This is article number two in the series What taxes should my business comply with? In the piece published on 03 April 2018 we listed a range of taxes that you will need to consider when running a business. Income tax is the one tax type that will impact on all business regardless of the how small the operation is.
The basic principle is that the business will pay a flat rate of 28% (2019 year of assessment) on all taxable profits generated by the business in the financial year reported on. Income tax is paid over to the receiver of revenue in three tranches over an 18 month period. In the business world these returns, and payments are referred to as provisional tax returns and payments.
For the sake of this piece let us assume that you are running a fintech start-up. The financial year runs from 01 March 2018 to 28 February 2019. The first provisional tax return and payment is due on 31 August 2018.
In order to submit the first provisional tax return you will need to project the taxable income for the full financial year and make a payment of 50% of the annual projected tax liability. Sticking with your fintech business, you have been on a growth spurt and project to show R 500 000 worth of taxable profits by 28 February 2019. The statutory tax rate for companies is 28% and this is the rate at which you will calculate the tax liability.
Projected full year taxable profit 500 000
Provide tax at 28% (500 000 x 28%) 140 000
First provisional tax payment due (140 000 x 50%) 70 000
By 31 August 2018 you will have to submit a provisional tax return and proof of payment of the provisional tax to SARS.
Due to the uncertainty present when making the forecast in August 2018, you will have another opportunity to make a second payment to SARS on or by 28 February 2019. The success that you have expected to carry to February 2019 did not materialize and you find that your full year taxable profits are R 350 000 and not the projected R 500 000. On 28 February you will have to submit the second provisional tax return and make a payment if necessary.
Actual unverified full year taxable profit 350 000
Provide tax at 28% (350 000 x 28%) 98 000
First provisional tax payment made 70 000
Second payment due to SARS (98 000 – 70 000) 28 000
Note that your annual liability is now R 98 000, you have already made a payment of R 70 000 to SARS in August and therefore only need to make an additional payment of R 28 000 to meet the R 98 000 projected liability. The income tax act makes provision for a third so called top-up payment which can be made within 6 months of year-end to ensure that you meet your full commitment to SARS without incurring any interest.
Please contact Five Oaks Consult for a more in-depth discussion of income tax and the impact thereof on your business.