January 23 deadline causing headaches for provisional taxpayers

The recent announcement that the deadline for provisional taxpayers has been brought forward to 23 January 2023 is causing confusion.

Some taxpayers have mistaken this to mean that their second provisional tax submission is due sooner this year, but this is incorrect.

In fact, it is their annual income tax return that is due on 23 January instead of 30 January – seven days earlier than normal. However, their second provisional tax submission and payment is still due on or before the last business day of February 2023.

The close relationship between annual income tax and provisional tax makes this kind of misunderstanding easy, especially if such announcements are not carefully worded.

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Provisional vs annual income tax

Non-provisional taxpayers should have submitted their annual income tax returns between 1 July and 24 October 2022. They therefore declared their annual employment income after having earned it in the previous tax year; that is, between 1 March 2021 and 28 February 2022.

A provisional taxpayer, on the other hand, is anyone defined in paragraph 1 of the Fourth Schedule of the Income Tax Act, No 58 of 1962, as any:

• natural person who derives income, other than remuneration or an allowance or advance as mentioned in section 8(1) or who derives remuneration from an employer who is not registered for employees’ tax.

In other words, any person who receives income (or to whom income accrues) other than a salary is considered a provisional taxpayer.

Unlike employment-only taxpayers, provisional taxpayers are given more time to reconcile and declare their total personal income from both employment and non-employment sources.

They have from 1 July 2022 until 23 January 2023 to submit their annual tax returns and pay tax on all income earned between 1 March 2021 and 28 February 2022.

A second tax – misunderstanding

Provisional tax is not a separate tax but forms part of the taxpayer’s personal income tax obligation.

This is where things get tricky. While personal income tax is declared in respect of the preceding tax year, provisional tax is declared in the current tax year in which the non-employment income is earned.

Provisional taxpayers declare their full income twice each year:

1. The first provisional submission is made before 31 August, and
2. The second provisional submission is made before the end of February in the following calendar year.

The payments on these first and second submissions are then consolidated into the provisional taxpayer’s eventual declaration of their total personal income in their annual tax submission.

This means that, for the 2022/23 tax year, provisional taxpayers should have made their first declaration of their income by 30 August 2022 and will make their second declaration on or before 28 February 2023.

The payment of the tax on that income will then be deducted from the tax calculated on the total personal income they declare in January 2024.

PAYE for non-employment income

According to the South African Revenue Service (Sars), provisional tax ensures that taxpayers with sources of non-employment income do not fall behind on their tax payments.

Employees have the Pay As You Earn (PAYE) system to protect them. Every month, employers calculate and withhold tax on the income each employee received that month in relation to their annual earnings. This withheld tax must be paid over to Sars within seven months of the month in which it was deducted.

At the end of the year, what the employed taxpayer has already paid to Sars through PAYE is reflected on their IRP5 certificate and this ‘prepaid’ amount is subtracted from their total calculated tax obligation.

Provisional tax achieves the same outcome for taxpayers with earnings received not subject to PAYE, as their tax cannot be administered by an employer.

It therefore helps the taxpayer regulate their own tax obligation, and avoid ending up in debt to Sars.

Read: Sars disallowed over 60% of home office claims last year

Being specific

The relationship between annual income tax and provisional income tax can make it confusing to separate the two systems, due to this not being a separate tax but rather a payment processing tool. This is exactly what happened as some news outlets did not clearly specify which of the two deadlines had been moved forward.

To reiterate, it is the provisional taxpayer’s annual income tax – not their second provisional tax submission – that is due by 23 January 2023.

Provisional taxpayers can breathe a sigh of relief, knowing that they will be under no more pressure than usual to meet their provisional tax obligation.

Nicolas Botha is tax team compliance and processing manager at Tax Consulting South Africa.