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Thread: Small business turnover tax

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    Site Caretaker Dave A's Avatar
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    Small business turnover tax

    From 1st March 2009 many small businesses with a turnover of less than R1 000 000 per annum can opt to be taxed purely on turnover.

    It certainly looks like this could result in a tax saving under the right circumstances. I know it would have meant some pretty big tax savings for me when I started out. Tax of R2 000.00 on a turnover of R300 000.00 - I would have been doing the dance of joy for sure. Unfortunately I don't qualify anymore

    You can find the details of the new turnover tax here.

    Creating a formula to calculate the breakeven point was beyond me. Maybe someone good at stats manipulation could give it a whirl. I suspect including VAT in that analysis would be a red herring. It's really about the relationship between your turnover and the tax that would attract vs your taxable income and the income tax you'd get hit on that.
    The trouble with opportunity is it normally comes dressed up as work.

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    I am interested in changing over - what do the tax pro's think? If you would like an example, how about a shop that turns over about R850 000 and net profit of about R170 000 operating as a sole prop..

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    Site Caretaker Dave A's Avatar
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    Well, your turnover tax assessment would be R27500.00.
    Income tax on R170 000.00 would be R25680.00 based on the 2009 tax scale, so I expect it will be a touch less for the 2010 tax year.

    (anyone got a link to the marginal rates for 2010?).
    The trouble with opportunity is it normally comes dressed up as work.

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    Silver Member geraldenek's Avatar
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    Hi

    The effective tax rate of an individual is a lot higher. So i would say if you qualify for the turnover tax rather do that because you end up paying for the 2010 tax year with a profit of R170 000, R23,504 as an individual and R700 if you choose the turnover tax system. But rather consult with your accountant or bookkeeper before you decide to make this choice.

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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by geraldenek View Post
    R700 if you choose the turnover tax system.
    Based on a turnover of R750k?

    I think the big winners with turnover tax will be the service industries. Professionals must be spitting mad that they're excluded from qualifying.
    The trouble with opportunity is it normally comes dressed up as work.

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    I'm also busy researching turnover tax at the moment. So I thought I'd list a few of the things I found mostly from here:

    1. Turnover Tax Rates

    Turnover Marginal Rates (R)
    R0 - R100,000 0%
    R100,001 - R300,000 1% of each R1 above R100,000
    R300,001 - R500,000 R2,000 + 3% of the amount above R300,000
    R500,001 - R750,000 R8,000 + 5% of the amount above R500,000
    R750,001 and above R20,500 + 7% of the amount above R750,000

    2. Capital gains and dividends

    The Turnover Tax will simply include 50% of the amounts received from the disposal of business assets in “taxable turnover”. Where the asset is immovable property, the amounts received will only be included to the extent that the property was used for business.

    Micro businesses that choose the Turnover Tax will also be exempted from STC to the extent that their dividend distributions do not exceed R200,000 a year. Any excess will be subject to STC.

    3. Exit VAT

    When any vendor deregisters from the VAT system, the vendor is required to pay VAT (exit VAT) on the lesser of the cost or market value of the assets held before deregistering. Vendors will be allowed to pay the exit VAT over a period of six months. Further relief will be granted by way of a deduction of up to R100,000 from the value of the assets held by that vendor prior to deregistration. This equates to a reduction of up to R12,281 in the exit VAT that will be payable. On the other hand, if a person was deregistered as a VAT vendor in order to register for the Turnover Tax and subsequently re-registers for VAT, the value of assets in respect of which VAT input credits can be claimed on re-registration will be reduced by up to R100,000. (I.o.w. the R100,000 is only tax relief untill you have to reregister for VAT)

    4. Specific inclusions in “taxable turnover”

    • 50% of the amounts received from the disposal of certain capital assets. See discussion of CGTin 4.7.
    • In the case of a close corporation, co-operative or company the “investment income” received, other than dividends. Dividends may be included at a later date. The reason for excluding dividends until a later date is that dividends are currently exempt from income tax, but will be subject to a dividend withholding tax at a later stage. Since the withholding tax will generally not apply to dividends paid to resident companies and the simplified tax system will exempt shareholders in micro businesses from the withholding tax, it may be necessary to tax dividends as part of the turnover of a small incorporated business to reduce revenue leakage.
    • Certain income tax allowances granted in the previous “year of assessment”, and which would have been added back to taxable income in the following “year of assessment” in the current income tax system e.g.
    a doubtful debts allowance. In order to avoid double taxation this inclusion will be limited to the excess of the allowances over any balance of an assessed loss that the “micro business” will be prevented from carrying forward.

    5. Specific exclusions from “taxable turnover”

    • “Investment income” received by sole proprietorships (individuals) and partnerships. This income will be taxable under the current personal income tax provisions in the hands of the individual recipients. The reason for this is to cater for the common law principle that businesses operated by individuals are not distinct or separate legal entities from the individuals who own them. It will al so allow for the capped annual tax exemptions for interest and dividend income that are currently granted to individuals.
    • Certain Government grants that are exempt from income tax.
    • Any amount that “accrued” to the business, and was subject to income tax in the hands of the business, in a “year of assessment” prior to it registering for the Turnover Tax.
    • Salary income, excluding a notional salary “payment” made by a sole proprietor to himself or herself, will be taxed in terms of the current personal income tax system.

    6. Record keeping

    A registered micro business must retain a record of –
    • amounts received during a year of assessment;
    • dividends declared during a year of assessment;
    • each asset at the end of a year of assessment with a cost price of more than R10,000 ; and
    • each liability at the end of a year of assessment exceeding R10,000.

    7. QUICK CHECK TO SEE IF A BUSINESS QUALIFIES FOR THE TURNOVER TAX

    (If the answer to any one of the following questions is “No”, the business will not qualify for the Turnover Tax for that year of assessment)

    1. Will the “qualifying turnover” of the business be less than or equal to R1 million for the year of assessment?
    2. Do you declare that the business is not registered for VAT or, if it is registered for VAT, that you are willing to deregister it for VAT?
    3. Do you declare that the business does not render a “professional service”?
    4. Do you declare that the business is not a “personal service provider” or a “labour broker” without a SARS exemption certificate (refer to 4.4.3)?
    5. Does the business trade in one of the following forms: sole proprietor, partnership, close corporation, co-operative or company?
    6. If the business is a partnership, do you declare that all the partners will be individuals throughout the year of assessment?
    7. If the business is a close corporation, co-operative or company, do you declare that all of the shareholders/members will be individuals throughout the year of assessment?
    8. Do you declare that the business is not a public benefit organisation or a recreational club?
    9. Does the business have a year of assessment that ends on the last day of February?
    10. Do you declare that the shareholders, members and the business do not hold shares/interests in another close corporation, co-operative or company other than the exceptions listed in 4.4.1?
    11. Do you declare that the “investment income” is not expected to exceed 10% of the total income of the business for the year of assessment (refer to 4.4.2)?
    12. Do you declare that the income from the disposal of assets by the business over the year of assessment and the past two years of assessment is not expected to exceed R1.5 million in total (refer to 4.7)?
    13. Do you declare that the business was not registered for the Turnover Tax for any of the last three years of assessment?

    8. My own opinions and notes

    One of the benefits that SARS list for turnover tax is that you can save money on accounting and tax services. (I've read somewhere that the administrative work are greatly reduced with Turnover Tax - herinafter referred to as T.T.). However I do feel that even though SARS i.e. only needs a small business to keep records of i.e. Assets and liabilities items exceeding R10 000 (and thus safe on accounting fees), surely you'd still have to keep a decent set of accounts, so that you can make management decisions? The turnover limit on this new tax is R1 000 000, but every small business intends to grow. When you register for T.T. you are registered for 3 years, and can only move over to the normal tax systems within that 3 years if you exceed or expect to exceed the R1 turnover. So what happens in year 4 if your business grows to show bigger turnovers, will you start with opening balances from the sparsely docs SARS required for T.T.? I'm sure all would agree that you want accurate records of how your business is and was doing year on year.

    As far as the fewer tax admin goes, T.T. info list that the following tax types will be replaced: VAT, Income tax, Provisional tax, CGT and STC. However, If you think about it, Income tax and provisional tax relate to the same type of tax, just submitted and paid at different times of the year. And as far as CGT and in a smaller measure STC tax goes, "small" business doesn't often incurr those types of taxes (well not thus far in my experience). Furthermore, there is a maximum on the dividend distribution, if it's in excess of R200 000 you'd STILL end up paying STC on the excess. So basically in my humble opinion, the lesser admin will happen on VAT. As far as T.T. goes, just like income tax, you will still submit 2 interim returns every year (every six months) and a third final return. Where's the difference in that?

    From the above it would seem that I don't approve the new T.T. system, but that's hardly the case, I think in the end it would really come down to T.T. vs. Tax on PROFIT (remember with profit you take into account turnover AND allowable expenses) + VAT.

    Disclaimer on point 8:

    Please note that my opinion is exactly that and I would LOVE for the tax pro's to point out to me if I'm mistaken on anything I've mentioned, and not only that I don't want my opinion (especially if it's wrong) to cloud anyones judgement that has to decide whether to switch to T.T. or not! I've got to do a quick training session on Monday on T.T. and would love to hear other experts' opinions!

    Thanks
    Ladel

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    My wife is a freelance graphic designer - is that considered a professional service?

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    Professional service

    Quote Originally Posted by Pap_sak View Post
    My wife is a freelance graphic designer - is that considered a professional service?

    Hi Papsak

    This is the only def I could find.

    "Professional Service Providers

    Definition: Individuals who provide your company with specialized service, including but not restricted to lawyers, accountants and management consultants"

    I still think yours is a good question. My first reaction that Professional certainly refers to a profession mayby with a registered body like Doctors and lawayers (as mentioned above) but I'm not too familiar with graphic designers and don't know whether they all belong to a designers 'board' and has to comply with the boards rules and regulations? Furthermore I ALSO don't know if belonging to such a board is what would define your profession as professional services.

    Looking forward to other responses!

    Ladel

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    Site Caretaker Dave A's Avatar
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    It's the registered professions.

    A graphics designer isn't going to get struck off any roll for bad design and she does not have to belong to a professional body to practice her art
    The trouble with opportunity is it normally comes dressed up as work.

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    That is pretty interesting - and a massive tax saving for services that operate from home with very little deductions..

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