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More tax relief for small businesses

26 February 2015   (0 Comments)
Posted by: Author: Lesedi Seforo
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Author: Lesedi Seforo (SAIT)

"Following recommendations of the Davis Committee, a more generous tax regime is proposed for businesses with a turnover below R1 million. Qualifying businesses with a turnover below R335 000 will pay no tax, and the maximum rate is reduced from 6 per cent to 3 per cent. - Finance Minister Nhlanhla Nene 

There can be no doubt that the growth of small businesses remains vital to a healthy economic climate. In an effort to bolster support for smaller entities, government introduced turnover tax some years ago. It is a completely separate tax that provides an alternative to income tax and applies to micro enterprises. The below table shows the tax rates applicable to businesses taxed under the turnover tax regime

0 - 335 000

0% of taxable turnover

335 000 - 500 000​

1% of taxable turnover above 335 000

500 001 - 750 000​

1 650 + 2% of taxable turnover above 500 000​

750 001 and above​

6 650 + 3% of taxable turnover above 750 000​

This tax regime exists alongside another tax incentive aimed at providing relief to small business - the ‘small business corporation’regime which applies to businesses with a turnover below R20 million and which falls under income tax. Small businesses with a turnover below R1 million therefore have a choice between which of these tax systems to adhere to.  

The Davis Tax Committee, in its Interim Report on Small and Medium Enterprises, stated that the small business corporation regime currently benefits only 50 000 enterprises. It further mentioned that over half these enterprises have an annual turnover of less than R1 million. Such businesses, it was found, would be better suited for turnover tax.  

Unfortunately the Achilles heel of turnover tax remains: it does not provide for the deduction of business expenses. Taxpayers under this regime are thus effectively taxed on their revenue and not on their profits. This is a major factor given that small businesses typically have big expenses to carry in their earlier years. 

A small business owner would therefore need to compare his company’s tax liability under both the turnover tax and the small business corporation regimes in order to make an informed choice. It would be more beneficial for taxpayers in an assessed loss position (where their tax deductions exceed their taxable income) to elect the small business corporation regime. However, if the taxpayer has a tax liability, a comparison between the two incentives would have to be made. Given the fact that turnover tax is now levied at a reduced rate, it may very well be the more beneficial option for certain taxpayers.

To find out what incentive would be most beneficial to you, it is advised to contact your SAIT tax professional.


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