As a business, you’re liable to pay corporate income tax, which is calculated based on your total income over the tax period. Under the traditional company income tax system for small business corporations, the threshold for paying income tax starts at R79,001, although rates vary depending on a number of factors, including:
- Your annual turnover
- Whether you’re based in South Africa, or have a branch in the country
- How many employees you have
All companies registered under the ordinary small business tax system are required to pay tax using the provisional tax method, which spreads out the tax liability over the assessment period. This system requires at least two amounts to be paid in advance, and calculating what you owe is crucial to making sure you’re not left with a large bill at the end of the year.
However, SARS has also introduced an additional tax type for qualifying small businesses. Known as turnover tax, this is a simplified system aimed at making it easier for micro business to meet their tax obligations. Currently, the threshold for tax under turnover tax is R335,001, making it an attractive option for certain businesses.
Types of taxes small businesses pay
Companies in South Africa may be liable for a number of different tax types, depending on the nature of their business. These include:
Income Tax – an annual tax company must pay, based on their profit.
- Provisional tax – a twice (or thrice) annual tax payment used to break up the income tax liability over the course of the year, avoiding one large payment.
- Capital gains tax – in general, capital gains tax is levied on the sale or disposal of company assets, such as property, where the proceeds of the sale are greater than the asset’s base cost. Capital gains tax is not a separate tax: it forms part of income tax.
- Dividends tax – this is a tax imposed on dividend payments to shareholders.
- VAT – value-added tax is a tax on the consumption of goods or services. Companies with an annual income of over R1 million must register for VAT. For companies with lower incomes, VAT registration is optional.
Simplified Tax: Turnover Tax
All of these tax requirements can place a large administrative burden on small businesses whose major focus is staying profitable and keeping new business coming through the door. This is why SARS introduced a simplified taxation system: turnover tax.
The turnover tax takes all the above payments and combines them into a single payment. To qualify for this simplified taxation system, you’ll need to meet certain qualifying criteria and have an annual turnover of less than R1 million.
Turnover tax is also an elective. You’ll be able to choose this payment type if you’re self-employed, in a partnership, or if you are a close corporation (CC), company, or co-operative. Otherwise, you’ll be liable to pay the standard small business tax rates as outlined by SARS at the beginning of each tax year.
Higher incomes place businesses in higher tax brackets. Standard small business tax brackets currently range from 7% to 28%, in addition to a lump sum payable.
If you’re considering turnover tax, do your research.
While this tax type is suitable for many small businesses, others can end up paying more tax by using the system – although they benefit from the simplified tax process.
If you’re unsure, ask your accountant which tax type would be right for you.
Preparing your Tax Return
In order to be as organized as possible, you should always keep clear, accurate records of your income, expenses, and resulting profit/loss throughout the year to determine how much tax you need to pay.
Since companies only pay tax on their profits, making sure you accurately include all your expenses is an important way of keeping your tax bill as low (and accurate) as possible.
According to South African tax law, the following can be deducted from taxable income as allowable business expenses:
- Regular business expenses: this includes all financial outgoings that are incurred as part of running the business. It includes things such as material and equipment costs, employee costs, and administration costs, but also covers business rental costs, office supplies, travel, uniforms (if needed), wholesale purchase costs for goods resold, financial charges (such as bank fees), utilities, legal fees, marketing, and promotion.
- Capital expenses: this relates to the cost of buying equipment and machinery, and also cover renovation costs.
- Start-up expenses: this is an expenditure that was incurred for business purposes in the period before the commencement of the first year of trade, provided these are expenses that would have qualified as deductible business expenses within the general operation of the business.
- Net operating losses: any losses carried forward from previous years.
When preparing your tax return, it is important to do so accurately, as SARS can request substantiating evidence to show that the return has been completed correctly.
This means keeping accurate, complete records of your business activities during the course of the year.
QuickBooks Online can help you keep accurate financial records easily, wherever you are, and our cloud-based software allows your bookkeeper or accountant to log in simultaneously and work directly with your data online.
All this means that when it comes time to submit your tax return, making the necessary calculations is a breeze – whether you choose to submit your tax return yourself or choose to have your accountant prepare one on your behalf.
Discover more free Small Business Resources at the Intuit QuickBooks Resource Centre to help grow your business in South Africa today.