In terms of paragraph 19(1)(b) of the Fourth Schedule to the Income Tax Act, 5, 1962 (the “Fourth Schedule”), every company that is a provisional taxpayer shall, during every period within which provisional tax is or may be payable by it as provided in terms of the Fourth Schedule, submit to the Commissioner of the South African Revenue Service (“SARS”), 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.
Paragraph 19(3) of the Fourth Schedule provides that the Commissioner may, inter alia, call upon any provisional taxpayer to justify any estimate made in terms of paragraph 19(1), and if the Commissioner is dissatisfied with the said estimate, he or she may increase the amount thereof to such amount as he or she considers reasonable.
In terms of paragraph 23 of the Fourth Schedule, provisional tax shall be paid by every company that is a provisional taxpayer:
- at the end of six months after the commencement of the year of assessment, one half of an amount equal to the total estimated liability of such company (as determined in accordance with paragraph 17 of the Fourth Schedule) for normal tax in respect of that year (referred to as the “first provisional tax payment”); and
- at the end that year, an amount equal to the total estimated liability of such company for normal tax in respect of that year less the “first provisional tax payment”.
We discuss below an increase by the Commissioner of a taxpayer’s estimated taxable income for purposes of its first provisional tax payment.
In our experience, for first provisional tax purposes, a company would typically review its accounting profit before tax for the financial year to date as per the management accounts (ie actual profit to date) and make the necessary income tax adjustments. The profit before tax is then also increased to account for the remaining portion of the financial year by taking into account estimated future income, anticipated expenses as well as factual developments that have occurred or are anticipated to occur.
If SARS is not satisfied with the estimate prepared by the taxpayer, the first provisional tax payment will be queried. If still not satisfied, despite reasons or support provided by the taxpayer, the Commissioner may advise the taxpayer of its intention to increase the estimated taxable income for first provisional tax purposes in terms of paragraph 19(3) of the Fourth Schedule. In our experience, this may well be the case where the estimated taxable income in respect of the second part of the year of assessment is less than that determined with reference to the actual profit before tax for the first part of that year. In such a case, SARS may advise the taxpayer of its intention to “annualise” the actual profit before tax for first provisional tax payment purposes. This will then result in an increased first provisional tax liability.
If there is a late payment as a result of the increased estimated taxable income, the taxpayer will be exposed to a 10% penalty in terms of paragraph 27(1) of the Fourth Schedule (read with section 213 of the Tax Administration Act, 2011 (“TAA”)) and interest will, unless the Commissioner “having regard to the circumstances of the case otherwise directs” be imposed in terms of section 89bis of the Act. The taxpayer may, therefore, depending on the facts, request a waiver of the interest in terms of section 89bis.
Sections 217(3) and 218 of the TAA provide for a remittance of penalties under certain circumstances.
Interpretation Note 1 (Issue 2), issued by SARS on 30 March 2016, lists, inter alia, the availability of financial results that support an increase in taxable income and the failure by the provisional taxpayer to justify the estimate when requested to do so by SARS as examples where a discretion may be exercised by SARS. Where, for example, the published results of a listed company do not support the estimated taxable income calculated by a taxpayer for provisional tax purposes and no reasonable explanation is provided, SARS could then reasonably increase the estimate in terms of paragraph 19(3).
However, a decision to “annualise” the actual profits of a company may not be appropriate where the taxpayer can demonstrate (and has demonstrated to SARS) that valid reasons exist for the estimated taxable income for the second half of a year of assessment being less than the estimated taxable income for the first six months determined with reference to actual profits.
A decision by the Commissioner to increase a taxpayer’s estimate is not subject to objection or appeal in terms of paragraph 19(3). Where it is alleged that the increased estimate was not determined on a reasonable basis, a taxpayer may request that the decision by SARS be withdrawn or amended as envisaged in section 9(1)(b) of the TAA. The basis for such a request would have to be clearly documented with reference to the facts and correspondence with SARS.
Alternatively, the taxpayer could challenge the decision of the Commissioner in terms of paragraph 19(3) by way of a review application in the High Court, relying on the provisions of the Promotion of Administrative Justice Act, 2000.