While the majority of businesses are subject to the standard corporate tax rate (currently 28%), very few business owners realise that there are two dispensations, available only to small businesses, which entail a number of tax concessions.
Two tax breaks for small businesses have been introduced for the dual purposes of expanding the small business sector by offering tax relief, and expanding the “tax net” to increase the number of business complying with tax law and contributing to the fiscus.
The first dispensation is that of Small Business Corporations (SBCs). An SBC is not a separate legal form of business (such as a close corporation or a private company), but rather a tax “concession” which existing businesses can qualify for. While there are specific benefits to qualifying as an SBC, such as accelerated asset write off periods, the main benefit comes in the form of paying a reduced percentage of tax on profits in a tiered manner – as compared to a flat rate of 28%, as is the case with a standard business. For the 2011/12 tax year (which applies to most tax returns being completed at the moment and in the near future), and the 2012/13 tax year, a qualifying SBC pays tax at the following rates:
• A business with a taxable income of less than R63 556 pays no income tax.
• A business pays only 7% tax on the income of between R63 556 and R350 000. (a total of R20 051 if the taxable income is exactly R350 000.
• A 28% tax is payable on taxable income above R350 000.
However, Sars cannot permit just anybody to get their hands on this saving, thus restricting who qualifies. Each and every one of the following criteria must be met (for the full tax year):
• The business must be a close corporation or a company (sole proprietorships and partnerships excluded).
• The business may not be an employment company.
• All members or shareholders must be natural persons.
• The members or shareholders cannot hold an interest in any other business (with certain specific exemptions).
• Turnover for the year may not exceed R14m.
• Not more than 20% of the total income may come from investments or from the rendering of personal services (certain exemptions apply as well).
The second dispensation, introduced much more recently, is known as Turnover Tax. Under this concession, qualifying businesses (there are a number of restrictions here too), with an annual turnover of R1m or less can elect to be taxed on their turnover figures instead of their profit figures. The intention here is to simplify the administration burden, as business owners would only need to have their turnover figures to be able to calculate their tax liability. The single tax figure calculated includes the business’s VAT as well, further simplifying the situation (although one would need to de-register for VAT if already registered and wishing to qualify). One of the restrictions is that personal service providers and “professional services” (auditors, lawyers, consultants, etc.), are excluded from qualifying.
The rates at which the Turnover Tax is paid are as follows:
• No tax on turnover below R150 000
• 1% tax on turnover above R150 000
• R1,500 plus 2% of taxable turnover above R300,000
• R5,500 + 4% of taxable turnover above R500,000
• R15,500 + 6% of taxable turnover above R750,000
Now, before you go rushing to register your micro-business for Turnover Tax because the rates seem much lower, do your sums.
Firstly, assuming you meet all the other criteria, keep your eye on the turnover levels: You can only qualify for Turnover Tax if your turnover is R1m a year or less, whereas the threshold for SBCs is 14 times that.
Then, very importantly, realise that with Turnover Tax the tax is payable regardless of whether or not the business makes a profit. So, whereas you may have paid low (or no) tax under the SBC concession (because of a small profit, or a loss), you may actually end up paying in much more under Turnover Tax. As a rule of thumb, if you have big, healthy margins, Turnover Tax could work for you. However if your margins are generally tighter, you’re probably better off using the SBC concession.
When making a decision involving your business’ finances, seeking professional advice is always advised, especially when needing to make strategic changes to qualify for certain concessions. All in all though, these concessions can be substantial. They could even be the difference between your business being viable or not and should certainly be taken into account when doing business, financial, and tax planning.