When completing and submitting provisional tax returns, you are required to estimate the taxable income for the first half of the year as well as for the full 12 month period. As provisional tax returns are normally due before the tax year-end, it is often a difficult task to know what the total taxable income of the business/individual will be before the year closes off. Here are some tips to keep in mind when calculating your estimated taxable income.
Remember the Income Tax Act requires at least 40% of taxable income to be declared with the submission of the first provisional tax return. This means that the tax thereon should be paid six months before year end.
80% of taxable income should be declared with the submission of the second provisional tax return. The tax thereon should be paid at year end.
Therefore in total you only have a variance of 20% in calculating your estimated taxable income. Inland Revenue can levy a 100% penalty on the under-estimated amount – so you have to make sure that you calculate your estimated taxable income carefully.
The easiest method of calculating taxable income is to do a ‘gross-up’ of the income and expenditure for 5 months (for a first provisional return) or the past 11months (for a 2nd provisional return). A gross-up entails using the amount as is, divided by the months which it represents and then multiplying by 12, to arrive at an annual amount. For example; the income from sales for 11 months was N$120,000. The gross up would be N$130,909 (N$120,000/11 months x 12 months). Any once-off items that does not occur evenly over the year, can be excluded from this calculation and added/deducted separately in calculating the taxable income.
For e.g. a once off expense took place for major repairs on a building (N$30,000), then this amount can be excluded from the expenses which are grossed up. The full amount is then deducted at the end
Income / 5 months x 12 = Y.
Expenses / 5 months x 12 = X
Y less X less N$30,000 = Grossed up taxable income used for calculating tax payable
Once a gross-up taxable income is calculated, this can be compared to the budgeted income for the year (if available) and whichever amount seems more reasonable can then be used.
You should think of and include any significant transactions which may still happen for the remainder of the tax year, which may significantly impact the estimated taxable income. Such transactions may include:
- Disposal of fixed assets; (This will most likely result in a recoupment to be included in taxable income)
- Fixed assets additions; (As you may be able to claim capital tax allowance on this, which will reduce your taxable income and result in less tax being payable)
- Other non-recurring transactions or once-off projects;
- Seasonal revenue trends. (If you know that the second half of the year has more sales as a result of the festive season, then you need to factor this into your estimates)
Because of the 40/80% pre-requisite, it is advisable to rather not decrease your taxable income to 40% or 80% once you calculated an estimated annual taxable income, as this may cause under-estimations. Keeping a buffer, rather than saving on provisional taxes may save you from unnecessary penalties and interest on provisional taxes. For this reason we would advise that you pay at least 50% (as opposed to 40%) of the tax due on your first provisional tax calculation.