[FAQ] Provisional tax when the financial year-end is changed

[FAQ] Provisional tax when the financial year-end is changed

• 19 August 2021
• Provisional tax (Link with other Taxes)
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2021.

Background

A company changed its financial year-end from February to June. The change was made on 13 March 2021 and approved by SARS. The second provisional tax return February 2021 was submitted.

Income Tax:

Is the company required to draft and submit annual financial statements for February 2021 (12 months) and June 2021 (4 months), as the year-end change has resulted in the period being more than 12 months?

Provisional tax:

Does the company have to submit a provisional tax return for June 2021? The second period provisional tax return for 2021 was already submitted in February 2021. Or is the company required to request a return for the June 2021 year end?

Answer

The Income Tax Act

I understand from your question that the end of the 2021 year of assessment was moved from 28 February to 30 June. Therefore the company has a 16 month financial year and period of assessment.

Relevant tax law

“Year of assessment” is defined in section 1(1) of the Income Tax Act as: “any year or other period in respect of which any tax or duty leviable under this Act is chargeable…”

Income tax return

Because SARS has agreed to extend the 2021 year of assessment to 30 June, ITR14 for 2021 applies for that 16 month period.

Provisional tax

For this we need to visit the Fourth Schedule to the Act.

Relevant tax law

Paragraph 23 “Provisional tax shall be paid by every company which is a provisional taxpayer in the following manner, namely- (a) within the period ending 6 months after the commencement of the year of assessment in question, one half of an amount equal to the total estimated liability of such company (as determined in accordance with paragraph 17) for normal tax in respect of that year; (b) within the period ending on the last day of that year, an amount equal to the estimated liability of such company (as so determined) for normal tax in respect of that year less the amount paid in terms of item (a)”.

I assume that the first provisional payment was made by no later than 31 August 2020, so the company is compliant in that regard. As for the second provisional payment, there is no requirement that it be made at the end of the year of assessment, only that it be made “within the period ending on the last day of that year”. According to your facts, the company has made it already. The fact that it was made four months ahead of the year end is not important. So long as the amount paid is in terms of the requirements of paragraph 19, it doesn’t matter that it was made four months ahead of the deadline. The first provisional payment for the 2022 year of assessment will be due on 31 December 2021.

Therefore, if your estimates are correct, no corrections are required. If the additional four months of income has the result that the estimate made in February turns out to be too low, the company should make an additional payment in terms of paragraph 23A.

Webinar Commentary

Refer to the following webinar: Provisional Tax 101 Series here.

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