Navigating your way through the world of tax can be a daunting task for inexperienced entrepreneurs. This plain and simple BizConnect guide provides a comprehensive overview of small business tax including the following:
Tax is levied on income and profit received by a taxpayer (which includes individuals, companies and trusts). It is the government’s main source of income, although some income sources have exclusions, such as interest and donations. The form of tax that people generally associate with the concept of income tax is "normal" income tax, but the Income Tax Act is also the source of a number of other taxes that form part of the income tax system, including employees’ tax and provisional tax.
The year of assessment for taxpayers covers a period of 12 months. For individuals and trusts, the year of assessment starts on 1 March and ends on the 28/29 February each year. For Companies and Close Corporations the year of assessment is the applicable financial year.
Income tax returns are available annually after the end of each year of assessment to registered taxpayers, and must be completed and submitted to SARS each year.
Failure to pay tax
The South African Revenue Service (SARS) has a system of strict administrative penalties against non-compliant taxpayers. The various tax or revenue laws provide for the imposition of interest, penalties and additional tax up to 200% for non-payment of or non-compliance to these laws. A person may also be liable on conviction to a fine or to imprisonment on matters such as non-payment of taxes, failure to complete tax returns, failure to disclose income, false statements, helping any person to evade tax or claiming a refund to which they are not entitled.
Business entities and tax
Once you have decided to start a business, you must also decide what type of business entity to use. There are legal, tax and other considerations that can influence this decision. There are several different types of business entities in South Africa – sole proprietorship, partnership, close corporation and a private company. Each of these has tax responsibilities.
A sole proprietorship is a business owned and operated by an individual and is the simplest form of business entity. The business has no existence separate from the owner who is the proprietor.
The owner must include the income from the business in their own income tax return and is responsible for paying taxes. A sole proprietor is subject to income tax levied at progressive rates ranging from 18% to 40%.
- Simple to establish and operate
- Owner is free to make decisions
- Minimal legal requirements
- Owner receives all the profits
- Easy to discontinue the business
- Unlimited liability of the owner
- The owner is legally liable for all the debts of the business
- Limited ability to raise capital
- The business capital is limited to whatever the owner can personally secure. This limits the expansion of a business when new capital is required
- One owner alone has limited skills, although they may be able to hire employees with sought-after skills.
A partnership is the relationship between two or more people who join together to form a business. It is also not a separate legal person or taxpayer. Each partner shares equal responsibility for the partnership’s profits and losses and its debts and liabilities.
The partnership itself does not pay income taxes, but each partner has to report their share (as agreed at the onset and noted in their partnership agreement) of business profits and losses on their individual tax return. Each partner is taxed on their share of the partnership profits.
Each partner is subject to income tax levied at progressive rates ranging from 18% to 40%. It is similar to a sole proprietorship except that a group of owners replaces the sole proprietor. The number of persons who may form a partnership agreement is limited to 20.
- Easy to establish and operate
- Greater financial strength
- Combines the different skills of the partners
- Each partner has a personal interest in the business
- Unlimited liability of the partners
- Each partner may be held liable for all the debts of the business. Therefore, one partner who is not exercising sound judgement could cause the loss of the assets of the partnership as well as the personal assets of all the partners
- Authority for decision-making is shared and differences of opinion could slow the process down
- Not a legal entity
- Lesser degree of business continuity as the partnership technically dissolves every time a partner joins or leaves
- Number of partners restricted to 20 except in the case of certain professional partnerships such as accountants and attorneys
Close corporations (CC)
A CC is a company, similar to a private company. It is a legal entity with its own legal personality and succession and must register as a taxpayer in its own right. A CC has no share capital and no shareholders.
The owners are the members of the CC and their initial interest in rands (which often reflect their ownership percentages) are called membership contributions. For income tax purposes a CC is regarded to be a company.
Note that following the new Companies Act that came into force on 1 April 2011, no new CCs can be incorporated. All existing, registered CCs will continue to exist. Current CCs can choose to either convert to a company or continue to exist until deregistration or dissolution.
No automatic conversion or dissolution is provided for. CCs that continue to exist will have to compile financial statements, as is currently the case, but will not be subject to audit on the same terms and conditions as companies.
CCs are taxed at a rate of 28% on taxable income for the tax year, unless they qualify as SBC (Small Business Corporations), in which case they are taxed at a different, lower scale.
A private company is treated as a separate legal entity and must also register as a taxpayer in its own right. The owners of a private company are the shareholders and the company name ends with the suffix “(Pty) Ltd”.
The new Companies Act only requires public companies, State-owned companies and certain others to audit their yearly financial statements. The Act also no longer limits the number of shareholders in a private company, which means that more companies will opt to take on the status of a private company and, therefore, will not be subject to auditing.
Private and Public Pty Ltds are taxed at a rate of 28% on taxable income for the tax year, unless they qualify as SBC (Small Business Corporations), in which case they are taxed at a different, lower scale.
- Life of the business is perpetual and continues uninterrupted as shareholders change
- Transfer of ownership is easy
- Efficiency of management is maintained
- Adaptable to both small and medium to large business
- Subject to many legal requirements
- Every shareholder and director who is involved in the management of the company’s overall financial affairs is personally liable for tax payable and for any debts of the private company if it is found that they have acted negligently.
- Directors who choose to opt out of having the company’s financial statements audited, place the company at risk of being refused funding in the future, should financial institutions require audited financial statements to be submitted before granting a loan
- More difficult and expensive to establish and operate than other forms of ownership such as a sole proprietorship or partnership
Small business corporations (SBCs) and micro businesses
Micro businesses pay turnover tax, which is discussed under the heading “Turnover tax”.
Value-added tax (VAT)
VAT is an indirect tax and must be included in the selling price of every taxable supply of goods or services made by a vendor. VAT is a destination-based tax, which means that only the consumption of goods and services in South Africa is taxed. It is paid on the supply of goods or services in South Africa as well as on the importation of goods into the country.
VAT is levied at the standard rate of 14% on most supplies and importations but there is a range of goods and services which are either exempt or subject to tax at the rate of zero percent (such as some basic foodstuffs).
Certain goods are also exempt from VAT on importation and the importation of services is only subject to VAT where the importer is not a vendor or where the services are imported for private purposes. VAT has to be included in all prices on products, price lists, advertisements and quotations.
Who is liable for the payment of VAT?
VAT is levied on all supplies made by vendors in the course of business and only a vendor may levy VAT. Vendors therefore charge and account for VAT on supplies but ultimately, the VAT charge is borne by the final consumers from whom the VAT is collected.
Any person who carries on an enterprise where the total value of taxable turnover exceeds or is likely to exceed the compulsory VAT registration threshold of R1 million in any consecutive 12-month period, must register for VAT.
The VAT Act also allows a person to register voluntarily as a vendor if that person carries on an enterprise where the total value of taxable supplies (taxable turnover) exceeds R50 000 (but does not exceed R1 million) in the preceding 12-month period.
When a vendor is supplied with goods or services by another vendor, VAT is levied by the supplier of those goods or services. The vendor acquiring the goods subtracts the input tax (VAT borne by the vendor) from the output tax (VAT charged by the supplying vendor). The difference is VAT payable to or refundable by SARS. The effect is that VAT is borne by the final consumer of goods and services.
The following goods and services are exempt from VAT:
- Financial services such as interest earned and life insurance benefits
- Public transport of fare paying passengers by road and rail
- The supply of residential accommodation under a lease agreement
- Certain educational services, for example, in primary and secondary schools, and tertiary institutions
- Medical services and medicines supplied by government (provincial hospitals) but excluding municipal medical facilities
- Any goods or services supplied by an organisation to its members to the extent that the supplies are funded from membership contributions
- Child minding services in crèches and after-school centres
a) Compulsory registration
Any person who carries on an enterprise and whose total value of taxable supplies (taxable turnover) exceeds, or is likely to exceed, the compulsory VAT registration threshold, must register for VAT. The threshold is currently R1 million in any consecutive 12-month period.
b) Voluntary registration
A person can register as a vendor if that person carries on an enterprise where the total value of taxable supplies (taxable turnover) exceeds R50 000 (but does not exceed R1 million) in the preceding 12-month period.
c) Refusal of registration
You will not qualify to register as a vendor if you do not fall within these categories. In all other instances, no VAT registration will be allowed if the annual turnover is below the minimum voluntary registration threshold.
How to register
Application for registration as a vendor must be made, on form VAT101 (obtainable from your local SARS office or on the SARS website), within 21 days of becoming liable to register. The reference guide available on the SARS website will assist you in the completion of the VAT101 form.
Submission of VAT returns
VAT may be submitted manually or electronically and payment can be made manually, electronically or at any one of the four major banks.
For more information on VAT, see the guide, available on the SARS website. Various other guides on specific VAT topics are also available.
An employer, as an agent of government, is required to deduct employees’ tax from the earnings of employees and pay the amounts deducted over to SARS on a monthly basis.
This employees’ tax is not a separate tax but forms part of the Pay-As-You-Earn (PAYE) system. The employees’ tax deducted serves as an income tax credit that is set off against the final income tax liability of an employee, calculated on an annual basis to determine the employee’s final income tax liability for the year of assessment.
Every employer who pays remuneration to an employee must register as an employer for employees’ tax purposes. That means that any business that pays a salary or a wage of any value to any person who qualifies under the definition of ‘employee’ must register with SARS for employees’ tax purposes within 14 days after becoming an employer.
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 and UIF contributions (if applicable) within seven days of the month following the month for which the tax was deducted.
Personal service provider (PSP)
A personal service provider means any company where services are personally rendered by a person connected to the company. Here are some factors which determine whether a business is a PSP:
- The person who is rendering the service would have been regarded as an "employee" of the client if the service was rendered directly to the client and not through the entity
- The person who is rendering the service or the entity performing the duties is mainly at the premises of the client and if so, that person is subject to the control or supervision of the client as to the manner in which the duties are performed or are to be performed
- More than 80% of the income of the entity from services rendered consist of or is likely to consist of amounts received from any one client, or from any associated institution in relation to the client
- Payments made to a personal service provider are subject to the deduction of employees’ tax at a rate of 34%.
The concept of an independent trader or independent contractor remains one of the more contentious pieces of legislation. When it comes to employees’ tax, an amount payable for services rendered by a person in the course of a trade carried on by them independently of the person by whom the amount is paid or payable is excluded from remuneration for employees’ tax purposes. However, this is true only if the PAYE test that applies in this regard has been passed.
A labour broker is a person who has a business that provides clients with people who render a service to the clients. These people are remunerated by the labour broker. Employers are required to deduct employees’ tax from all payments made to a labour broker, unless the labour broker is in possession of a valid exemption certificate issued by SARS.
This is a simplified tax system for micro businesses and serves as an alternative to the current income tax, provisional tax, capital gains tax, secondary tax on companies and VAT systems.
A person qualifies as a micro business if that person is a natural person or company where the qualifying turnover of that person for the year exceeds R150 000 but is less than R1 million. From 1 March 2012, qualifying micro businesses are allowed to be registered for VAT and turnover 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 upon which you become a provisional taxpayer. Companies are automatically regarded, and often 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 instalments in respect of estimated taxable income that will be 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.
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, and is one of the minimum requirements if you trade as a company, or as a close corporation, especially if your company needs to be audited.
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
- Supporting vouchers
Please note that different documents have varying periods for which they have to be retained, ranging from 5 years, to 15 years, to indefinitely – the list is obtainable from www.sars.gov.za as a downloaded PDF.