Tax Basics For Business Owners What you need to know about tax as a business owner.
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Small businesses are required to follow the same tax processes as medium or large businesses, but small businesses often experience the tax process as stressful. The complex and strict nature of tax returns is often intimidating and quite a burden to small business.
- Type of business entities
- Tax Registration
- What tax you need to pay
- Determining how much tax to pay
- Turnover Tax: Relief for micro business
- The importance of record keeping
- Use a tax professional
Type of business entities
The tax requirements and considerations for small businesses is dependant on the type of business entity:
1. Sole proprietorship
A sole proprietorship also known as a sole trader is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business.
All profits and all losses accrue to the owner. The owner doesn't need to register the business with SARS but does need to include the income from the business in their own tax return.
A partnership is also not a separate legal person or taxpayer. Each partner is taxed on his or her share of the partnership profits.
3. Private company
A private company is treated by law as a separate legal entity and must also register as a taxpayer in its own right. It has a life separate from its owners with rights and duties of its own.
Shareholders are generally not responsible for the liabilities of the company, however certain liabilities do exist.
This includes where an employer or the person who performs functions similar to a director of the company, will be personally liable for employees' tax, VAT, additional tax, penalty or interest for which the CC is liable (where these taxes have not been paid to SARS within the prescribed period).
As soon as you commence your business, you are required to register with your local SARS office to obtain an income tax reference number. You must register within 60 days after you have commenced business by completing an IT77 form (available from your local SARS office or from the SARS website).
A CC or private company must be registered with the Registrar of Companies and Close Corporations to obtain a business reference number. Your CC or private company will then be registered automatically as a taxpayer.
Depending on other factors such as turnover, payroll amounts, whether you are involved in imports and exports etc. you could also be liable to register for other taxes, duties, levies and contributions such as VAT, PAYE, Customs, Excise, SDL and UIF contributions.
What tax you need to pay
1. Provisional tax
As soon as you commence business you will become a provisional taxpayer and will be required to register with your local SARS office as a provisional taxpayer within 30 days after the date you become a provisional taxpayer. CCs and companies are automatically registered as provisional taxpayers.
The payment of provisional tax is intended to assist taxpayers in meeting their normal tax liabilities.
This occurs by the payment of two installments in respect of income received or accrued during the relevant tax year and an optional third payment after the end of the tax year, thus obviating, as far as possible, the need to make provision for a single substantial normal tax payment on assessment after the end of the tax year.
The first provisional tax payment must be made within six months after the commencement of the tax year and the second payment not later than the last day of the tax year.
The optional third payment is voluntary and may be made within six months after the end of the tax year if your accounts close on a date other than the last day of February.
For a tax year ending on the last day of February, the optional third payment must be made within seven months after the end of the tax year.
2. Employees' tax
Employees' tax is a system whereby an employer, as an agent of government, deducts employees' tax (PAYE) from the earnings of employees and pays it over to SARS on a monthly basis.
This tax serves as a tax credit that is set off against the final income tax liability of an employee, which is determined on an annual basis.
A business (an employer) that pays salaries, wages and other remuneration to any of its employees above the tax thresholds, must register with SARS for employees' tax purposes.
This is done by completing an EMP 101 form and submitting it to SARS. The EMP 101 is available at all SARS offices and on the SARS website.
Once registered, the employer will receive a monthly return (EMP 201) that must be completed and submitted together with the payment of employees' tax within seven days of the month following the month for which the tax was deducted.
3. Directors' remuneration
The remuneration of directors of private companies (including individuals in CCs performing similar functions) is subject to employees' tax.
Their remuneration is often only finally determined late in the tax year or in the following year. In these circumstances they finance their living expenditure out of their loan accounts until their remuneration is determined.
To overcome the problem of no monthly remuneration being payable from which employees' tax can be withheld, a formula is used to determine a deemed monthly remuneration upon which the company must deduct employees' tax.
A director is not entitled to receive an employees' tax certificate (IRP5) in respect of the amount of employees' tax paid by the company on the deemed remuneration if the company has not recovered the employees' tax from the director.
Determining how much tax to pay
In order to prepare your income tax return, you will need to understand the basic steps in determining your business's profit or loss. These steps are much the same for each type of business entity. Basically, net profit or loss is determined as follows:
Income – Expenses = Profit (Loss)
You will use this formula with some slight changes in determining your profit or loss.
The IT Act provides for a series of steps to be followed in arriving at the taxpayer's "taxable income". The starting point is to determine the taxpayer's "gross income".
Receipts or accruals of a capital nature are generally excluded from gross income. However, "gross income" also includes certain other receipts and accruals specified within the definition of "gross income" regardless of their nature.
The next step is to determine "income" which is the result of deducting all receipts and accruals that are exempt from income tax in terms of the IT Act from "gross income". Finally, "taxable income" or "assessed loss" is arrived at by:
- Deducting all the amounts allowed to be deducted or set off, in terms of the IT Act, from "income"; and
- Adding taxable capital gains to the net positive figure or deducting taxable capital gains from the net negative figure.
A sole proprietor or each partner in the case of a partnership is subject to income tax on his or her taxable income. Income tax (normal tax) is levied at progressive rates ranging from 18% to 40%.
Unlike individuals, a company or CC pays 28% income tax on its taxable income for the tax year and 10% secondary tax on companies (STC) on the net amount of dividends declared.
Turnover Tax: Relief for micro business
To reduce the administrative burden on small businesses, SARS introduced a single tax system as a tool for small businesses to help streamline their tax obligations, known as Turnover Tax.
Turnover Tax is a simplified tax system for small businesses with a turnover of up to R1 million per annum. It is a tax based on the turnover of a business and is available to sole proprietors (individuals), partnerships, close corporations, companies and co-operatives.
Turnover Tax is a substitute for VAT, Provisional Tax, Income Tax, Capital Gains Tax and Secondary Tax on Companies. So qualifying businesses pay a single tax instead of five other taxes. It's elective – so you choose whether to participate!
1. How does Turnover Tax work?
Turnover Tax is calculated by simply applying a sliding tax rate to the "taxable turnover" of a business. The "taxable turnover" consists of the turnover of the business for the year of assessment with a few specific inclusions and exclusions.
- R0 – R100 000: 0%
- R100 001 – R300 000: 1% of each R1 above R100 000
- R300 001 – R500 000: R2 000 + 3% of the amount above R300 000
- R500 001 – R750 000: R8 000 + 5% of the amount above R500 000
- R750 001 and above: R20 500 + 7% of the amount above R750 000
2. Will you pay less tax with the Turnover Tax system?
Whether or not you will pay less tax with the Turnover Tax system depends on the unique factors of the business including the profitability of the business and whether or not it is in a tax loss position in the standard income tax system.
But remember that the Turnover Tax system is primarily designed to reduce your administrative burden – so you need to factor in all the costs associated with meeting your current or future tax obligations.
Like how many hours you spend completing and submitting VAT and income tax returns, and calculating the relatively involved income tax that is payable for provisional tax and final assessment purposes
Use the following quick analysis to see whether switching to the Turnover Tax will benefit you or not.
- Step 1: In one column take your estimated turnover for the financial year for which you want to register for the Turnover Tax.
- Step 2: Calculate the tax you will pay for the year.
- Step 3: Add your estimated cost of completing one simple Turnover Tax return and making two six-monthly interim payments for each year of assessment (if liable).
- Step 4: Now in another column write down the income tax, CGT, STC, your business paid for the last financial year (or estimate for the coming financial year).
- Step 5: Add all the costs associated with the completion and submission of your two or three provisional income tax returns, the final income tax return, STC returns, VAT Returns, and other tax obligations.
- Step 6: Now simply compare the costs in column A and B.
A small business that chooses to join the Turnover Tax system must remain in the system for at least three years unless it is specifically disqualified (for example if the turnover exceeds R1 million during this period).
Equally, a small business that exits the Turnover Tax system will not be allowed to re-register for a period of three years.
This is to stop businesses from chopping and changing between the tax systems because of the administrative burden of registration and de-registration for the various taxes each time and the potential to abuse the systems to pay less tax.
3. Joining the Turnover Tax system
Existing small businesses that want to be registered for Turnover Tax must apply for registration by the last day of February so that they can be registered for the following year of assessment.
New businesses must apply within two months from the date of commencement of business activities. You apply by completing a Turnover Tax (TT01) application form which is available at any SARS branch or you can download it from the SARS website.
The importance of record keeping
You must keep records that will enable you to prepare complete and accurate tax returns if you are involved in a business. You may choose a system of record-keeping that is suited to the purpose and nature of your business.
These records must clearly reflect your income and expenditure. This means that, in addition to your permanent books of account or records, you must maintain all other information that may be required to support the entries in your records and tax returns.
Paid accounts, cancelled cheques and other source documents that support entries in your records should be filed in an orderly manner and stored in a safe place.
For most small businesses, the business chequebook is the prime source for entries in the business records. It is advisable to open a separate bank account for your business so that you do not mix your private and business expenses. The records should include:
- Records showing the assets, liabilities, undrawn profits, revaluation of fixed assets and various loans
- A register of fixed assets
- Detailed daily records of cash receipts and payments reflecting the nature of the transactions and the names of the parties to the transactions (except for cash sales)
- Detailed records of credit purchases (goods and services) and sales reflecting the nature of the transactions and the names of the parties to the transactions
- Statements of annual stocktaking; and
- Supporting vouchers.
Use a tax professional
It is advisable to acquire the services of a tax specialist who can formulate an appropriate tax strategy that is aligned with your overall business strategy and the tax challenges facing your business.
SARS tax consultants (either at their offices or via the phone) can help you calculate your tax and answer any questions that you may have regarding your business.
Large accounting companies or smaller firms can assist depending on your requirements, but will charge for their professional services. Contact the South African Institute of Chartered Accountants for more details.
Be sure to choose someone sufficiently qualified, and who won't leave you in trouble with the taxman. Do not assume that because a practitioner is registered with SARS, they are fit to advise you.
There are no requirements for those who register and registration is no indication of your tax practitioner's competency. Call references to gauge service delivery or ask trusted associates for recommendations.
A company is required by law to appoint an auditor who will audit and sign an audit report in respect of its financial statements. Similarly a close corporation is required to appoint an accounting officer. Normally, the auditor or accounting officer will provide assistance in determining the taxable income and the amount of tax to be paid.