Micro businesses:Turnover tax

Advantages of the turnover tax

According to SARS ‘the all-in-one tax that is simple and saves you time and money’ (?)

‘Small businesses have the potential to grow the economy, generate jobs and reduce poverty. With this initiative in mind and in line with Government’s commitment to reducing the administrative burden on small businesses and cultivating an environment for entrepreneurship, SARS has designed a new single tax system as a tool for small businesses to help streamline their tax obligations.’

Disadvantages of the turnover tax

VAT deregistration

Assessed losses

A person might be subject to the turnover tax as well as normal tax.

The disposal of certain capital assets might disqualify a person from being registered for the turnover tax.

Taxable turnover Rate of tax

Not exceeding

R100 000

0% of taxable turnover

Exceeding R100 000, but not R300 000 1% of taxable turnover exceeding R100 000

Exceeding R300 000, but not R500 000 R2 000 + 3% of taxable turnover exceeding R300 000

Exceeding R500 000, but not R750 000 R8 000 + 5% of taxable turnover exceeding R500 000

Exceeding R750 000, but not R1m R20 500 + 7% of taxable turnover exceeding R750 000

Micro business tax rates

Micro business tax rates

Taxable turnover (R) Taxation (R) Tax % of turnover

100,000 Nil 0%

200,000 1,000 0.5%

300,000 2,000 0.7%

400,000 5,000 1.3%

500,000 8,000 1.6%

600,000 13,000 2.2%

700,000 18,000 2.6%

750,000 20,500 2.7%

800,000 24,000 3.0%

900,000 31,000 3.4%

1,000,000 38,000 3.8%

Qualifying turnover may not exceed R1m (excludes amounts of a capital nature)

Who could qualify as a micro business?

Natural person (including a partnership), or a company (including a close corporation).

“qualifying turnover” means the total receipts from carrying on business activities, excluding any amount of a capital nature and certain amounts that would have been excluded from normal tax.

In the case of a company (or CC) the shareholders (or members) must all be natural persons.

The natural person or shareholders (in the case of a company or CC) may not at any time during the year of assessment hold any share or an interest in the equity of other company (there are exceptions).

Who could qualify as a micro business?

Who could qualify as a micro business?

The person may not be rendering a professional service during the year of assessment.

“professional service” means a service in the field of accounting,actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftsmanship, education, engineering, entertainment, health, information technology, journalism, law, management, performing arts, real estate, research, secretarial services,

The person may not be a personal service provider or a labour broker without an exemption certificate.

Who could qualify as a micro business?

Not more than 10% of the person’s total receipts may be from investment income.

Investment income is defined as dividends, royalties, rental derived in respect of immovable property, annuities or income of a similar nature, any interest, any proceeds derived from investment or trading in financial instruments, marketable securities or fixed property.

Total amount received from disposal of immovable property and business capital assets may not exceed R1,5m during a three year period.

The three year period comprises of the current year of assessment and the immediately preceding two years of assessment, or such shorter period during which that person was a registered micro business.

Who could qualify as a micro business?

In the case of a company, its financial year must end on the end of February.

If the person is a partnership:

All partners must be natural persons

Partners may not be partners in more than one partnership

Qualifying turnover of the partnership may not exceed R1m

What is qualifying turnover?

The taxable turnover of a registered micro business in relation to any year of assessment consists of all amounts not of a capital nature received by that registered micro business during that year of assessment from carrying on business activities in the Republic.

Including:

50% of receipts of a capital nature from the disposal of immovable property to the extent that it was used for business purposes and other assets mainly used for business purposes

Allowances granted in a previous year that should be added to income in a subsequent year to the extent that it exceeds the balance of assessed loss that is prevented from being carried

forward in terms of s 20

in the case of a company, investment income as defined in section 12E (other than dividends);

What is qualifying turnover?

Excluding:

In the case of a natural person, investment income (as defined in s12E)

Amounts exempt from normal tax: certain government grants; certain export incentive rebates; state subsidies for the

promotion of film production

Amounts received by the micro business that accrued to it before registration as micro business if the amount was subject

to income tax

STC – first R200 000 dividend declared exempt

VAT (may not be registered)

Turnover tax

Payroll taxes (PAYE, UIF, SDL)

Normal tax (including capital gains tax) – Natural person

Dividends tax – first R200 000 dividend declared exempt (s 64f(h))

Donations tax

Normal tax (including capital gains tax) – Company

Interaction with other taxes

Section 10(1)(zJ) exempt micro business income received or accrued from normal tax

Natural person - Investment income NOT exempt (section 12E definition)

Natural person -Remuneration NOT exempt (Fourth Schedule definition)

Par 57A of the 8th Schedule disregard capital gain or loss - from the disposal of immovable property to the extent that it was used for business purposes and - other assets mainly used for business purposesWhere a person is registered as a micro business, it may not register as a VAT vendor (s 23(8))

Interaction with other taxes

Mr X (50 years) has registered micro business as from 1 March 2009. Info for 2010 year of assessment as follows: R

Payments from outstanding trade debtors as on 28 February 2009 20 000

Business non capital receipts 745 000Capital receipt (house – 10% as offices) 2 300 000

Doubtful debt allowance for 2009 7 500

Dividend income 5 000

Interest income 35 000

Example 1 – natural person

Turnover tax Normal tax

Business non capital receipts

R745 000 Exempt s 10(1)(zJ)

Capital receipt house (10% offices)

R115 000

(R2,3m x 10% x 50%)

90% of capital gain/loss (10% disregarded – par 57A)

Add back: doubtful debt allowance 2009

R7 500

Par 6(c) inclusion

Exempt s 10(1)(zJ)

Dividend income Par 7(a) exclusion Exempt s 10(1)(k)

Interest income Par 7(a) exclusion R14 000 (35 000 less R21 000)

Payment of old debtors Par 7(c) exclusion Exempt s 10(1)(zJ)

Example 1 – Natural person (cont)

Taxable income as % of turnover

Turnover   10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

100,000 TT - - - - - - - - - -

  SBC - - - - - 580 1,580 2,580 3,580 4,580

200,000 TT 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

  SBC - - 580 2,580 4,580 6,580 8,580 10,580 12,580 14,580

300,000 TT 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000

  SBC - 580 3,580 6,580 9,580 12,580 15,580 18,580 21,580 24,580

400,000 TT 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000

  SBC - 2,580 6,580 10,580 14,580 18,580 22,580 30,180 41,380 52,580

500,000 TT 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000

  SBC - 4,580 9,580 14,580 19,580 24,580 38,580 52,580 66,580 80,580

600,000 TT 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000

  SBC 580 6,580 12,580 18,580 24,580 41,380 58,180 74,980 91,780 108,580

700,000 TT 18,000 18,000 18,000 18,000 18,000 18,000 18,000 18,000 18,000 18,000

  SBC 1,580 8,580 15,580 22,580 38,580 58,180 77,780 97,380 116,980 136,580

800,000 TT 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000

  SBC 2,580 10,580 18,580 30,180 52,580 74,980 97,380 119,780 142,180 164,580

900,000 TT 31,000 31,000 31,000 31,000 31,000 31,000 31,000 31,000 31,000 31,000

  SBC 3,580 12,580 21,580 41,380 66,580 91,780 116,980 142,180 167,380 192,580

1,000,000 TT 38,000 38,000 38,000 38,000 38,000 38,000 38,000 38,000 38,000 38,000

  SBC 4,580 14,580 24,580 52,580 80,580 108,580 136,580 164,580 192,580 220,580

Small businesses

Tax rates: Turnover tax vs Small business corporation`

Natural person Company

Taxable turnover R900,000 R900,000

Profit R300,000 R300,000

Salary or dividend - Paragraph (c)?

Normal tax?

STC (10/110) - 10/110 - R9 090

Dividends tax (10%) - 10% - R10 000OR

Salary vs dividends

Turnover tax

Voluntary deregister after period of three years.

Compulsory deregister when exceed R1m threshold or is disqualified from being a micro business.

Payment of turnover tax

01/03 31/08 28/02

Turnover tax on 50% of estimated taxable

turnover

May generally not be less than previous year

Turnover tax on estimated taxable

turnover

20% penalty if estimate less than 80% of actual

6 months 6 months

Administration of turnover tax system

Turnover tax

VAT compulsory registration threshold

Threshold for compulsory VAT registration increased to R1m from 01-03-2009.

If a person ceases to be a VAT vendor a deemed supply takes place in terms of s 8(2) of the VAT Act:

All goods (excl goods iro which an input tax was

denied)

All rights capable of assignment

AND

Are deemed to be supplied immediately

before person cease to be a

vendor

Consideration for deemed

supply is lesser of:

Cost

Open market value

s 8(2)

OR

VAT deregistration

If a vendor has not fully paid the supplier of the goods or services but originally claimed an input tax, output tax on the unpaid balances will also become payable if he ceases to be a vendor (s 22(3)(b) and 22(3) proviso (ii)(dd)).

VAT deregistration

VAT on deemed supply is payable in six equal

monthly instalments (or period that CIR allows)

If a person ceased to be a vendor because of the sole reason that:

The person registered as a micro business

The person’s taxable supplies are less than R1m

s 8(2D)

The value of the deemed supply must be reduced by

R100 000s 10(5A)

VAT on deemed supply is payable in six equal

monthly instalments (or period that CIR allows)

s 8(2C)

The person ceases to be a vendor before 30-06-2009

AND

VAT deregistration

A client has registered as a vendor during 2001 when his taxable supplies exceeded the R300 000 threshold. At present his taxable supplies is about R800 000 per annum. The client carries on a manufacturing enterprise. He considers to register as a micro business and has to deregister for VAT.

His balance sheet shows the following assets (at cost):

Land and buildings R500 000Machinery R800 000Trading stock R250 000Debtors R150 000Creditors R120 000

What are the VAT consequences if the client deregisters as a vendor?

EXAMPLE

VAT deregistration

Balance sheet Cost

(incl. VAT)

Market value

(incl. VAT)

Lesser of cost / market value

Land and buildings

R500 000 R570 000 R800 000 R570 000

Machinery R800 000 R912 000 R600 000 R600 000

Trading stock R250 000 R285 000 R350 000 R285 000

Debtors R150 000 R150 000 R130 000 R130 000

Creditors R120 000 R120 000 R120 000 R120 000

TOTAL R1 705 000

The cost and open market value of the clients assets are as follows:

EXAMPLE

VAT deregistration

The VAT consequences from the deregistration as a VAT vendor is as follows:

Lesser of cost / open market value of assets R1 705 000

Output VAT liability (R1 475 000 x 14/114) R181 140

The supply of debtors is however an exempt supply(s 2(1)(c) and s 12(a)) (R130 000)

Section 10(5A) reduction (R100 000)

EXAMPLE

VAT deregistration

Standard rated supplies R1 475 000