Understanding Business Tax

Getting a new business off the ground is an exciting and stressful time. You’re looking forward to getting your new product or service into the market, but also need to see to the administrative processes to get it off the ground legally. An important element of this is tax.

Paying tax correctly and on time is a necessary part of running any business. But many entrepreneurs have questions about how and when to file. In this guide, we cover the basics and take a look at some of the types of tax small businesses may need to pay.

Also Read: Tax Tips for Small Businesses: A Guide

Sole proprietor or company?

The first step towards tax compliance is understanding what type of company you run – namely, do you operate as a formally incorporated company, or as a ‘sole trader’? Different tax filing requirements and tax rates pertain to each situation.

Sole traders

• Sole traders must be registered as a provisional taxpayer in their personal capacity and pay tax twice a year on their estimated business profit.
• Owners are taxed on the profits at the applicable personal income tax rate.
• Business profits are included in the owner’s individual tax return (ITR12) under the “Local Business, Trade and Professional Income” section.
• A sole proprietor’s drawings are not subject to PAYE tax (pay-as-you-earn). (But they must be registered for PAYE if there are employees.)
• Sole traders are required to register for VAT (value-added tax) when turnover for a twelve-month period is R1 million or more.

Registered companies

• The company must be registered as a provisional taxpayer and pay tax twice a year on estimated business profit.
• Company profits are taxed at a flat rate of 28% (unless the company qualifies as a SBC or Micro Business registered for Turnover Tax).
• Company needs to file a Company Tax Return (ITR14).

SARS

The South African Revenue Service (also known as SARS ) is the tax collection body in South Africa. SARS has branches in major cities and also operates an online portal. Taxpayers deal with SARS when paying tax in both their personal and business capacities.

Getting registered for tax

After starting your new business, don’t wait around to get a tax number. If you are a sole trader, you will probably already have one. If not, get one as soon as possible.

For new business owners with formal businesses (i.e. not sole traders), business registration online through the CIPC (Companies and Intellectual Property Commission) often leads to SARS registration as part of the process.

If not, it is also possible to complete an IT77 form manually and submit it to a SARS branch to register for tax – this must be done within 60 days of the start of trade.

Understanding tax basics

Tax is levied on a company’s profit, and every company in South Africa is liable to pay income tax on that profit. Depending on factors such as turnover, payroll amounts, whether you are involved in imports and exports etc. you could also be liable to register for other taxes, duties, levies and contributions such as VAT, PAYE, Customs, Excise, SDL and UIF contributions.

At the basic level, net profit or loss is determined as follows: Income – Expenses = Profit (Loss). You only pay tax on your profits.

What tax you need to pay

Income tax, annually. (All businesses)

As mentioned above, sole traders will complete an individual tax return (ITR12) to do this. Companies need to file a company tax return (ITR14). Income tax is a ‘backward looking’ tax, covering the previous tax year.

Provisional tax, twice or three times yearly. (All businesses)

Provisional tax is a ‘forward-looking tax’ and the payment of provisional tax is intended to assist taxpayers in meeting their normal tax liabilities (income tax). Provisional tax is paid in two installments, and aims to ‘smooth’ tax payments for companies, so they are not left with one large bill at the end of the year.

The first provisional tax payment must be made within six months of the start of the year of assessment. For years of assessment starting March, this will be 31 August. During the first period, you will pay half of the total estimated tax for the full year.

The second payment must be made no later than the last working day of the year of assessment. This will be 28/29 February. The second period covers the total estimated tax for the full year, less the amount paid for the first period.

A optional third payment is voluntary.

Employees’ tax (some businesses)

Employees’ tax is a system whereby an employer deducts employees’ tax (PAYE) from the earnings of employees and pays it over to SARS on a monthly basis. 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 within seven days of the month following the month for which the tax was deducted.

Directors’ remuneration (all businesses)

The remuneration of directors of private companies is subject to employees’ tax.

As directors’ remuneration is often only finally determined late in the tax year or in the following year, many directors finance their living expenditure out of their loan accounts until their remuneration is determined.

Turnover Tax: Relief for micro business

All of this may seem a little complicated for new business owners.

To reduce the administrative burden on small businesses, SARS has introduced a single tax system as a tool for small businesses to help streamline their tax obligations, known as Turnover Tax.

Turnover Tax is a simplified tax system for small businesses with a turnover of up to R1 million per annum. It is a tax based on the turnover of a business and is available to sole proprietors (individuals), partnerships, close corporations, companies and co-operatives.

Turnover Tax is a substitute for VAT, Provisional Tax, Income Tax, Capital Gains Tax and Secondary Tax on Companies. So qualifying businesses pay a single tax instead of five other taxes. It’s elective – so you choose whether to participate.

How to pay turnover tax?

There are three payment dates:

• The first 1st payment is in the middle of the tax year on the last business day of August.
• 2nd payment is at the end of the tax year on the last business day of February.
• The final payment is after the annual TT03 – Turnover Tax Return is submitted and processed. The submission of TT03 turnover tax returns is in line with the submission of the annual income tax returns, between 1 July and 31 January of the following year.

How to submit a company tax return on eFiling?

Taxpayers have a number of options when completing their returns.

Many small business owners choose to use e-filing, SARS online filing portal, and complete their returns themselves. It is also possible to receive telephonic assistance, or go to a branch and have an agent help you with your form.

The documents you need to complete the eFiling registration process: 

• Tax registration number

• ID number

• Personal details

• Name of the company

• The SARS tax number 

• The company's banking details 

• The year-end of the company

Larger businesses may use the services of a qualified accountant.

Submit a company tax return on eFiling in 3 steps

Step 1: Register a company profile on eFiling

In order to use SARS eFiling, first create a company profile on the platform. Once your business is activated, simply log in and click on “Returns” to proceed.

Step 2: Request the return 

From the side menu options under “Return Issued”, select “Income Tax(ITR14/IT12TR/IT12EI)” by clicking on it.

To request a return on SARS eFiling, start by selecting the desired year of assessment from the drop-down menu. Then, click on the "Request Return" button. This will bring up the "Return Search" page where you should click on the "Open" hyperlink. 

If any returns are in an issued/saved status when the submission due date arrives and haven't been filed through any other submission channel, they will be considered overdue. In such cases, the system will display a message stating, "Your return is overdue, please submit it urgently."

Step 3: The last step before you capture the ITR14 return

After you make the return request, you will be directed to the "Income Tax Work Page."

In order to submit the ITR14 return, it is necessary to confirm your status as a representative taxpayer by validating your details, which may include demographic information such as contact details, physical address, postal address, and bank account details.

After selecting the "Continue" button, the "Income Tax Work Page" will appear and the status will be updated to read "Return replaced with the latest version."

Additional guidance for filling out the ITR14 form

When completing your return, a customized ITR14 form will be generated based on your company type and answers to other initial questions. Company types will be categorized according to the following descriptions:

Using accounting software to keep financial records 

You must keep all financial records that will enable you (or your accountant) to prepare complete and accurate tax returns on eFiling.

These records must clearly show 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.

Products like QuickBooks can help you track your business expenses and income during the year, making sure that you are able to file your tax return promptly and correctly with a minimum of hassle.

Discover more free small business resources at the Intuit QuickBooks Resource Centre to help grow your business in South Africa today. Read our tax guide to help your small business prepare for tax time.

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