South Africa: Provisional Tax R1.8m Threshold Raised by New Bill

• The Tax Administration Laws Amendment Bill of 2026 proposes two key changes to South Africa's provisional tax penalty system.
• The threshold for using the basic amount alternative for provisional tax estimates will increase from R1 million to R1.8 million.
• This higher R1.8m threshold will apply to tax years commencing on or after March 1, 2026, benefiting more individual taxpayers.
• A new provision will deem a taxpayer's final estimate to be their aggregate payments if the second provisional tax payment is not made in full within one month of its due date.
• This change means late second provisional tax payments can trigger underestimation penalties, regardless of the initial estimate's accuracy.

Critically, this means that even if a taxpayer's initial estimates were accurate, a delay in the second provisional payment could still trigger underestimation penalties, necessitating strict adherence to payment deadlines.

The Tax Administration Laws Amendment Bill of 2026, recently introduced in parliament, outlines significant adjustments to the provisional tax system in South Africa. These proposed changes primarily target the penalties associated with underpayment of provisional tax, aiming to both simplify compliance for certain taxpayers and introduce stricter consequences for late payments.

Provisional tax is a mechanism for taxpayers to pay their income tax liability in advance through two installments during a given year of assessment. This system typically applies to individuals earning income beyond a standard salary, such as from rental properties, freelance work, business operations, or investment returns exceeding specified thresholds. All companies, irrespective of their income levels, are generally classified as provisional taxpayers.

The Bill introduces two distinct modifications. The first involves an upward revision of a key threshold, which will allow a broader segment of the taxpayer population to utilize a more straightforward method for estimating their provisional tax obligations. The second amendment focuses on the repercussions for taxpayers who fail to make their second provisional tax payment by the stipulated deadline, even if their initial estimates were accurate.

One of the key SARS provisional tax changes is the increase in the threshold for applying the 'basic amount' alternative in provisional tax calculations. Currently, provisional taxpayers whose actual taxable income exceeds R1 million for a year of assessment must ensure their estimated taxable income for the second provisional payment reaches at least 80% of their actual taxable income to avoid underestimation penalties. If this 80% threshold is not met, a penalty of 20% is levied on the shortfall between the normal tax due on 80% of actual taxable income (after rebates) and the total tax paid through PAYE and provisional payments.

For taxpayers with a taxable income of R1 million or less, the compliance requirement is less stringent; their estimate needs to be at least 90% of their actual taxable income or their 'basic amount,' whichever results in a lower payment. The 'basic amount' is generally defined as the taxable income from the most recent assessment by the South African Revenue Service (SARS), adjusted for certain capital gains and lump sums, and increased by 8% per annum if more than 18 months have elapsed since the end of that assessed year. The new Tax Administration Laws Amendment Bill of 2026 proposes to raise this R1 million threshold to R1.8 million. This higher threshold will apply to years of assessment commencing on or after March 1, 2026, meaning it will impact the 2027 tax year for individual taxpayers. This adjustment aims to align the threshold with shifts in personal income tax brackets observed since the 2009/10 tax year, enabling more provisional taxpayers to rely on the simpler basic amount alternative rather than needing to precisely estimate 80% of their current year's actual taxable income.

In contrast to the threshold adjustment, a second significant amendment addresses the provisional tax late payment penalty South Africa. This change is slated to become effective immediately upon the Bill's promulgation. The new proviso fundamentally alters how the final or last estimate is determined for the purpose of underestimation penalties if the required second provisional tax payment is not settled in full within one month of its due date.

Critically, this means that even if a taxpayer's initial estimates were accurate, a delay in the second provisional payment could still trigger underestimation penalties, necessitating strict adherence to payment deadlines. Specifically, if the one-month grace period following the due date passes without full payment, the taxpayer will be deemed, under Paragraph 20(1) of the Fourth Schedule, to have submitted a final estimate equivalent to the aggregate of all payments made, including PAYE deductions and qualifying foreign tax amounts as outlined in Paragraph 21 or 23, up to that point. For instance, consider Company A, with a year of assessment ending February 28, 2027, and no foreign tax rebate. If Company A anticipates a taxable income of R10,000,000 throughout the year, resulting in a tax liability of R2,700,000, and uses this R10,000,000 as its estimated taxable income for both IRP6 forms for the 2027 year of assessment. If the first payment of R1,350,000 is made in August 2026, but the final R1,350,000 is not paid by February 26, 2027, due to cash flow issues, the new rule would apply, potentially leading to penalties despite the initial accurate estimate.

These proposed amendments carry substantial implications for provisional taxpayers and their advisors. The increase in the provisional tax basic amount alternative threshold to R1.8 million offers a welcome simplification for a larger group of taxpayers, reducing the administrative burden and the risk of underestimation penalties for those falling within the new bracket. This change reflects an acknowledgment of inflation and income growth since the previous threshold was set.

However, the new rule regarding late second provisional tax payments introduces a critical compliance challenge. It shifts the focus not only to the accuracy of estimates but also to the punctuality of payments. Taxpayers and their financial teams must now be acutely aware that even a perfectly estimated provisional tax liability can result in penalties if the second installment is not paid in full and on time. This necessitates robust cash flow management and strict adherence to payment schedules to avoid unexpected liabilities, particularly for businesses and individuals who may face liquidity challenges.

Lawyers and compliance officers must advise clients on the new R1.8 million threshold for the provisional tax basic amount alternative, which simplifies compliance for a broader range of taxpayers. Critically, they need to warn clients about the proposed changes that will trigger underestimation penalties for late second provisional tax payments, even if initial estimates were accurate, necessitating strict adherence to payment deadlines to avoid unexpected liabilities.

Source: Original reporting via Moneyweb on proposed tax law changes.