New South African business owners often have a number of questions about tax when they first begin trading. One of the major ones is whether the business needs to reach a certain size before it is required to file for tax.
The answer is yes: a certain business size (measured by income) does need to be reached. However, this only applies to formally established companies. For entrepreneurs who trade as sole proprietors or as part of a partnership, there is no minimum limit.
In short, assessing whether a small business in South Africa is liable for tax means considering its annual turnover.
That is, when a company’s gross income exceeds a limit that’s set by the government each financial year, it becomes liable for tax payments.
The tax amount payable depends on two factors. The first is which type of tax the business is registered for. The second is the tax bracket that the company falls into.
Before we dive into the details, note that SARS (the South African Revenue Service) also takes into account whether your business is resident in the country, or simply operates a local branch. This can affect whether you’re over a certain threshold for payments, because:
- Internal companies based and operating in South Africa pay tax on income earned within South Africa as well as on income earned abroad
- External companies based outside South Africa are only taxed on the turnover sourced from their operations in South Africa.
Once it has been established whether a company is internal or external, it’s time to move on to looking at the minimum amount of taxable income (or tax threshold) for the relevant year.
Turnover Tax versus Company Tax
Every small business owner should decide on the kind of company tax they want to register for. In other words: whether they would like to pay standard small business income tax rates, or would rather elect for turnover tax. Turnover tax has a different minimum income tax limit to ordinary company tax as it’s a simplified, all-in-one rate aimed at reducing small business administration for companies with an annual turnover of less than R1 million. To make record keeping easier, the turnover tax system estimates a company’s business expenses, removing the need to track tax deductible expenses and ultimately making tax rates significantly lower than the standard tax system.
As you get to decide for yourself whether to adopt the turnover tax system, you should look at your records carefully to see whether the ability to estimate your expenses under this method works out in the best interests for your company. If your tax deductible expenses are very large, you should consider working these out under the standard system, as turnover tax uses estimates and you may miss out on money you could claim back.
Let’s compare the rates as they stand for the 2019-2020 tax year:
Standard SBC minimum amount of taxable income: R79,000
Turnover tax minimum amount of taxable income: R335,000
With such a difference at the minimum limit – you’ll also pay a lower percentage in tax even at higher income brackets – you should choose your tax type carefully, based on your eligibility, liability and level of expenses.
VAT: Value-added Tax
Many South Africans who begin their own companies also have questions about another common tax type: VAT.
Here are answers to some of the most common questions about VAT.
VAT (value-added tax) is an indirect tax levied on the consumption of goods and services in South Africa. The South African government requires certain businesses to register charge VAT on the taxable supplies of goods and services they provide.
VAT is charged at each stage of the production and distribution process. VAT increased from 14% to 15% in April 2018.
VAT is charged on the supply of most goods and services produced in South Africa as well as on goods that are imported, in which case it is collected by customs. A small number of goods and services are subject to VAT at the zero rate or are exempt from VAT.
Should I file a VAT Return?
If you’re just starting out in business, it may not be time to worry about VAT yet.
In South Africa, it is only mandatory to register for VAT once revenue grows above R1 million in any consecutive twelve month period.
However, any person that carries on a business may choose to voluntarily register for VAT, if annual revenue exceeds R50,000. It is important to note that the term “person” is not only limited to companies but also includes, amongst others, individuals and partnerships.
Filing for Tax as an individual
If you run your business as a sole proprietor (in other words, your business is not a separate legal entity from you), the income that you make from trading must be reported as part of your personal income tax return. In this case, there is no “minimum threshold” to meet before you are required to file taxes.
However your business is set up – whether you operate as a company, partnership or sole proprietor – keeping accurate ongoing financial records is important, and not only when it comes time to pay tax.
With QuickBooks, it’s easy to track your income and expenditure throughout the year. Better yet, it’s easy to file tax, once your income puts you over the minimum threshold (if you operate a company) or right from the beginning if you’re a sole proprietor.
Whether you choose to self-file your tax through the SARS eFiling online website, or use the services of an accountant to prepare a tax return on your behalf, QuickBooks makes tax quick and easy. Why not try it Free for 30 days?
Discover more free Small Business Resources at the Intuit QuickBooks Resource Centre to help grow your business in South Africa today.