Is the micro-business turnover tax a blessing or a clever SARS sham?

Gareth Stokes, FAnews Online Editor

If there’s one thing a small business owner hates its red tape. That’s probably why the recently introduced turnover tax for small businesses commands their attention. It’s another in a line of South African Revenue Service (SARS) proposals to add more South African businesses to the tax net. But it could also induce businesses that are already paying tax to make a costly mistake. Although the tax appears sensible at first glance there are some important considerations to take before changing your assessment basis.

How the turnover tax works

“Turnover tax is a simple tax that is being introduced for small businesses,” says SARS. Businesses, including sole proprietors (individuals), partnerships, close corporations, companies and co-operatives, can switch from their current tax system to the turnover tax system between 1 March 2009 and 30 April 2009. The idea behind the new tax structure is to “reduce the tax compliance and administrative burden by simplifying and reducing the number of returns that have to be filed.” This is the line that will interest most small business owners who are struggling to keep head above water where statutory returns are concerned. When all is said and done, even the smallest businesses gets bogged down with Value Added Tax, Income Tax, Provisional Tax, Capital Gains Tax and Secondary Tax on Companies, seldom submitting less than nine returns in a single tax year.

SARS proposes that small businesses side-step its heavy administrative burden by signing up for the simplified tax system proposed in the turnover tax. Instead of submitting and filing all these forms the small business (with a turnover not exceeding R1m per annum) will only submit three returns – two interim and one final. There are a number of additional criteria that have to be met before switching to this tax. SARS doesn’t want taxpayers to abuse the system to reduce their tax obligation and has ruled out a range of professional services (including accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftsman, education, engineering, entertainment, health, information technology, journalism, law, management, performing arts, real estate, research, secretarial services, sport, surveying, translation, valuation or veterinary science) from qualifying.

There are a number of benefits to the turnover tax. It reduces the human resources cost of administration, eliminates many of the technical aspects of compliance within existing taxation structures and does away with the need to register for VAT. It’s important to note that companies that register for the turnover tax CANNOT be registered for VAT – if you are already registered you have to de-register and will be assessed for exit VAT!

What will you pay under the turnover tax system?

SARS has introduced a tax scale for businesses that adopt the turnover tax system. For turnover between R0 and R100 000 per annum the marginal rate is zero, followed by 1% up to R300 000, R2 000 plus 3% for turnovers between R300 000 and R500 000, R8 000 plus 5% for turnovers between R500 000 and R750 000 and R20 500 plus 7% of annual turnover in excess of R750 000. Does this sound too good to be true?

The trouble with turnover tax is that you pay tax even if your company is losing money. If, for example, your turnover is R750 000 in a given year and your business makes a loss of R100 000 you will still be liable for turnover tax of R20 500. Under the existing system you would have reported an assessed loss which you could have carried over to your next period of assessment. Businesses with inconsistent profits should certainly think long and hard before moving to the turnover tax method of assessment. Another consideration is that since the 2009/2010 tax year businesses with a turnover of less than R1m no longer have to register for VAT anyway. So you might be better off simply deregistering for VAT and continuing on the existing tax system for all other statutory requirements.

Don’t forget – once you deregister for VAT your business can no longer claim any input taxes on your monthly outgoings! Another problem is that once you make the decision to move to the turnover tax system you have to stick with the plan for three years!

Fantastic reader responses

It’s hardly surprising that many taxpayers are quick to dismiss this so-called tax innovation. Comments by readers to a recent Fin24 article on the topic are spot on. They reckon the small business tax is “a loophole to bill companies that would ordinarily have an assessed loss,” comparing it to the royalty fee levied by franchisors. A franchisee usually pays a monthly royalty (a fixed percentage of his turnover) whether his branch is making profit or not. Another concludes “you must be dumb to register – you can claim no expenses and have to pay tax on all sales!”

For small businesses that are making consistent profit on low turnovers and with relatively small costs (on which they could claim input VAT under the old system) the new tax structure is certainly worth a look.

Editor’s thoughts: The SARS turnover tax system is tempting for small businesses, particularly sole traders and smaller partnerships, who don’t expect to top the R1m mark in the next few years. What are your thoughts on the turnover tax for small business? Is it an innovative SARS initiative – or a sneaky attempt to squeeze more tax from unsuspecting taxpayers? Add your comments below, or send them to gareth@fanews.co.za