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Alert: Change to Provisional Taxpayer Rules

Posted 23 March 2017

Currently, there is a legal obligation for South African resident employers to register with SARS for employee’s tax (PAYE) so they can withhold tax on a monthly basis from their employees’ salaries, and pay this over to SARS. However, the situation is different for foreign companies who employ South African residents. If these companies don’t have an office or a branch or some other legal representation in South Africa, they don’t have an obligation to register with SARS for PAYE. The taxpayers who work for such organisations are often paid their gross salary (i.e. with no tax deduction) and may be left unsure as to when they need to declare their income and pay over tax.

This confusion exists partly due to the current definition of “provisional taxpayers” which refers to taxpayers who earn income other than remuneration (i.e. non-salaried taxpayers). This definition excludes those taxpayers working for an employer and earning a salary, as the assumption is that these taxpayers would be paying PAYE each month and therefore the provisional tax system would not be relevant. This assumption is valid for taxpayers who work for local resident employers who are registered with SARS however it leaves the employees of offshore companies in limbo – they don’t pay PAYE, nor are they classified as provisional taxpayers (who are obligated to pay tax twice per year).

The only option left for these taxpayers is to pay tax on assessment when they file their annual tax return (ITR12). What normally happens, is that SARS would then notify these taxpayers that they should in fact be registered as provisional taxpayers, but this is usually after imposing penalties and interest for the current year.

To reduce the administrative burden on both SARS and the taxpayer, the definition of a “provisional taxpayer” has changed. From 1 March 2017, it includes those salaried taxpayers who work for employers who are not registered with SARS and therefore don’t deduct PAYE from their earnings.

There are two types of individuals who will be impacted by this change and will need to register as provisional taxpayers and pay tax twice a year:

• South African residents who work for foreign employers (i.e. offshore companies) who are not registered with SARS.

• Foreigners sent by a foreign company to work in South Africa (i.e expats). Sometimes, large multi-national companies have global mobility programmes where they send employees to South Africa on short-term secondments.

This change should hopefully clarify the confusion for many taxpayers who work for offshore companies and don’t have tax deducted from their salary.

However, it may create some additional confusion and red tape for the second type of taxpayer above. With double tax agreements, “shadow payrolls”, home payrolls and now the additional burden to register as a provisional taxpayer – the situation for expats could become very tricky. These types of taxpayers should consult a Tax Practitioner to ensure they understand the tax consequences of their assignment.

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