Small business turnover tax

[Dave A]

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.

[Pap_sak]

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..

[Dave A]

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?).

[geraldenek]

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.

[Dave A]

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.

[Ladel]

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

[Pap_sak]

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

[Ladel]

Professional service

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

[Dave A]

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

[Pap_sak]

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

[southafricanrob]

Turnover Tax sounding good??

Hi,
I am a Sole Prop turning 700k and profitting about 350k. Turnover tax lets me pay R18000 on this if I am correct. I have been to several accountants/firms to try and get advice and all have been non committal and given wishy washy answers to my questions at great expense..

I gather that there might be options for me to register a CC, qualify as an SBC and use dividends to filter some money to me and reduce tax burdeb but the cheapest quote I've found so far is R15000 plus a monthly fee depending on how many hours they need. I am currently not VAT registered and would prefer to keep it tha way as I dont charge my customers VAT at this stage as they are end users and I would have to take 14% off my takings.

>>> Basically I am looking for a no nonsense answer as to realistically what I would pay if I was clever and paid normal SBC tax. Only then can I do the easy comparison to see if Turnover Tax is better for me.

Any comments and suggestions truly welcome.

[Dave A]

What a lovely pre-tax profit margin

This was the SBC concession for 2008 tax year, so it might have changed some:

The first concession is to be taxed on the basis of a progressive rate system, viz SBCs tax is calculated at a rate of 0% on the first R43 000 of taxable income, 10% on taxable income in excess of R43 000 but not exceeding R300 000 and thereafter at a rate of 29% for every R1 in excess of R300 000.

The second concession is the immediate write-off of all plant or machinery used in a process of manufacture or similar process in the tax year it is brought into use for the first time. Furthermore, an accelerated write-off allowance for depreciable assets (other than manufacturing assets) acquired on or after 1 April 2005 is available at 50% of the cost of that asset in the tax year during which that asset was brought into use for the first time, 30% in the second year and 20% in the third year. [See
also under Special Allowances, par (n)]

Unless you're doing something pretty special in the way of depreciable assets, it's hard to see you doing better than an R18k tax bill for the year. Add the admin costs you mentioned for the CC and it looks like Turnover Tax is the way to go for you.

I expect SBC will become important to you once your turnover goes over R1 million per annum.

[Ladel]

Hi

I absolutely agree with Dave...

Unless you're doing something pretty special in the way of depreciable assets, it's hard to see you doing better than an R18k tax bill for the year. Add the admin costs you mentioned for the CC and it looks like Turnover Tax is the way to go for you

Based on the info you have given your SBC tax calc would look like this

(43 000 @ 0%) + (257 000 @ 10%) + (50 000 @ 29%)
thus 0 + 25 700 + 14 500 = 40 200.

On this info alone, and provided your line of business does qualify for Turnover Tax, 18000 is the obvious choice.

[Dave A]

I'll tell you one thing that became apparent in that little excercise - the step through the R1 million turnover mark is going to be quite a shock to the system. It looks like the kind of level you'll have to burst through, or face ending up with significantly less money in the pocket for a while.

[Ladel]

Yip tax could more than double after the 1 mil mark, and not only that, can you imagine the chaos after reaching it? Suddenly having to register for VAT and all kinds of tax with no paper trails? I'm v-e-r-y wary of this turnover tax craze, but hey I'm an optimist let's hope that in the end it works out after all!