Facing a SARS Adjustment? How to avoid Penalties Under Paragraph 19(3)

Paragraph 19(3) of the Fourth Schedule allows the Commissioner to verify the provisional tax estimate that was submitted to SARS and request particulars of income and expenditure or any other particulars that may be required for that year of assessment in respect of which the provisional tax payment is being made. 

This provision ensures that SARS provides realistic estimates of taxable income and minimises taxpayers' underpayments.

If the Commissioner is unsatisfied with the estimate, they may increase it to an amount they consider reasonable.

The Commissioner can also increase any provisional tax estimate to an amount that he considers reasonable. This discretion may be exercised whenever enough information is available to substantiate the increase.

However, its practical application can be complex and has significant implications for taxpayers and society.

What Does Paragraph 19(3) Mean for the Average Taxpayer?

To understand Paragraph 19(3) in simpler terms, consider it a way for SARS to ensure your "best guess" for your annual income is accurate before you submit your final tax return.

Taxpayers like freelancers, businesses, or individuals with income outside of a regular 9-5 are required to estimate their taxable income and pay taxes on that estimate during the year, i.e. provisional tax.

The following are examples of where the discretion may be exercised:

• Big Income Changes: An increase in taxable income resulting from events like legislative changes, mergers, or acquisitions.
• Available Results: The availability of financial results that support increased taxable income.
• ‍Old Info: The estimate submitted by the taxpayer is based on a basic amount that is more than two years old.‍
• First-Year Taxpayers: It is the taxpayer's first year of assessment.

The taxpayer will be informed of any intention to apply paragraph 19(3) and will be allowed to respond within 14 days to the proposed increased estimate. The taxpayer is required to send the following information:

• Reasons for a 'nil' or non-payment (if a 'nil' or a non-payment was made)
• Kindly confirm whether COVID-19 Tax Relief measures with respect to the deferral of provisional tax was applied;
• Computation of taxable income;
• Management accounts;
• Income statement and Balance sheet;
• Section 24C schedule, if applicable;
• Projected capital expenditure for the financial year; and
• A schedule, if applicable, of net capital gains expected for the financial year. These gains should also be included in the computation of taxable income above.

A period of 14 days is usually granted to settle the additional provisional tax payable.  Interest will be charged, and a 10% penalty may be imposed should the additional provisional tax not be settled within this period.

What Happens If You Underestimate Your Provisional Tax?

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If you underestimate your taxable income significantly, SARS can penalise you under Paragraph 19(3). For instance:

• Suppose you estimated your income to be R500,000 for the year but, in reality, earned R1,000,000.
• You would have paid tax on only R500,000, leaving you with a large balance unpaid.
• SARS could impose a penalty of up to 20% on the difference between the tax paid and the actual tax due.

This ensures taxpayers provide more accurate estimates, even though it can lead to cash flow issues if taxpayers overestimate to avoid penalties.

Are there any social wins or challenges?

Motivates Compliance

The provision ensures taxpayers don't intentionally underestimate income to delay tax payments, helping the government collect revenue more evenly throughout the year.

Ensures Public Revenue

By minimising underestimations, SARS ensures funding for public services like healthcare, education, and infrastructure, benefiting society.

Small Biz Problems

Taxpayers with unpredictable income, like freelancers or startups, may need help to estimate accurately. Overestimating ties up money they could use to grow their business, while underestimating leads to penalties and interest.

Burden on Administration

 Responding to SARS' queries and providing supporting documentation can be time-consuming and costly, especially for small businesses that may need to hire tax consultants.

Stress/Penalties

Taxpayers often feel pressured to be overly cautious to avoid penalties, which can strain finances unnecessarily, especially in a tight economy.

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Take the guesswork out of your provisional tax. Discover solid tax solutions

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