Provisional tax requires you to estimate your taxable income before your final annual tax calculation has been completed.
That creates an obvious question:
How are you supposed to know exactly what you will earn before the year is finished?
The answer is that SARS does not expect you to predict the future perfectly.
What matters is that your estimate is reasonable, supported by the information available to you, and updated as better financial information becomes available.
For provisional taxpayers, particularly business owners and people with several income streams, getting this estimate right can help prevent unexpected tax bills, penalties and interest.
Start With Taxable Income – Not Turnover
One of the first mistakes business owners make is confusing turnover with taxable income.
They are not the same thing.
Imagine a business has:
Annual turnover: R1,500,000
and qualifying business expenses of:
R900,000
That does not mean provisional tax is calculated on R1.5 million.
In a very simplified example, the business may have:
Income: R1,500,000
Less qualifying expenses: R900,000
Profit before further tax adjustments: R600,000
Taxable income would then be determined after considering the applicable tax rules and any further adjustments.
The calculation can therefore be very different from simply applying a tax rate to money received into the bank account.
Accounting Profit and Taxable Income Are Also Different
Even once you know your accounting profit, you may still not know your taxable income.
Tax law does not necessarily treat every accounting item in exactly the same way.
For example, your accounts might contain:
- Accounting depreciation
- Entertainment expenses
- Fines or penalties
- Capital purchases
- Provisions
- Private-use expenses
- Donations
- Capital gains or losses
- Other accounting adjustments
Some expenses may be deductible for tax purposes.
Others may not be deductible.
Some capital expenditure may qualify for allowances rather than an immediate full deduction.
Your provisional tax estimate should therefore ultimately aim to estimate taxable income, not simply accounting profit.
Step 1: Make Sure Your Bookkeeping Is Up to Date
Accurate provisional tax begins with accurate accounting records.
If you are preparing your February estimate but your bookkeeping was last updated in September, you have a problem.
Before calculating provisional tax, ensure that you have captured relevant:
- Sales and other income
- Supplier invoices
- Business expenses
- Payroll
- Bank transactions
- Interest
- Rental income
- Investment income
- Asset purchases and disposals
- Other significant transactions
The more complete your records, the less guessing you need to do.
Step 2: Review Your Year-to-Date Results
Once the bookkeeping is reasonably current, look at what has actually happened during the tax year.
For a business, consider:
Turnover to date
How much revenue has actually been generated?
Gross profit
Has your margin changed?
Operating expenses
Are expenses tracking according to expectations?
Net profit
What does the business’s current profitability look like?
Once-off transactions
Were there unusual income or expenses that are unlikely to repeat?
This gives you a starting point for estimating the remainder of the year.
Step 3: Forecast the Rest of the Tax Year
The first provisional tax estimate generally occurs approximately halfway through the year.
You therefore need to forecast the remaining months.
Do not automatically take six months of results and multiply them by two.
That works only where income and expenses are reasonably consistent.
Instead, ask what you realistically expect to happen.
Consider:
- Confirmed customer orders
- Signed contracts
- Seasonal trading patterns
- Expected price increases
- New customers
- Lost customers
- Planned shutdown periods
- Staff changes
- Expected bonuses
- Annual insurance costs
- Planned marketing expenditure
- Known repairs
- Expected professional fees
- Other predictable income and expenditure
A reasonable forecast incorporates information you already know.
Example: Why Doubling Six Months Can Be Wrong
Suppose a business earned R400,000 of accounting profit between March and August.
Simply doubling this gives:
Estimated annual profit: R800,000
But perhaps the business earns 65% of its annual revenue between October and January.
In that case, R800,000 may significantly underestimate the likely annual result.
The opposite can also happen.
A tourism business may have a very strong first half and a much quieter second half.
This is why understanding the business matters.
Step 4: Include Income Outside the Business
For individuals, one of the easiest mistakes is preparing a provisional tax calculation using only the income from the main business.
Your taxable-income estimate may also need to consider other sources, such as:
- Salary
- Freelance income
- Consulting fees
- Rental income
- Taxable interest
- Foreign income
- Investment income
- Capital gains
- Other taxable receipts
This is particularly important where PAYE has already been deducted from a salary.
PAYE may cover the salary portion of your tax liability, but additional income can still affect your overall tax position.
Step 5: Review Rental Income Properly
If you own rental property, don’t simply include the gross rent as taxable income without considering the applicable deductions.
Likewise, don’t assume that every property-related payment is automatically deductible.
Rental calculations can involve items such as:
- Rates and taxes
- Levies
- Agent fees
- Repairs
- Insurance
- Interest on qualifying finance
- Other expenses incurred in producing rental income
Capital improvements need to be distinguished from ordinary repairs and maintenance.
The resulting taxable rental income or loss should then be considered in the broader tax calculation.
Step 6: Don’t Forget Investment Income
Interest and investment income can easily create differences between your estimate and your final assessment.
Review:
- Bank interest
- Fixed deposits
- Money-market accounts
- Investment accounts
- Foreign investments
- Dividends
- Other investment returns
Remember that different forms of investment income can receive different tax treatment.
For example, South African-source interest received by natural persons is subject to an annual exemption, while local dividends are generally treated differently.
Do not simply combine all investment returns into one figure without considering their tax treatment.
Step 7: Consider Capital Gains
Selling an asset or investment during the year can materially change your taxable-income position.
Examples could include selling:
- Shares
- Investment property
- Cryptocurrency
- A business asset
- Other investments
A capital gain is not necessarily taxed in exactly the same manner as ordinary trading income, but the taxable portion can affect your overall taxable income.
Large asset disposals should therefore be considered when preparing the provisional estimate.
Step 8: Review Whether Expenses Are Actually Deductible
A payment leaving your business bank account is not automatically a tax deduction.
Broadly, business expenses need to satisfy the relevant tax requirements before they can reduce taxable income.
Common examples may include qualifying:
- Accounting fees
- Advertising
- Bank charges
- Business insurance
- Office costs
- Salaries and wages
- Software subscriptions
- Telephone and internet costs
- Business travel
- Repairs and maintenance
However, private expenditure, capital expenditure and certain specifically prohibited deductions may require different treatment.
Incorrectly deducting expenses can make your provisional taxable-income estimate artificially low.
Step 9: Separate Capital Purchases From Normal Expenses
Suppose your business buys a R150,000 piece of equipment.
You should not automatically assume:
“I spent R150,000, therefore taxable income is R150,000 lower.”
Capital assets may be dealt with through applicable capital allowance provisions rather than being fully deductible as an ordinary operating expense.
The exact treatment depends on the asset and circumstances.
Large equipment, vehicle, machinery and technology purchases should therefore be reviewed carefully when estimating taxable income.
Step 10: Consider Assessed Losses Carefully
If a business has losses brought forward from previous years, these may affect taxable income.
However, the tax rules governing the use of assessed losses need to be applied correctly.
Do not automatically assume that every historic loss can simply be offset in full against any current-year income.
This becomes particularly important for companies because restrictions can apply to the utilisation of assessed losses.
We deal with this separately in “Why You Shouldn’t Offset Business Losses Incorrectly on Your Return.”
Step 11: Compare Your Estimate With Previous Years
Historical results are useful as a reasonableness check.
Compare the current estimate with:
- Last year’s turnover
- Last year’s taxable income
- Previous profit margins
- Previous provisional tax estimates
- The SARS basic amount
If last year’s taxable income was R900,000 and this year’s estimate is suddenly R300,000, ask why.
There may be a perfectly legitimate explanation.
Perhaps a major customer was lost or the business had an unusually poor year.
But a significant difference should be understood and supported by the underlying financial information.
What Is the SARS Basic Amount?
The basic amount is generally based on taxable income from a previous assessment, subject to the applicable provisional-tax rules and adjustments.
It can provide an important reference point when preparing provisional tax.
However, the basic amount should not become a substitute for reviewing what is actually happening in the current year.
If the business has grown substantially, relying only on historical taxable income may produce an estimate that is too low.
Why the Second Provisional Estimate Matters So Much
By the second provisional period, the tax year is effectively complete.
You should therefore have considerably better information than you had during the first period.
SARS’s underestimation rules make this particularly important.
Where actual taxable income is R1 million or less, the relevant test considers both:
- 90% of actual taxable income; and
- The basic amount.
Where actual taxable income is more than R1 million, the second provisional estimate generally needs to be at least 80% of actual taxable income to avoid the applicable underestimation penalty calculation.
The rules are more detailed than these percentages alone, but they illustrate why the second estimate should be approached carefully.
What Is the Underestimation Penalty?
Where the applicable requirements are met, SARS can impose an underestimation penalty calculated at 20% of the relevant tax shortfall determined under the provisional-tax formula.
This is not simply:
Actual income – estimated income × 20%
The calculation works with the tax consequences of the underestimation and relevant credits and payments.
The potential cost is nevertheless significant.
Don’t Manipulate the Estimate to Match the Cash Available
This is one of the most important practical lessons.
Suppose your calculation indicates that you need to pay SARS R120,000, but the business only has R50,000 available.
It may be tempting to reduce the taxable-income estimate until the provisional payment becomes R50,000.
That does not solve the problem.
It creates a potentially inaccurate provisional tax submission while leaving the underlying cash-flow problem unresolved.
Your estimate should reflect your expected taxable income.
Cash-flow difficulties should be managed separately.
Keep Evidence of How You Reached the Estimate
You should ideally be able to explain your provisional tax estimate.
Keep information such as:
- Management accounts
- Profit and loss reports
- Forecasts
- Tax calculations
- Investment certificates
- Rental schedules
- Capital-gain calculations
- Supporting spreadsheets
- Notes explaining unusual adjustments
This becomes particularly valuable where the final taxable income differs substantially from the estimate.
Update the Estimate When Circumstances Change
An estimate prepared in August does not need to remain unchanged in February.
In fact, it often should change.
Perhaps:
August estimate: R700,000 taxable income
By February, actual information indicates:
Updated estimate: R920,000 taxable income
Your second provisional calculation should reflect the newer information.
The purpose of the second period is partly to bring your provisional tax position closer to the actual result.
A Practical Provisional Tax Checklist
Before finalising your estimate, ask:
- Is the bookkeeping reasonably current?
- Have all major income streams been included?
- Have I considered rental and investment income?
- Have capital gains been considered?
- Are the expenses genuinely deductible?
- Have capital purchases been treated correctly?
- Are there once-off transactions affecting the year?
- Does the forecast reflect seasonal income?
- Have previous provisional payments been considered?
- Has PAYE already paid been included correctly?
- Does the estimate make sense compared with previous years?
- Can I explain how the estimate was calculated?
If you cannot answer several of these questions confidently, the estimate may need further work.
Better Books Mean Better Tax Planning
Accurate provisional tax is one of the many reasons businesses benefit from keeping their accounting records current.
Good bookkeeping allows you to understand:
How profitable the business actually is
What tax is likely to become payable
How much cash should be reserved for SARS
Whether expenses are increasing
Whether margins are improving or declining
Whether the business is performing according to plan
Provisional tax therefore shouldn’t be viewed purely as a SARS compliance exercise.
It is also an opportunity to review the financial health of the business.
Need Help Estimating Your Taxable Income?
Estimating taxable income becomes more complicated when a business is growing, income fluctuates during the year, several income streams are involved, or significant tax adjustments need to be made.
Boatwright Consulting can assist with reviewing your accounting records, estimating taxable income, preparing your provisional tax calculation and identifying potential underestimation risks before the submission deadline.
Contact Boatwright Consulting if you would like assistance preparing an accurate provisional tax estimate or want to understand what your current financial results could mean for your next SARS payment.
This article provides general information and should not be regarded as tax advice specific to your individual circumstances.