Small Businesses: Make The Most of Your Tax Breaks!
"There are two systems of taxation in our country: one for the informed and one for the uninformed." (U.S. Judge Learned Hand)Whether you have recently started a new venture or have had a small business for a while don’t forget that SARS offers two types of favourable tax treatments for small entities:
- Turnover Tax on micro businesses
- Tax on Small Business Corporations (SBCs).
This is a tax on entities with turnover of R1 million or less per annum. Tax rates are:
The maximum tax payable is R14,150 per annum assuming a turnover of R1 million. This is a very low amount – for example, assume the entity is a company and makes R200,000 taxable income, then it will pay R56,000 in income tax versus R14,150 above.
Turnover Tax businesses pay no other income taxes (such as Provisional Tax and Capital Gains Tax) but will need to collect and hand over Employee Tax, and VAT should the business entity choose to voluntarily register for VAT.
In terms of who may register for the tax the field is broad - companies, sole proprietors, partnerships, close corporations and cooperatives are eligible.
Another break is that these entities need only keep limited records as follows:
Turnover Tax is not that popular with organisations. Commentators have speculated this is due to:
SBCs are one step up from Turnover Tax entities and must be:
These are attractive rates as a normal company would pay R154,000 when taxable income is R550,000 – so at that level SBCs save just over R95,000 in tax.
The restrictions applicable to Turnover Tax (above) also largely apply to SBCs. Also the company’s shares must be held by only “natural persons” (some trusts also qualify – take specific advice if applicable). Importantly all shareholders in a SBC may only hold shares in that one SBC and no other company, CC or co-operative (there are some exclusions including for listed share investments), otherwise it will be disqualified from the special tax regime.
In addition, SBCs qualify for accelerated tax depreciation – if plant or machinery is used in a process of manufacture then the whole cost can be written off in the first year of acquiring it. Other assets also qualify for faster tax write offs.
As a rule of thumb if choosing between the two tax regimes, SBC favours capital-intensive or low mark-up entities.
Both the Turnover Tax and SBC allowances can be attractive to small businesses, but the above is of necessity only a summary. Speak to your accountant if you think your business may qualify for, and benefit from, either of these dispensations.