Think Before You Estimate: The Growing Risk in Provisional Tax Submissions

Provisional tax allows taxpayers to settle their income tax liability in instalments over the course of the year, rather than facing a significant payment on assessment. It also forms a key part of SARS’ revenue collection approach, ensuring that tax is received on an ongoing basis.

This framework places responsibility on taxpayers to estimate their taxable income for the year with a reasonable degree of accuracy. Although the prior year’s assessed taxable income (the “basic amount”) may be used as a starting point, it cannot be relied on without considering current financial performance, known changes, and expected trends for the year.

We have observed a growing trend of SARS issuing paragraph 19(3) letters following the submission of provisional tax returns. These requests require taxpayers to substantiate the basis of their estimates, signalling increased scrutiny from SARS.

In terms of paragraph 19(3) of the Fourth Schedule to the Income Tax Act, 1962, SARS may call for supporting information and, where the estimate is not considered reasonable, determine a revised taxable income. Notably, such a revision cannot be disputed through the objection and appeal process.

It is also important to address the misunderstanding that the use of the basic amount protects taxpayers from challenge. SARS remains entitled to interrogate estimates where they do not appropriately reflect the taxpayer’s current circumstances.

In addition, paragraph 20(2) provides that where an estimate is regarded as having been understated due to negligence or intent, any underestimation penalty imposed will not be subject to remission.

The implication is clear: insufficiently supported or inaccurate estimates increase the risk of SARS intervention, upward revisions, and exposure to penalties.

Accordingly, taxpayers should ensure that provisional tax calculations are properly considered, well supported by documentation, and aligned with actual performance trends. Any engagement with SARS should be addressed thoroughly and with appropriate supporting detail from the outset.

We recommend a proactive approach—ensuring that both provisional tax estimates and responses to SARS are robust and defensible. CentaTax can assist with the preparation of these calculations, as well as the drafting of well supported and comprehensive responses to paragraph 19(3) letters.

At Centatax, we have successfully assisted employers in implementing a structured and compliant approach to managing these instructions received from SARS. Our services include drafting communication, training, assistance in navigating the relevant SARS systems and corresponding with the appropriate SARS officials.