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Articles tagged with: basic amount

Provisional Tax Estimate - The Risk of using the Basic Amount

on Sunday, 06 August 2017. Posted in General, Tax

Provisional Tax Estimate - The Risk of using the Basic Amount

Many tax practitioners have reverted to the easy option of using the basic amount as an estimate for provisional tax. Many tax professionals are also under the incorrect impression that this is within the ambit of the income tax act to use the basic amount as an estimate.

The actual purpose of the basic amount is twofold:
1. It serves as the minimum estimate.
2. It is used as a limit to calculate underestimation penalties if the taxpayer's assessed income it below R1 million.

A brief examination of the income tax law will substantiate statements one and two above:

Paragraph 19 of the Fourth Schedule of the Income Tax Act 58 of 1962:

19. (1)(a) Every provisional taxpayer (other than a company) shall, during every period within which provisional tax is or may be payable by that provisional taxpayer as provided in this Part, submit to the Commisioner (unless the Commissioner direct otherwise) a return of an estimate of the total taxable income which will be derived by the taxpayer in respect of the year of assessment in respect of which provisional tax is or may be payable by the taxpayer: Provided that such estimate will not include any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit or any severance benefit received by or accrued to or to be received by or accrue to the taxpayer during the relevant year of assessment.

(b) Every company which is a provisional taxpayer shall, during every period within which provisional tax is or may be payable by it as provided in this Part submit to the Commissioner (unless the Commission directs otherwise) a return of an estimate of the total taxable income which will be derived by the company in respect of the year of assessment in respect of which provisional tax is or may be payable by the company.

(c) The amount of any estimate so submitted by a provisional taxpayer (other than a company) during the period referred to in paragraph 21(1)(a), or by a company (as a provisional taxpayer) during the period referred to in paragraph 23(a), shall not be less than the basic amount applicable to the estimate in question, as contemplated in item (d), unless the circumstances of the case justify the submission of an estimate of a lower amount.

It is clear that the basic amount serves as a minimum estimate when
paragraph (a), (b) and (c) are read together.

An important point to note is that paragraph (c) does not absolve the taxpayer of the obligation to estimate the taxable income and instead fall back on the basic amount.

Paragraph 20 of the Fourth Schedule of the Income Tax Act 58 of 1962:

20. (1) If the actual taxable income, as finally determined under this Act, for the year of assessment in respect of which the final or last estimate of his or her taxable income is submitted in terms of paragraph 19(1)(a) by a provisional taxpayer other than a company, or the estimate of its taxable income in respect of the period contemplated in paragraph 23 (b) is submitted in terms of paragraph 19(1)(b) by a company which is a provisional taxpayer, in respect of any year of assessment is--

(a) more than R1 million and such estimate is less than 80 per cent of the amount of the actual taxable income for such year of assessment, a penalty, which is deemed to be a percentage based penalty imposed under Chapter 15 of the Tax Administration Act, equal to 20 per cent of the difference between--

(i) the amount of normal tax, calculated at the rates applicable in respect of such year of assessment and after taking into account any amount of a rebate deductible in terms of this Act in the determination of normal tax payable, in respect of a taxable income equal to 80 per cent of such actual taxable income; and

(ii) the amount of employees' tax and provisional tax in respect of such year of assessment paid by the end of the year of assessment;

(b) R1 million or less and the estimate is less than 90 per cent of the amount of such actual taxable income and is also less than the basic amount applicable to the estimate in question, as contemplated in paragraph 19(1)(d), the taxpayer shall, subject to the provisions of subparagraphs (2), (2B) and (2C), be liable to pay to the Commissioner, in addition to the normal tax payable in respect of his or her taxable income for such year of assessment, a penalty, which is deemed to be a percentage based penalty imposed under Chapter 15 of the Tax Administration Act, equal to 20 per cent of the difference between--

(i) the lesser of--

(a)(a) the amount of normal tax, calculated at the rates applicable in respect of such year of assessment and after taking into account any amount of a rebate deductible in terms of this Act in the determination of normal tax payable, in respect of a taxable income equal to 90 per cent of such actual taxable income; and

(b)(b) the amount of normal tax calculated in respect of taxable income equal to such basic amount, at the rates applicable in respect of such year of assessment and after taking into account any amount of a rebate deductible in terms of this Act in the determination of normal tax payable; and

(ii) the amount of employees' tax and provisional tax in respect of such year of assessment paid by the end of the year of assessment...

It is evident from paragraph 20 that the basic amount is used as a limit when calculating the understatement penalty for taxpayers where the assessed taxable income was below R1 million.

It is tempting to use the basic amount as a default estimate for the provisional tax. However, risk is involved in doing so.

Let us take a situation where the taxpayer had a basic amount of R900 000 and thus based his / her taxable income estimate for the provisional tax on this amount. If the actual assessed income is R1 200 000 paragraph 20(a) will apply (since actual taxable income above R1 000 000). Thus the basic amount will not be used as a limit to calculate an underestimation penalty.

The taxpayer's estimate was less than R960 000 (80% of R1 200 000) and therefore according to paragraph 20(a), an understatement penalty will be issued. The fact that the taxpayer's basic amount was used will not be a justification to avoid the penalty, however, if the taxpayer can provide another legitimate reason SARS may remit the penalty.

The conclusion is that the taxpayer should estimate taxable income and not rely on the basic amount as a default. The basic amount was not intended for this purpose and SARS does not accept it as such.

 Author: Chris Herbst - CH Consulting

Contact us for tax consulting: https://www.chconsulting.co.za/contact