Is Turnover Tax worth it?

[Intothedeepbluesea]

Turnover Tax seems to good to be true, is there some catch?

Turnover​ Marginal Rates for 2014​
R0 - R150,000​ 0%​
R150,001 - R300,000​ 1% of each R1 above R150,000​
R300,001 - R500,000​ R1,500 + 2% of the amount above R300,000​
R500,001 - R750,000​ R5,500 + 4% of the amount above R500,000​
R750,001 and above​ R15,500 + 6% of the amount above R750,000​

R750000 turnover and only pay R15500 tax!
And no vehicle logbook or bulging files of invoices etc

So if you are a sole prop and your business has R750000 turnover you will only pay a total of R15500 tax for that year?
Granted if you made a loss it may not be so rosy but most small businesses generally only make income if its profit generating so looks like a win all the way.

Can you be registered for Turnover Tax as a Sole Prop if its a side business and you also earn a salary?

[pmbguy]

Can you be registered for Turnover Tax as a Sole Prop if its a side business and you also earn a salary?

No

[Greig Whitton]

Turnover Tax seems to good to be true, is there some catch?

Yes, there is a catch. It's a tax on turnover, not profit.

[dellatjie]

And at this stage you have to stay registered for 3 years. So for a startup business, with low profits, it may be worth it..

They did, however mention at the budget speech that turnover tax is being investigated for improvements.

[Intothedeepbluesea]

Yes, there is a catch. It's a tax on turnover, not profit.

Indeed, the way I see it the catch is not that its on turnover but rather whether it suits the way your business generates and distributes profits.

And at this stage you have to stay registered for 3 years. So for a startup business, with low profits, it may be worth it..

They did, however mention at the budget speech that turnover tax is being investigated for improvements.

That has apparently been scrapped, you are fixed to Turnover tax for max 1yr now but you have to apply to change to a different tax type during the previous tax yr so if you decide to change at the end of a tax year you will only be able to change in year following the the coming year.

[Beancounter]

Turnover tax nurtures bad administration habits. So you pay little tax as a start-up business and you even pay tax if you make a loss. But what about when your turnover exceeds the turnover tax limit? By then the bad habits of not applying proper administrative control over your business is so entrenched that it may be impossible to get things in order for the real world of Income Tax, VAT, PAYE etc. A proper tax practitioner will be hands-on and will advise appropriately so that turnover tax doesn't have to be an option.

[Dave A]

I know I would have loved to have a turnover tax option when I started out - there's no doubt it would have saved me a fortune in tax. But as Beancounter suggests, I still would have tracked the expenses. Without proper financial information at hand, it's all too easy to make bad financial decisions.

The snag I foresee is when you approach the ceiling. Do you continue to grow, or do you hold back and stay under the ceiling?

I know I held back on growth a couple of years as I was approaching the VAT registration ceiling way back when because I recognised it was going to hurt the bottom line some. Low overheads, very high gross profit, very little to claim in the way of input VAT, and a client base that weren't registered VAT vendors themselves - at the time, just crossing the VAT threshold pretty much meant giving away over 10% of turnover to the taxman that I didn't have to staying under the line.

The way I see it, that jump might have got even bigger with this turnover tax threshold, especially if one has a business with the kind of profile I had at the time.

Certainly not a valid reason not to take the tax break if you qualify and it pays, though. Just when you're approaching that threshold, know that you'll actually need something of a growth spurt, together with some healthy margins and reserves to absorb the hit when you cross over.

[Greig Whitton]

Personally, I think that the Small Business Corporation tax structure trumps Turnover Tax:

R​0 - R70 700 | 0% of taxable income​
R70 701 - R365 000​ | 7% of taxable income above R70 700
R365 001 - R550 000​ | R20 601 + 21% of taxable income above R365 000​
R550 001 and above​ | R59 451 + 28% of the amount above R550 000​

With SBC tax, your first R70,700 of taxable income is tax free. The only way you could beat that with Turnover Tax is if you had revenue of R150,000 and a net profit margin of 50%!

[CLIVE-TRIANGLE]

What Greig said!

And that does not even take into account the accelerated wear and tear allowances, nor the next 2 tiers of marginal rates.

The advantage of turnover tax is the reduction in record keeping and form filling overhead, but as alluded to already, that in itself is a mixed blessing.

[dellatjie]

Thanks Dave and Beancounter, this is a side of the argument that I have never heard before!