By Hlengiwe Mkhize
One of the most important factors involved in the financial planning process of owning and running a small business in South Africa is tax management. This quick guide provides an overview of everything you need to know to manage your tax efficiently, and in doing so, save money and ensure that your operations are tax compliant.
Tax basics for SMEs
Most small and medium enterprises (SMEs) are not always liable to pay tax due to a low level of profit or not meeting the minimum threshold to pay tax. However, it’s still important to be registered with SA Revenue Service (Sars), within 21 business days after becoming an employer, unless none of your employees are liable for normal tax.
Getting registered from the outset and submitting tax returns timeously will ensure that as your business grows and your tax obligations change, the process of paying tax is set up and that you won’t incur unnecessary penalties in future.
These are the thresholds to be aware of:
∎ Small business corporations with a profit of R95 750 or less are not eligible to pay tax.
∎ Businesses with a turnover of R335 000 or less are also not eligible to pay tax.
Five types of taxes for SME owners
Turnover tax:
This simplified tax is designed for micro-businesses with an annual turnover of R1 million or less. The tax rate is up to 3%, making it easier for small businesses to manage their tax obligations without extensive paperwork. Turnover tax also provides the added benefit of a reduced tax burden, as tax is calculated on turnover instead of profit, which can add up to significant tax savings over time.
Turnover tax payments are made in three instalments:
First payment: By the last business day of August.
Second payment: By the last business day of February.
Final payment: After submitting the annual TT03 return, typically between July 1 and January 31 of the following year.
Provisional tax:
Provisional tax is not a separate tax, but rather a mechanism by which to pay the normal income tax liability during the tax year for individuals who are self-employed or who own a business.
A provisional taxpayer is generally required to make two provisional tax payments: one six months into the year of assessment; and one at the end of the year of assessment. Provisional tax payments are calculated on estimated taxable income, including current taxable capital gains for that particular year of assessment.
These estimates of taxable income are submitted to Sars on an IRP6 return. The major difference between turnover tax and provisional tax is that the latter is based on profit while turnover tax is calculated as an estimated tax that is based turnover (total business income), as opposed to profit (total business income minus expenses).
The provisional tax system allows SME owners to claim back various expenses subject to various conditions, including:
Home office deduction: If you run your business from home, you may be eligible for a home office deduction. This can include a portion of your rent or mortgage, utilities, and maintenance costs.
Business equipment and supplies: Expenses for business-related equipment and supplies, such as computers, printers, and office supplies.
Vehicle expenses: If you use your vehicle for business purposes, you can deduct related costs. This can include fuel, maintenance, insurance, and depreciation.
Travel and meals: Travel expenses for business purposes, such as flights, accommodation, and meals.
Marketing and advertising: Expenses incurred for marketing and advertising your business, including online ads, print materials, and promotional events.
Insurance premiums: Premiums for business-related insurance policies, such as liability insurance, property insurance, and health insurance for employees.
Interest on business loans: If you’ve taken out loans to finance your business operations, the interest paid on these loans is deductible.
Professional services: Fees paid to accountants, lawyers, and other professionals for business-related services. This includes costs associated with tax preparation, legal advice, and consulting services.
Employee salaries and benefits: Wages paid to employees, along with associated payroll taxes and benefits. This can include health insurance, retirement plans, and bonuses.
Licenses and permits: Fees for business licenses and permits required to operate legally, including costs associated with industry-specific certifications and regulatory compliance.
Employee taxes:
As is the case in any size or type of business in South Africa, employers need to ensure that their employees are registered with the PAYE (Pay-As-You-Earn) tax system. This is a tax on salaries paid to employees earning more than R95 750 annually.
Other deductions include UIF (Unemployment Insurance Fund), whereby employers and employees each contribute 1% of the employee’s monthly earnings up to a maximum of R177.12 each. UIF provides short-term relief to employees who become unemployed or are unable to work due to specific conditions.
There is also a SDL tax (skills development levy), which equates to 1% of the total employee cost. This levy is used to fund training and skills development initiatives, as part of each employer’s B-BBEE-compliance requirements. Employers with an annual salary bill exceeding R500 000 are liable for SDL.
VAT (Value-Added Tax):
VAT is a consumption tax levied at 15% on the value added at each stage of production and distribution. Businesses must submit VAT returns either monthly or bi-monthly.
Income tax:
This is an annual tax on profit, with the rate for SMEs and corporations being up to 27%.
Hlengiwe Mkhize: Tax practitioner and mentor for Business Partners Limited.
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