Income tax is the bane of our business and personal existence, but as upright citizens, we have to pay it. And the time of payment creeps up on us unexpectedly at least twice a year. Provisional tax is paid in Aug and Feb of every year. But those payments are not the actual tax expense that is reflected in our accounting records. Only at the end of the financial year, once all the accounting activities have completed and we have a set of annual financial statements, can we say exactly what profit (or loss) has been made, and therefore exactly what tax is due. Thus, your annual income tax return is a reflection of the final picture for the year.
Against this final financial picture is laid the provisional tax that you have paid during the year to see if you have over/underpaid. Typically the provisional tax is shown as an expense in the financial year until the final accounting entries to calculate the total tax for the year. Then the over/underpayment of tax is added/subtracted to make the tax expense account tie-up with the tax return. Any overpayment (where you paid too much provisional tax) is then shown on the balance sheet as a receivable, but if you owe SARS a bit extra in tax, this will reflect as payable in the accounting records.
It sounds like you only have to think about income tax a few times a year, but if you don’t plan for it, you can end up without enough money to pay it. We suggest putting an estimated amount aside in a separate account every month, to make sure you have enough money to pay SARS. To know what to estimate, you need a good and accurate idea of your monthly profit.
To help you stay on top of your estimated tax bill, give us a ring.