06 May Small Businesses: Make The Most of Your Tax Breaks!
“There are two systems of taxation in our country: one for the informed and one for the uninformed.” (U.S. Judge Learned Hand)
Whether you have recently started a new venture or have had a small business for a while don’t forget that SARS offers two types of favourable tax treatments for small entities:
- Turnover Tax on micro businesses
- Tax on Small Business Corporations (SBCs).
This is a tax on entities with turnover of R1 million or less per annum. Tax rates are:
The maximum tax payable is R14,150 per annum assuming a turnover of R1 million. This is a very low amount – for example, assume the entity is a company and makes R200,000 taxable income, then it will pay R56,000 in income tax versus R14,150 above.
Turnover Tax businesses pay no other income taxes (such as Provisional Tax and Capital Gains Tax) but will need to collect and hand over Employee Tax, and VAT should the business entity choose to voluntarily register for VAT.
In terms of who may register for the tax the field is broad – companies, sole proprietors, partnerships, close corporations and cooperatives are eligible.
Another break is that these entities need only keep limited records as follows:
- Income received
- Dividends declared
- Any Asset over R10,000
- Any Liability over R10,000 at year end.
There are restrictions placed on the business, the main ones being:
- Owners cannot hold investments in other companies except listed entities and other public-interest entities such as bodies corporate
- The business must have its year end on 28 February (to comply with SARS requirements in terms of dates when tax payments are to be made)
- If more than 20% of income received is from investments or professional services, the business will not qualify
- NGOs, public benefit organisations and recreational clubs cannot apply
- Labour brokers and personal service providers are also not eligible
- The proceeds from the sale of capital assets cannot exceed R1.5 million in a three year period.
As soon as turnover exceeds R1 million in a business’ financial year, it must de-register as a Turnover Tax entity.
Turnover Tax is not that popular with organisations. Commentators have speculated this is due to:
- The SARS administration workload.
- Keeping only limited records reduces the business’ ability to analyse how well (or badly) it is doing. Having information is particularly important in the early stages of a business.
- A further important aspect is that with turnover tax you cannot deduct your expenses – so if your business is a loss-making one (as many start-ups are) or if its taxable income (revenue less expenses) is minimal, you could well pay more tax on the turnover tax basis than on the normal income tax basis. You cannot carry forward any losses you incur from one year into the next year as this is only a tax on turnover. Over time, this can negatively affect cash flow.
- To qualify for the Turnover Tax, you must register before the tax year starts and thus you need to weigh up carefully if Turnover Tax is best for your business.
Small Business Corporations
SBCs are one step up from Turnover Tax entities and must be:
- A company
- A close corporation
- A personal liability company or
- A cooperative.
Turnover cannot exceed R20 million a year and once taxable income goes above R550,000 the SBC becomes liable for the 28% corporate tax rate.
These are attractive rates as a normal company would pay R154,000 when taxable income is R550,000 – so at that level SBCs save just over R95,000 in tax.
The restrictions applicable to Turnover Tax (above) also largely apply to SBCs. Also the company’s shares must be held by only “natural persons” (some trusts also qualify – take specific advice if applicable). Importantly all shareholders in a SBC may only hold shares in that one SBC and no other company, CC or co-operative (there are some exclusions including for listed share investments), otherwise it will be disqualified from the special tax regime.
In addition, SBCs qualify for accelerated tax depreciation – if plant or machinery is used in a process of manufacture then the whole cost can be written off in the first year of acquiring it. Other assets also qualify for faster tax write offs.
As a rule of thumb if choosing between the two tax regimes, SBC favours capital-intensive or low mark-up entities.
Both the Turnover Tax and SBC allowances can be attractive to small businesses, but the above is of necessity only a summary. Speak to your accountant if you think your business may qualify for, and benefit from, either of these dispensations.