February, August and September are very possibly the most underrated, intense and stressful months in the tax calendar for both taxpayer and their practitioner. The reason being the collision of two tax years, the past and the present.
Filing season for the 2023 tax year commenced on 7 July 2023. The 2023 tax year covers the period 1 March 2022 until end February 2023. The deadlines for the submission of the 2023 tax returns to SARS are:
- 23 October 2023 for non-provisional taxpayers, and
- 24 January 2024 for provisional taxpayers.
So what is all the fuss about if there is still time before reaching these deadlines?
The problem that arises is that provisional taxpayers only have until end September to make any top up provisional tax payments to SARS should they still have a tax liability for the 2023 tax year. As from 1 October SARS charges interest on the outstanding tax balance owed to them.
The interest charge is market related and not unreasonable given that the taxpayer has already enjoyed an interest free period subsequent to the end of the tax year – March until end September. Taxpayers are however already so stretched that they do not wish to suffer further liability if this can be avoided.
The determination of any final tax liability still owed to SARS which needs to be paid before the end of September can only be made based on the actual calculation of the figures for the 2023 tax year. This requires that all the necessary information and tax certificates for the tax year to be available, which is not always possible.
One month prior to the top up payment deadline, is the 1st provisional tax deadline for the 2024 tax year. This covers the first six months of the new tax year being March until end August 2023.
So just one month apart, there are potentially two major payments required to be made to SARS. Taxpayers get very overwhelmed as to what they are paying and for which tax year.
Now you may argue that a provisional taxpayer should have already paid most of their tax liability for the 2023 tax year at the end of February 2023. Although taxpayers and practitioners do their absolute best to make accurate provisional tax estimates for the 2nd provisional tax period, this is not always an absolute possibility as there are many extenuating circumstances at play.
One of the major anomalies when estimating a taxpayer’s provisional tax for the 2nd provisional tax period which is due for payment before the end of February, is the inclusion of any trust income which mostly take the form of trust income distributed to a beneficiary or interest on a loan account.
Although investment houses have made huge progress in being able to provide year to date tax information and reports to aid the process of estimating annual taxable income, there are still gaps in the process which are humanly impossible to narrow.
As from the 2024 tax year which covers the period 1 March 2023 until end February 2024, SARS will be introducing third party data submission for all trusts. This will be similar to what the banks and investment houses are required to do in terms of reporting investment income.
The information that will need to be reported to SARS will allow them to identify cases where trust income has not been disclosed by individuals in their personal tax returns which leads to tax leakage due to this income not being taxed in either the trust or the individual’s hands.
The deadline for the submission of this third party data to SARS will align with the existing third party data submission deadline which is the end of May annually. Various organisations and governing bodies are currently in the process of lobbying for this deadline to be extended until September annually.
Here is the gap…most investment houses in order to assist taxpayers with their 2nd provisional tax estimates due to SARS for the end of February, produce provisional tax packs which advise the year to date investment income. Most of these only cover the tax year period March until end of December which leaves both the taxpayer and the tax practitioner with a 2 month void.
The third party data that must be submitted to SARS before the end of May must be the actual information from the trust to the individual for the tax year. A further problem is that the actual tax year certificates reporting the final amounts for the full tax year period only becomes available after the end of May annually.
Many trusts are in a position whereby the trustees decide that certain classes of taxable income in a trust will be distributed to certain beneficiaries. These final amounts are however only quantified upon receipt of the actual tax certificates for a tax year and once the trust’s annual financial statements have been drafted. This will no longer be the case as going forward as from the 2024 tax year, these amounts need to be finally determined before the 3rd party data submission deadline which is the end of May 2024. Any undistributed trust income will remain and be taxed in the trust at 45%.
Although it has become second nature for a tax practitioner to take year to date information and annualise an estimate for the year, there is still one major hurdle over which the tax practitioner has no control. This hurdle is capital gains tax.
Why is capital gains a hurdle?…because the tax thereon in a trust is 50% more expensive than when distributed and taxed in the hands of an individual.
Why is the accurate estimation of the 2nd provisional tax payment so important?…because it is subject to severe under estimation of provisional tax penalties by SARS on assessment.
There is a time line of events which will occur for the first time ever as from January next year. Not paying attention to this time line will have severe adverse repercussions for taxpayers.
In order to navigate what lays ahead, especially for taxpayers that potentially receive trust distribution income, I would suggest the following:
- Make time for your trustee meeting (s),
- Trustees should discuss their concerns and take advice from their professional trustee,
- It is more important now than ever to make serious consideration of quantifying amounts that need to be made available from investments in terms of cash flow requirements. Should you only convene for one trustee meeting annually, these cash flow requirements should be for at least the next 12 to 18 months,
- Try to minimize the amount of times large capital gains are triggered from the trust’s investment portfolio in order to free up cash flow, and
- Where possible, free up cash flow from investments between the period of March until December annually so that any triggered capital gains will be disclosed by the investment houses in their year to date provisional tax reports. Any capital gains triggered during January and February are at risk of not being considered as distributed income from the trust.
In an artificial intelligence (AI) driven world where we are all trying to keep pace and have no time to catch our breath, it has become more important than ever to have open channels of communication between trustees, taxpayers, accountants and tax practitioners. Compliance has skyrocketed and becoming a true AI beast to be reckoned with. It however still takes real people to navigate real problems and road map real solutions.
National Tax Team Leader