Provisional tax in August: how to stop guessing.
Every August, thousands of South African business owners sit down to submit their first provisional tax return and do one of two things: they guess, or they round up and hope for the best. Both approaches cost money.
Provisional tax exists because SARS doesn't want to wait until your year-end to collect income tax. Instead, you pay in two instalments — the first in August, the second in February — based on your estimated taxable income for the year.
The common mistakes
Guessing low is tempting. It feels like managing cash flow. But if you underestimate by more than the basic amount (currently the lesser of 90% of actual or last year's assessment plus 8%), SARS will charge interest and penalties on the shortfall. That interest isn't deductible.
Padding high to be safe is also a mistake. Yes, you'll get a refund — eventually. But SARS refunds take time, and in the meantime you've effectively given SARS an interest-free loan from your working capital.
The right answer is: estimate accurately, using your actual year-to-date numbers.
How to estimate properly
By August, you're five or six months into your financial year (if you're a February year-end) or further along if your year-end is different. That gives you real data to work with.
Take your actual revenue and expenses to date. Apply your known gross margin. Project forward based on your pipeline and seasonality. Then apply your effective tax rate — accounting for deductible expenses, any assessed losses carried forward, and available allowances.
This isn't a complicated model. But it requires your books to be current. If your bookkeeping is three months behind, you're guessing no matter how sophisticated your spreadsheet looks.
What your accountant should be doing
Your tax practitioner should be running this estimate with you — not for you, without you. You know what the next six months look like commercially better than anyone. The role of your accountant is to translate that knowledge into a number that's defensible to SARS and sensible for your cash flow.
At Digital Treehouse, we include provisional tax planning as part of every client's quarterly review. By the time August arrives, we've already modelled it twice — so the submission is confirmation, not calculation.
If you're filing your first provisional return and feeling uncertain, don't guess. Talk to someone first.