Turnover tax: perhaps it has some benefits

South Africa's new turnover tax, effective March 1 2009, will be of substantial benefit to South Africa's many micro enterprises.

Strangely enough, though, for thousands of small firms the penny has yet to drop.

The legislation is incorporated into a new Sixth Schedule to the Income Tax Act.

Most significantly, micro businesses will be taxed in terms of a table very different to those applicable to other taxpayers and companies.

A micro business could be incorporated or unincorporated, with sole proprietors or partnerships falling into the latter category. A micro business is defined as one whose turnover, excluding capital and certain exempt amounts, does not exceed R1m for the year of assessment.

Micro businesses pay turnover tax per the following table:
 

The following are notable exclusions:

•·         Companies with a year-end other than February;
•·         Public-benefit organisations;
•·         Clubs; and
•·         Professional services businesses, no matter how small the firm might be.

Examples of professional services include accounting, auditing, broking, consulting management, secretarial services and translation.

There is a need to take careful note of the legislation's anti-avoidance rules.  This caters for circumstances where the micro business is broken up between connected persons (eg, a family) to ensure that each business component remains within the R1m cap. In such instances the turnover of the connected persons' business activities will be added together for purposes of applying the cap.

As the name suggests, the tax will be levied on turnover and not the taxable income to which we are all accustomed. This will make life a whole lot simpler for micro enterprises, because:

•·         The determination of taxable income can be a highly complex exercise;
•·         Micro business will only have to worry about PAYE, since VAT will not be levied;
•·         Secondary tax on companies (STC) where dividends are less than R200 000 per annum is not applied,
•·         and as to capital gains tax (CGT), the turnover tax will simply include 50% of the amounts received (the proceeds) from the disposal of business assets in taxable turnover. Immovable property will only be included to the extent that it was used for business purposes. This amount is excluded from the R1m turnover limit.

The amount must have been received and turnover tax is therefore levied on a cash basis. However, the non-business income of natural persons that are registered as a micro business representing investment income and remuneration from employment is still subject to normal tax and will not be taxed under the turnover tax.

The VAT exclusion is particularly significant, since it removes a huge administrative burden, given that the VAT system requires careful record keeping.

The turnover tax is levied annually, from the beginning of March to the end of February of the following year. Payments are made in two six-monthly interim, or provisional, payments.

In order to opt for the turnover tax one must apply before the beginning of the year of assessment and remain in the system for at least three years, unless disqualified. This year Sars extended the registration date to 30 April 2009. A micro business that exits the system will not be allowed to re-register for a period of three years.

Consequently qualifying micro enterprises will no longer have to spend as much time as they did in the past on complicated tax systems requiring detailed record keeping. No doubt the objective of this system is to reduce the administrative burden on both the taxpayer as well as Sars.

While on the face of it the new turnover tax regime is a win-win solution, taxpayers should do their sums before entering the system.

Thus: Where a business turning over less than R1m a year is not registered for VAT and is currently making tax losses, the only tax payable is PAYE on salaries paid, assuming there is no CGT or STC. If one compares the same business in the turnover tax system, any income in excess of R100 000 will be taxed in terms of the table and the business will also still be liable for PAYE on any salaries paid.  Careful consideration must be given to all costs of full tax compliance versus the simplified turnover tax regime, particularly paying careful attention to the effect of the increasing sliding scale used.

Decreasing the administration tax burden on average South Africans is encouraging. It will free businesses up to concentrate on generating profit.

*Muneer Hassan is project director of tax at the South African Institute of Chartered Accountants

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responses to this article

Turnover Tax If the cc act stipulates that a cc needs to produce a set of signed annual financial statements a year, how can a cc only keep records of its turnover. by H on April 15 2009, 16:13 Find this comment inappropriate? Report it

Refreshingly plain English Thanks for a very clear article. by BB @ MoreThanMoney on April 16 2009, 12:52 Find this comment inappropriate? Report it

Best article on the subject yet I've been following the new tax quite closely, and this article has so for been the most comprehensive, easy-to-read one yet. So congrats, Muneer... I would, however, do something about your photo - looking like Beelzebub won't help bring in . .more clients! . .less by LimoGuy on April 16 2009, 14:59 Find this comment inappropriate? Report it

Accounting records Both Companies and Close Corporations must keep proper books of account as required by their respective Acts. The new turnover tax requirements for proper books of account not to be kept, is contradictory to the previous Acts. Surely these Acts are not . .more going to be amended just to satisfy SARS? . .less by T Harper on April 17 2009, 10:47 Find this comment inappropriate? Report it

Accounting Records in New Companies Act? As I read it you *need not* keep detailed records for the turnover tax. That's different from being *required not* to keep detailed records. Anyone checked the new Companies Act and what it has to say about record keeping for very small companies? by Enquiring Mind on April 20 2009, 07:45 Find this comment inappropriate? Report it

turnover tax If a cc has annual turnover of less than R 1 million, but generates a capital gain of R 5 million on disposal of the business , how will this gain be taxed? by delia on April 20 2009, 08:49 Find this comment inappropriate? Report it

Non-business taxes If a sole proprietor earns money from a small business but also from a pension and interest/dividends does he/she need to complete two tax returns? by Eric on April 20 2009, 16:59 Find this comment inappropriate? Report it

Turnover tax What about the exclusion of "personal service providers"? by Hugh on April 21 2009, 08:42 Find this comment inappropriate? Report it

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