Provisional Tax Compliance
Delecia Venter, Tax Director, PKF Port Elizabeth
The compliance rules around provisional tax are set to become more stringent following the recent proposed amendments. These proposed changes are aimed addressing the misalignment in the currents system that allowed the taxpayer to meet the estimation requirements while deferring the actual payment of provisional tax.
Under the current provisional tax system, provisional taxpayers are required to seriously calculate their estimated taxable income to avoid underestimation penalties being levied. Underestimation penalties are levied on assessment of the annual income tax return, at 20% on the resulting shortfall between the estimated tax paid and the actual tax liability, where the estimated taxable income falls outside the acceptable threshold levels.
The thresholds operate as follows which determines when an underestimation penalty of 20% is leviable:
1. In the case of actual taxable income being R1 million or less, the penalty will give rise where the estimate is the lesser of:
- 90% of actual taxable income; or
- the basic amount (this is generally the prior year’s assessed taxable income, subject to adjustments).
2. In the case of actual taxable income being more than R1 million, the penalty will give rise where the estimate was below 80% of the actual taxable income.
The current framework permits taxpayers to submit estimates that fall within these thresholds, thereby avoiding underestimation penalties, even in circumstances where the corresponding provisional tax liability is not fully settled. In such cases, taxpayers may still be exposed to late payment penalties and interest.
Consider the following example of an individual provisional taxpayer:
| Provisional Tax Estimate | Actual Income Tax Assessment |
|---|---|
| Estimated Taxable Income: R1 500 000.00 | Actual Taxable Income: R1 675 000.00 |
| Tax*: R514 519.00 | Tax*: R586 269.00 |
| Less Rebate: R17 235.00 | Less Rebate: R17 235.00 |
| Less Primary Medical Credit: R4 368.00 | Less Primary Medical Credit: R4 368.00 |
| Less PAYE: R492 916.00 | Less PAYE: R400 000.00 |
| Tax Payable: R0.00 | Tax Payable: R164 666.00 |
*tax is calculated using the 2025/2026 tax tables for individuals
In this example, the taxpayer’s estimate exceeds 80% of the actual taxable income (R1 500 000 compared to R1 675 000), and therefore no underestimation penalty arises. However, the taxpayer should have settled provisional tax of R92 916 (R514 519.00 – R17 235 – R4 368 – 400 000) by the end of the second provisional period. The shortfall is only fully paid upon assessment, resulting in a deferral of tax. This example illustrates how a taxpayer may comply with the estimation thresholds while effectively deferring the payment of provisional tax until assessment, which is the behaviour that the proposed amendments seek to address.
To address this issue, National Treasury has proposed that the ability to rely on an estimate for purposes of avoiding underestimation penalties be made contingent on the timely payment of the associated provisional tax liability. This would effectively align estimation compliance with actual payment. This amendment may have a direct impact on taxpayer’ cash flow management strategies limiting the taxpayer’s ability to defer provisional tax payments.
In addition, it has been proposed that the R1 million threshold be increased to R1.8 million which will affect the application of the 90%b and 80% rules. The proposed effective date for this amendment is 1 March 2026.
These proposed changes have not yet been legislated. However, should these proposed changed be enacted, it requires both an accurate estimation and timely payment in order to avoid penalties. Taxpayers are urged to review their provisional tax positions and consult with their tax advisors to ensure preparedness for the potential tightening of compliance requirements.