[Question] Turnover or Provisional Tax?

[derek.course]

Hi, After being unemployed for quite a while and unable find employment, I've managed to start a small online administration and investment consultancy business. I have two corporate clients and one individual. I don't earn more than 80% from one client. Which tax should I register for? I'm a pretty bad stutterer and mailed SARS for assistance but no response at all.

[Dr Thomas]

I'd suggest that you, as an investment consultant, 'invest' in an appointment with an accountant and discuss your options, since each one may have it's own advantages/disadvantages depending on your unique situation.

I'm not an accountant, but as I understand it, here is my 2c:

If there is any possibility you can make a loss, it's better to have provisional tax, since then you won't pay any tax if your business is running at a loss. But you will need an accountant or be very good at accounting yourself to be able to accurately pay provisional tax. Provisional tax is a tax on PROFIT. If you are running at a loss and owe millions to the bank/suppliers/customers, then at least SARS won't come gunning for you as well. Please note, that you as the business owner are fully liable for provisional tax - if your accountant fails to accurately file your provisional tax, and there is a short fall, it's YOU who will be liable for the penalties and interest. You can maybe try and sue the accountant but from SARS' point of view, you are the business owner, and you are the one who must pay. It's therefore important not to delegate too much responsibility to your accountant and to have regular meetings with him/her to discuss your business and your tax compliance status.

If your business cannot really make a loss (i.e. it's not possible to end up with mostly debts) and if your expenses are not much (i.e. not really enough to warrant writing off as tax expenses) then turnover tax will mean that you don't need to hire any accountant and just pay tax on your turnover. Bear in mind, this is TURNOVER tax (i.e. all the money that flows into the business, before profits are calculated), not a tax on profit, meaning that any money coming in is tax liable even if you owe millions to the bank/suppliers/customers. That means you owe SARS in addition to everyone else. But if you don't really owe anyone anything, then this simple tax is supposed to be easy enough to do yourself or have someone do it on your behalf from time to time and might be suitable.

There are huge advantages to provisional tax and in general, if you can afford the monthly amount for an accountant, it's better to pay provisional tax, because you can write off a lot of tax as business expenses and the accountant may end up paying itself with all the tax relief they figure out for you.

But if you can't afford an accountant and the business is super simple in structure, and doesn't have any real operating costs and can't run into debt, then turnover tax is suitable.

But like I said, I'm not an accountant, it's better for you to find an accountant, take them all the bank statements for the business and ask this question directly of them. Some accountants offer a free initial consultation and can give advice on what you must do to proceed further.

[derek.course]

Thanks Dr Thomas,

I more of a market analyst so agree consulting an expert is worth while. My operating expenses are minimal but still worth discussion with an accountant.

Thanks again for taking the time answer comprehensively.

[Andromeda]

As a natural person, you can only register for turnover tax if your "professional" income does not exceed 20% of the total income. I think that the rules regarding the two options will end up obliging you to go the normal sole proprietor route.

[Dr Thomas]

It seems that 'personal services', which may include your admin/consulting work, are specifically excluded from turnover tax. SARS has a full checklist here: http://www.sars.gov.za/TaxTypes/TT/H...companies.aspx

It looks like the way the rules are structured, you are going to need to pay provisional tax.