Thanks to vigorous submissions by several organisations, recent amendments to the Income Tax Act have ameliorated the draconian and totally unrealistic provisions introduced last year relating to the second provisional payment. At the same time, the exemption of several classes of taxpayers from the need to register as taxpayers is to be welcomed.

SARS had decided in its wisdom that taxpayers were enjoying an unfair advantage in being able to base their second provisional payment on the so-called basic amount, which is the taxable income reflected in the most recent assessment. If you based your estimate of taxable income for the current year on the basic amount, you could not be penalised for underestimating. If you based it on a lesser figure, you had to be accurate within 10%, otherwise a penalty of 20% of the tax on the underestimate would result.

For the 2009 year of assessment, the right to use the basic amount was removed and, as a sop to taxpayers, their estimates were allowed to be out by up to 20%. This provision ignored or refused to acknowledge the reality faced by the great majority of small and medium sized businesses, namely that they normally do not have the information in the last month of a financial year to estimate their profits, let alone their taxable income, with that degree of accuracy. After intensive lobbying and protests and many meetings with SARS, sanity prevailed, at least insofar as smaller businesses are concerned.

The new dispensation is as follows:

• Taxpayers whose taxable income does not exceed R1 million may, as before, calculate their second provisional payment based on the basic amount. If they estimate their income at less than the basic amount and are out by more than 10%, they are liable to a penalty of 20% of the tax on the amount of the underestimate. If the basic amount is based on a year of assessment that is more than one year old, the basic amount must be increased by 8%. The Commissioner may remit all or part of the penalty if satisfied that the estimate was seriously calculated with due regard to the relevant factors and was not deliberately or negligently understated. This wording suggests that the penalty will be imposed and the taxpayer will have to show why it should be reversed or reduced.

• Taxpayers whose taxable income exceeds R1 million will not be able to rely on the basic amount and their estimates will have to be not less than 80% of the actual taxable income. If not, the Commissioner "may, if he or she is not satisfied that the amount of such estimate was seriously calculated with due regard to the factors having a bearing thereon or was not deliberately or negligently understated", impose a penalty of up to 20% of the tax on the amount of the underestimate.

Although this partial relaxation is welcome, it is still unsatisfactory. SARS has stated that 90% of taxpayers will benefit, but it nevertheless leaves a lot of taxpayers at risk of contravening the provisions and having to satisfy SARS that their estimates are defensible. It would surely have been administratively easier for both taxpayers and SARS if the right to use the basic amount had been retained, with the proviso that it be increased by 8% across the board.

The good provisional taxpayer news is that registered public benefit organisations, recreational clubs and bodies corporate under sectional title and share block schemes no longer qualify as provisional taxpayers. The taxable income threshold for persons older than 65 to be exempt from registration has increased from R80 000 to R120 000, unless some of the income arises from carrying on a business.

Written by: Prof Peter Surtees, Director of Tax Services, Deneys Reitz