Small business tax has been adjusted to be in line with the tax threshold for individuals. Picture: 123RF./LE MOAL OLIVIER
Small business tax has been adjusted to be in line with the tax threshold for individuals. Picture: 123RF./LE MOAL OLIVIER

In a move to encourage the development of small businesses, the government allows certain enterprises to register for a type of tax called turnover tax. If you meet the following main requirements (there are some others that would not affect most people but must be considered), you may be able to register your business for turnover tax and have access to reduced tax rates:

• Your business operates as one of the following vehicles:

a. Sole proprietor, that is if you run the business in your own name;

b. Company;

c. Partnership (if all partners are individuals);

d. Close corporation; or

e. Co-operative;

• The qualifying turnover of your business is less than R1m for the tax year;

• If the business is a company, close corporation or co-operative, all shareholders/members must be individuals;

• The year of assessment for your business ends on the last day of February;

• Neither you nor any other shareholder, member or your business itself can hold shares or interests in a company that is not listed in SA;

• If your business runs as a sole proprietor/ partnership, income from professional services cannot constitute more than 20% of its income;

• If your business operates as a company, close corporation or co-operative, not more than 20% of income may come from professional services and investment income.

If your business meets these requirements, you may be able to register it with the South African Revenue Service (Sars) for turnover tax.

You can do this by completing and submitting a TT01 form which is available on the Sars website.

This is a distinct application that you must complete and once you are registered you will be required to submit turnover tax returns to Sars.

The purpose of this tax option is to simplify the tax process for anyone who runs a small business.

The turnover tax system enables a qualifying micro-business to pay tax on its turnover instead of in the usual way, which, generally speaking, is to pay tax on the income of the business after business expenses have been deducted.

This means that with turnover tax you as the business owner do not need to keep detailed records of applicable business expenses because these are not taken into account in determining the tax payable.

Note that the business must however keep detailed records of income, dividends declared, assets and liabilities.

Low tax rates an incentive

While this system might appear to be detrimental to the business owner, bear in mind that turnover tax rates are low.

For example, if the turnover of a business is less than R335,000 no tax will be payable.

If the turnover of the business is between R335,000 and R500,000, the business will pay tax at the rate of 1% of the amount over R335,000; so if the turnover of the business is R500,000 the tax payable will be R1,650.

The maximum marginal rate of turnover tax is 3% on turnover between R750,001 and R1m.

On the other hand, if you run your small business as a small business corporation, as discussed in an earlier article, your marginal tax rate ranges from 0% to 28% on taxable income.

Lack of business expenses

As the taxable income method takes into account the expenses that a business incurs, it is difficult to establish whether turnover tax or operating as a small business corporation is the better option; each business would have unique expenses that it is able to deduct (if it operates as a small business corporation) to reduce its tax bill.

In other words, to establish whether your business would pay less tax by registering for turnover tax, you would need to do an analysis of it.

Generally speaking, if you run a business that
has minimal business expenses, the turnover tax system would probably be the better choice because your lack of business expenses would not result in a higher tax burden.

But if you operated as a small business corporation with minimal expenses, you could end up paying more tax than if you were on turnover tax.

The turnover tax system is completely optional, so there is no legal obligation to register for it if you meet the requirements.

It is best to do an analysis of your situation to determine whether it would benefit you to register for turnover tax.

Please note that if you are a personal service provider or a labour broker (without a Sars exemption certificate), you cannot register for turnover tax.

Baines is the author of How to Get a Sars Refund and a tax consultant at Mazars