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Turnover Tax Regime - is it worth it for small business?

29 May 2014   (0 Comments)
Posted by: Author: Lesedi Seforo
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Author: Lesedi Seforo (SAIT Technical)

The turnover tax was introduced by government some years ago as an alternative tax regime for small businesses. 

Most entrepreneurs can attest to the fact that, regrettably, financial record keeping is usually not on their priority list. At the early stages of a business, the main focus of a business owner is to make money, not having lengthy meetings with accountants. Lost invoices as well as the use of the business account for personal expenses are common occurrences when businesses are still very small. The fact that income tax and VAT require very accurate records to be kept doesn’t make things any easier.

Turnover Tax Regime

The turnover tax regime on the other hand offers an attractive option for taxpayers as far as record keeping is concerned. Taxpayers need only keep annual records of revenue made by the business, dividends declared and each business asset and liability worth over R10 000. 

The turnover tax is available to sole traders, close corporations or companies with a ‘qualifying turnover’ of below R1 million. These entities are known as micro businesses. The qualifying turnover referred to earlier is essentially revenue less amounts of a capital nature. Amounts of a capital nature are fundamentally amounts from the sale of assets which are not trading stock.

Turnover Tax Rates 

Turnover tax is levied on the ‘taxable turnover’ of a micro business. Here are the turnover tax rates for the year of assessment ending February 2015:

TAXABLE TURNOVER

RATE OF TAX

Up to R150 000

0%

R 150 001 to R300 000

1% of the amount above R 150 000

R300 001 to R500 000

R1 500 +  2% of the amount above R300 000

R500 001 to R750 000

R5 500 +  4% of the amount above R500 000

R750 001 and above

R15 500 + 6% of the amount above R750 000

Pro’s and Con’s

This seems extremely attractive, till one looks closely at the precise meaning of ‘taxable turnover’.  The term includes: 

  1. Revenue
  2. Interest, dividend and rental income (where the micro business is a company/CC) 
  3. 50% of the amounts from the sale of immovable property or assets mainly used for business purposes 

Where the micro business is a sole trader, taxable turnover excludes interest, dividend and rental income.

You will notice that expenses are not subtracted from taxable turnover. With income tax, the basic formula is revenue less expenses to get to net profit or a loss. Where there is a loss, no tax is payable in that year and the loss can be carried forward to future years to be set off against future profits when determining the tax payable then.

Unfortunately no such ‘relief’ is available for the micro business registered under the turnover tax regime. This is significant, given the fact that most small businesses take a few years to become profitable. It is not uncommon for a business to be unprofitable during its first 3 years. Under the income tax regime, by the time such a company finally becomes profitable, the losses made in the previous 3 years would usually be significant enough to wipe out whatever profits were made in the 4th year. It quite possible, therefore, for a small business not to pay income tax for 4 years. 

Under the turnover tax regime, the same business would pay tax every year.  Thus adding yet another expense to an already overburdened business. 

Conclusion 

It is recommended that those considering a move to the turnover tax regime approach their SAIT tax practitioner, who will analyse the business financials in order to determine whether it is worth it for the taxpayer to register for turnover tax. 




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