Are you tired of navigating through a maze of tax laws and regulations just to keep your small business afloat?
Well, in 2008, the South African government made an important move to ease the tax burden on small businesses by introducing the Turnover Tax on Micro Businesses. This simplified tax system is a game-changer for small businesses as it eliminates the need to account for Income Tax, Capital Gains Tax, STC, and VAT. In this article, we’ll highlight the hidden risks of Turnover Tax that you as small business owner should be aware of.
Quick Take-Aways
- Turnover Tax simplifies taxes for small businesses.
- Turnover Tax starts taxing from first sale, not just profit.
- Businesses must stay in Turnover Tax for 3 years.
- Only keep records of receipts and assets over R10,000 with Turnover Tax.
You would have to applaud the government for finally realizing that they would have to take steps to ease the tax burden on small businesses. But the real questions are: Â Have they succeeded AND will you, in fact, pay less tax?
Qualifying taxpayers have the choice to get taxed on turnover based on the new system or on profits based on the old system. This is an important distinction to make. Under the new system, you will start paying tax from almost the first rand of sales, whether you make a profit or not. Even if you make massive losses, you will still pay tax. In the current system, you will only pay tax if you make a profit.
The following tax rates are applicable:
|
Turnover (R) |
Tax payable |
|
0-150000 |
0% |
|
150 001-300 000 |
1% of each R1 above R150 000 |
|
300 001-500 000 |
R1 500 + 2% of amount above R300 000 |
|
500 001-750 000 |
R5 500 + 4% of amount above R500 000 |
|
750 001 and above |
R15 500 + 6% of amount above R750 000 |
Once a taxpayer has elected the new system, he needs to remain in the system for a period of three years. If the taxpayer discovers that he pays more tax under the new system, he will have to wait for the three years to elapse before he can opt-out. Also, keep in mind that the taxpayer will not be able to re-register for a period of three years after opting out.
The option is available to sole proprietors, a micro business, close corporations, companies, and cooperatives with an annual turnover of less than 1 million rand. Trusts are excluded.
Businesses under the new system used to not be able to register for Vat as proper records need to be kept for Vat. However, as of March 2012, businesses in the Turnover Tax system will be allowed to register for VAT.
Would I qualify for the new Turnover Tax system?
The following businesses are excluded:
1. Any person who holds shares in another company for any period during the year.
- When more than ten percent of the receipts are from investment income (interest/dividends)
- Personal service providers
- A labor broker without an exemption certificate
- Professional service providers
- A taxpayer if the proceed from the sale of assets exceeds R1.5 million over a three-year period.
2. A CC or company if
- at any period during the year, any shareholder of the company or CC held shares in any other company or CC
- it is a recreational club
- it is a public benefit organization
- at any period during the year, any of its shareholders were not natural persons
What advantages would I have over my current tax system?
The only records you need to keep are receipts and details of assets with a value greater than R10 000. There will be a saving in accounting and bookkeeping fees, as well as a reduction in administrative duties. Keep in mind that you will still have to do some sort of bookkeeping, as it is impossible to run a business efficiently without proper accounting records.
Will I actually benefit?
It depends. Taxpayers who make a big margin on sales and have low overheads will benefit. The problem is that most taxpayers who fall into this category are in the service industry and personal service providers are specifically excluded.
If you are eligible make a three-year forecast and determine whether you will pay less tax under the normal tax system or the turnover tax system. Take administrative savings into account and choose the system that will lead to the least amount of tax.
We are however of the opinion that most businesses will not benefit from switching to the new system. Start-up companies make little, if any, profit during the first years of operation. To pay tax on turnover instead of profit during this period does not make much sense. Start-up businesses that could have benefited, namely service companies, are specifically excluded in most circumstances.
Get in contact with our tax consultants for more information on turnover tax registration options for your business.
