Uptake of turnover tax regime remains minimal
07 April 2016
Posted by: Author: Amanda Visser
Author: Amanda Visser (BDlive)
The government’s efforts to encourage entrepreneurs to start small businesses by offering a simplified tax regime based on turnover is neither widely used nor understood.
A lack of proper communication about the benefits and the complexity of the rules remain major drawbacks. The Davis Tax Committee made some recommendations to address the issues, but not all the recommendations were accepted by the National Treasury.
The turnover tax regime is available for small businesses with a qualifying turnover of R1m or less. The system provides for a single tax based on turnover in place of the usual income, corporate, capital gains and dividends taxes.
Tax rates for qualifying micro businesses range from 1% of the amount above R150,000 to R300,000 and R15,500 plus 6% of the amount above R750,000.
It became effective in 2009. The latest figures indicate that SA has fewer than 10,000 active micro businesses.
Nico Theron from Tax Consulting, a firm offering tax services to small accounting and auditing firms, says the rules governing the regime remain complicated, which increases the cost of compliance.
Communication and education from the South African Revenue Service (SARS) also remain insufficient.
"The very comprehensive updated guide on the regime issued by SARS earlier this year is welcomed. However, I am of the view that more needs to be done to educate taxpayers actively, rather than taking what appears to be a mainly passive approach through the issue of guides and website questionnaires."
The Davis committee’s recommendation — to remove the "restrictive requirement" that businesses remain locked in for three years once they have opted for the turnover tax — was accepted.
Mr Theron says this addressed, to some extent, a major drawback of the regime that involved registered micro businesses paying more tax than they would have, had they not opted for the turnover tax regime.
Before this year, a business that registered as a micro business had no choice but to stay in the regime for three years.
"If you opted into the micro business regime and made losses, you would still be liable to tax on your turnover provided turnover exceeds R335,000 and you would have been stuck in that tax-paying position for three years," he says.
With the lock-in period now removed, these cases may be avoided, although not completely. The optimal solution would have been to allow taxpayers to opt in and out of the system. However, such approach will open the door for evasion and is likely to complicate the legislation even further.
Another restrictive requirement, which increases compliance cost, is the filing of multiple income tax returns and making three payments annually. It would have been far easier and cheaper for these companies to submit a single annual return and make one payment.
Mr Theron, who is also a member of the South African Institute of Tax Professionals (Sait), says the regime has many qualifying requirements. and can be difficult to establish whether they have been satisfied.
Establishing whether a company is a "personal service provider" is a complex inquiry into the fourth schedule to the Income Tax Act. The prudent layman will be forced to obtain expert tax advice, which does not come cheap, Mr Theron says.
"The regime is attractive, but having a regime that hides behind complex rules and the high compliance costs defeats the purpose to a large extent."
He acknowledges the need to encourage and assist small business, on the one hand, and the need to prevent tax evasion, on the other, hence the anti-avoidance rules (the ifs and buts).
"As long as there are unscrupulous taxpayers there will be ifs and buts. It is, unfortunately, a necessary evil. These should, however, be explained and small businesses (should be) educated about qualifying requirements. While SARS’s guides and website indeed go a long way in doing exactly this, it is not enough."
Royden Whitfield, director at Whitfield Fintax, an independent firm specialising in accounting, taxation and estate planning, says the firm’s typical client base would not generally qualify for the turnover tax initiative.
The firm currently has more than 1,000 clients, yet only one is registered for turnover tax.
He believes the government should rather increase the benefits of the small business corporation (SBC) tax benefits and expanding the qualifying criteria.
"I think the SBC tax regime has been far more successful and beneficial to the South African economy than turnover tax," says Mr Whitfield.
Companies with a turnover of less than R20m qualify for the small business corporation tax relief regime, which provides for progressive tax rates of 0%, 7%, 21% and 28%.
The National Treasury last year withdrew a proposal that these reduced tax rates be scrapped in favour of a flat corporate tax rate of 28%, and that mall business corporations would receive an annual R15,000 rebate for compliance cost.
This article first appeared on bdlive.co.za.