Turnover Tax Regime - is it worth it for small business?
29 May 2014
Posted by: Author: Lesedi Seforo
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
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
RATE OF TAX
Up to R150 000
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:
- Interest, dividend and rental income (where
the micro business is a company/CC)
of the amounts from the sale of immovable property or assets mainly used for
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
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.