For many businesses in South Africa, it’s that time of year again – the financial year end. Financial year-end means Provisional Tax needs to be calculated and paid to SARS by the last business day of the financial year.
What is provisional tax?
Provisional Tax is a prepayment of Income Tax. Instead of paying one large lump sum at the end of each tax year, payments are broken down into two parts during the course of the financial year, with an optional third payment.
All companies are provisional tax payers, with the first provisional tax payment being due 6 months into the financial year, and the second being due by the last business day of the financial year.
What happens if you submit the incorrect estimate?
Upon your final tax assessment for the financial year, SARS will compare your provisional tax estimates to your final assessment, and if your estimate was less than 80% (Taxable income of more than R1 million) or 90% (Taxable income of less than R1 million) of the final assessment, SARS will levy a 20% penalty on the difference, as well as interest.
How can you prepare?
If you are a little confused about where to start, see our list of items to consider and review for financial year-end success:
Review outstanding invoices and determine whether all amounts are likely to be received, or some need to be credit noted or written off. You can also provide for bad debts, which will provide some tax relief.
Ensure all outstanding invoices to creditors have been captured, and that all captured invoices are still outstanding. Should an invoice be duplicated, and later reversed, this will result in increased profits and therefore tax.
- Balance sheet:
The balance sheet reflects balances as a point in time, of both assets owned by the company, amounts owed to the company, and amounts owing by the company. Review the balances for reasonability, and question any balance that appears incorrect, as this could in a significant adjustment to profit and therefore tax estimate.
- Loan accounts:
Most small businesses have loan accounts with the shareholders and/or directors. These balances need to be reviewed before year-end, and where an individual has a balance owing to the business, interest needs to be accounted for at SARS prescribed interest rate.
Apart from being a good internal control, an inventory count approaching year-end will give you a good indication of the reasonability of your stock balance in your accounting records. Consider writing off any obsolete stock. Any adjustments to the inventory account will affect your profit or loss. Remember to also schedule an inventory count at year-end.
- VAT turnover reconciliation:
SARS regularly compares the total of the turnover/sales as per the VAT returns submitted to your total turnover in your tax return. Do this reconciliation before year-end to determine whether there are any differences that need to be investigated and resolved.
Make sure that all amounts paid to the benefit of employees are accounted for as expenses. Consider the possibility of paying employees a bonus before year end if cash flow permits this and your end goal is in line with decreasing your company tax liability.
- Split of interest and capital on loans/finance leases:
Ensure that only the interest portion of loan or finance lease repayments have been accounted for as an expense. The bank should be able to provide you with an amortisation schedule with the split.
- Forecasted profit or loss:
Once you are comfortable that the actual numbers are correct and reliable, you need to do a forecast for the remainder of the financial year.
- Forecast taxable income:
Your accountant will need to adjust your forecasted profit or loss for non-deductible expenses and other tax adjustments to arrive at taxable income.
- Determine if you qualify as a Small Business Corporation (SBC):
Should your business have a turnover of less than R20 million and meet the other SBC requirements, you will qualify for a lower tax rate on the first R550,000 (2018 tax year) taxable income.