As with various other business transactions, taxes in their various forms also attract interest, either payable by the taxpayer to SARS, or due to the taxpayer from SARS. Apart from knowing which of the various SARS interest rates are applicable (which is often a challenge in itself), knowing in which circumstances interest is applicable and the relevant income tax treatment of that interest, is increasingly important. This article explores one such a scenario: provisional tax.
Overpayment of provisional tax
If a taxpayer has any tax credit (amount by which taxes already paid exceeds the calculated tax liability) and that credit exceeds R10 000 or the taxpayer has a tax credit and the taxable income exceeds a certain amount (R50 000 for individuals and trusts and R20 000 for companies), the taxpayer earns interest at the prescribed rate, namely 6% (compared to the 10% when interest is payable to SARS – see in more detail below).
Subsequent income tax treatment
Interest earned from SARS will be included in the gross income of a taxpayer and accordingly, is fully taxable (subject to any annual interest exemptions for natural persons). Although income tax generally works on the principles of receipt and accrual, section 7E of the Act determines specifically that any interest due to a taxpayer from SARS will only be deemed to have accrued on the date on which it is paid to (received by) a taxpayer. Although less material for individuals, this could lead to some differences in treatment for companies and potentially give rise to deferred tax.
Underpayment of provisional tax
If a taxpayer’s normal tax obligation exceeds any tax credit and the taxable income exceeds a certain amount (R50 000 for individuals and trusts and R20 000 for companies), interest will be levied by SARS at the prescribed rate, – currently 10%. Interest is also payable at the 10% prescribed rate on late payments in respect of first, second and third provisional tax periods.
Subsequent income tax treatment
Section 23(d) prohibits the deduction from taxable income of any interest paid under any act that is administered by SARS. Therefore, any interest paid to SARS will not be deductible for income tax. Presumably, this is since this interest will be not be considered to be in the production of income or expended for the purposes of a trade.
Given the widely publicised delays on refunds for various types of taxes, taxpayers should carefully scrutinise their statements of account from SARS to ensure that interest they are entitled to in terms of the various tax acts has been paid to them. Taxpayers should also carefully take note of due dates for provisional tax payments, to ensure that interest is not incurred on late payments or any underpayments.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)