a basic amount of R650,000. The estimate is below 90% of actual (R720,000) and below the basic amount, so the test is failed. Assume the normal tax after rebates on R650,000, the lesser figure, is R150,000, and that PAYE and provisional tax paid by year end total R110,000. The difference is R40,000 and the penalty is R8,000. Had the estimate been R660,000, above the basic amount, no penalty would arise.
Is the penalty reduced by the late payment penalty?
Yes. Paragraph 20(2B), as the SARS guide states, reduces the underestimation penalty by any paragraph 27 penalty imposed for late payment of the second period. Paragraph 27 is a 10% penalty on late payment of the first and second periods.
Does the third top-up payment count?
No. Interpretation Note 1 states that the voluntary top-up payment, made after the year end, is not taken into account in the penalty, which counts only provisional tax paid by the end of the year. The top-up reduces interest, not the paragraph 20 penalty.
Is interest charged as well as the penalty?
Yes. Interest under section 89quat is a separate charge on the underpayment of provisional tax. The SARS guide states that it applies where an individual's taxable income exceeds R50,000 and normal tax exceeds the credit amount, and it runs from the effective date, seven months after a February year end.
Can I reduce the interest?
The top-up payment is the tool for interest. Interpretation Note 1 states that for a February year end it must be paid by 30 September to reduce exposure to interest. The guide also states that interest on underpaid provisional tax is not tax deductible.
Can SARS waive the interest?
Only in narrow cases. In A Taxpayer v Commissioner (IT 45638, Tax Court, 19 July 2023) the court remitted the paragraph 20 penalty but refused to waive section 89quat interest, holding that following professional advice was a decision within the taxpayer's control and not a circumstance beyond it.
Where does the penalty appear on my assessment?
The penalty is raised on your income tax assessment once SARS assesses the ITR12 for the year. The SARS guide to submit a dispute via eFiling (GEN-PEN-05-G02) lists it as source code 9990, "Underestimation of provisional taxpayer (Par20)", one of the additional taxes that can be disputed as a separate item. Our guide to the source codes on your ITA34 explains how to read the rest of the assessment.
Is 9990 the same as 9988?
No. The dispute guide lists 9988 as "Underpayment of provisional taxpayer (89Q(2))", which is the section 89quat interest, and 9990 as the paragraph 20 penalty. Each is disputed as its own item.
Can SARS remit the underestimation penalty?
Yes. Paragraph 20(2) gives SARS a discretion to remit the penalty in whole or in part where it is satisfied, or partly satisfied, that your second estimate was seriously calculated with due regard to the factors having a bearing on it and was not deliberately or negligently understated.
What does "seriously calculated" mean?
Interpretation Note 1 states that the calculation must be carefully considered, thoughtful, earnest and sincere, worked out by careful reasoning using all available information. It also states that taxpayers who merely rely on the basic amount are unlikely to meet the test unless their facts show the basic amount was actively considered and appropriate.
What evidence supports a remission request?
The evidence is the working behind your estimate: the income records available when you filed the second IRP6, the calculation itself, and any professional advice you followed. In IT 45638 the Tax Court directed remission in whole because the estimate rested on independent tax advice that was not obviously untenable.
Can I object if SARS refuses to remit?
Yes. Section 220 of the Tax Administration Act, quoted in that judgment, makes a decision by SARS not to remit a penalty subject to objection and appeal under Chapter 9. Interpretation Note 1 states the same for the paragraph 20 decision.
How do I dispute the underestimation penalty on eFiling?
You dispute the penalty through eFiling's dispute screens, selecting source code 9990 on the income tax period in which it was raised. The steps below follow the SARS eFiling dispute guide.
- Check the ITA34. Confirm that source code 9990 appears on the assessment and note the amount.
- Open the dispute screen. Log in to eFiling, open the Returns tab, then "Dispute\Suspension of Payment", and select "New".
- Select the tax type and period. On the "Request to File Dispute" page choose Income Tax and the year of assessment, then click Next.
- Select the item. In the Dispute Item List tick source code 9990 and enter the Requested Value, the amount you believe the penalty should be.
- State your grounds. In the Reason/Grounds block, explain how the second estimate was calculated and why it meets the paragraph 20(2) test. Attach the working.
- Submit and track. File the dispute and follow its status on the Dispute Work Page.
The SARS dispute guide routes a dispute against the assessment result through a Notice of Objection. Our step-by-step guide to the SARS Notice of Objection (NOO) covers the 80 business day period and the documents SARS requires.
What if the objection is disallowed?
If the objection is disallowed or partly allowed, the next step is a Notice of Appeal, as the dispute guide sets out.
How do I avoid the underestimation penalty?
You avoid the penalty by making the second estimate a real forecast of the full year, not a repeat of last year. These steps line up with the IRP6 itself.
- Start from actual figures. By February most of the year has happened. Use your salary records, rental statements, interest certificates and trading results to date.
- Include capital gains. The SARS guide states that the taxable portion of the year's capital gain must be included in both provisional tax calculations. A property or share sale belongs in the estimate.
- Compare with the basic amount. The IRP6 shows the basic amount. At R1 million or less, an estimate above it removes the penalty. Above R1 million it gives no protection.
- Pay on time. Pay the second period by the last day of the year of assessment, using the payment reference number on the IRP6. Our guide on how to complete an IRP6 on eFiling shows each field.
- Keep the working. File your calculation with your records. It is the evidence a remission request depends on.
- Top up if needed. If income turns out higher, a top-up payment by 30 September reduces interest, though not the penalty.
What are the common mistakes with the underestimation penalty?
Most penalties we see come from treating the second IRP6 as a payment to make rather than an estimate to get right.
- Copying the first estimate. The August estimate was made with half the year unknown. The February estimate is tested.
- Relying on the basic amount above R1 million. At that income level only the 80% test applies.
- Leaving out a capital gain. The basic amount excludes capital gains, but this year's estimate must include them.
- Missing the second IRP6. A return not filed within four months after year end is a deemed nil estimate.
- Counting the top-up. A payment made after February does not reduce the penalty.
- Disputing without the working. A remission request is judged on how the estimate was calculated, so a request with no calculation attached has nothing to stand on.
Not sure whether you are a provisional taxpayer at all? Start with who should register for provisional tax, and see IRP6 vs ITR12 for how the two returns fit together.
Do You Need Help With the IRP6 Underestimation Penalty?
We prepare and file IRP6 returns with a documented estimate for each period, and we prepare the dispute when a paragraph 20 penalty has been raised. See our provisional tax service, the fixed fees on our provisional tax pricing page, or contact us to start. More guides are on the provisional tax topic page, including the first IRP6 calculation and how to appoint a tax practitioner.
