When you start your own business, you are the architect of how it will be structured and how it will operate. One of your key concerns when deciding on the structure of your business, are tax issues and implications. Different business structures require different business strategies. To help you understand taxes better, here’s a run down of the various types of tax in South Africa…
How does my business pay tax?
- A sole proprietorship is a business that is owned and operated by a natural person (individual). This is the simplest form of business entity. You, as the owner, must include the income from such business in your own income tax return and are responsible for the payment of taxes thereon.
- A close corporation is a legal entity with its own legal personality and perpetual succession and must register as a taxpayer in its own right.
- A partnership is described as a relationship between two or more persons who join together to carry on a trade, business or profession. It is therefore also not a separate legal person or taxpayer but each partner is taxed on his or her share of the partnership profits.
- A private company is treated by law as a separate legal entity and must also register as a taxpayer in its own right. It has a life separate from its owners with rights and duties of its own.
SA’s Tax System:
The standard tax system in South Africa requires businesses to pay the following taxes, if applicable:
1) Income Tax
2) Value-Added Tax (VAT)
3) Provisional Tax
4) Capital Gains Tax (CGT)
5) Secondary Tax on Companies (STC)
Income tax is the government’s main source of income and is levied on your income. Entities which are incorporated, established, formed or have its place of effective management in the country, are regarded as being resident in South Africa.
In respect of the 2011 year of assessment, companies are taxed at a rate of 28%.
Value-Added Tax (VAT)
- VAT is paid in South Africa on goods or services delivered. VAT is a direct tax based on consumption of goods and services in the economy.
- VAT is currently paid at a standard rate of 14%. Although rumours and speculation has it that the VAT rate might be increased, it did not happen during the finance minister’s 2011 budget speech.
- Persons who are liable to register, and those who have registered voluntarily, are referred to as VAT vendors.
- Revenue is raised for the government by requiring certain traders or vendors to register and to charge VAT on taxable supplies of goods or services. It is also paid on imports into the country.
- Taxable supplies are any supplies of goods or services made by a vendor. A taxable supply is subject to VAT at either the standard rate of 14% of 0%.
- Exempt supplies are supplies of goods or services on which VAT is not levied. Examples of exempt supplies include certain educational services and medical aid provision.
Basic characteristics of VAT:
- VAT applies generally to transactions related to goods and services.
- It is proportional to the price charged for the goods and services.
- It is charged at each stage of the production and distribution process.
- The taxable person (vendor) may deduct the tax paid during the preceding stages, i.e. the burden of the tax is on the final consumer.
- The onus will be on you to ensure that VAT is indeed collected on all transactions that are taxable, that VAT is included in advertising of prices or quotes and submitting returns and payments, on time.
You need to register for VAT when:
- Your turnover exceeds R1 million rand over a 12-month period
- You make taxable supplies in excess of R1 million over a 12-month consecutive period
- You can also register voluntarily provided that the minimum bench of R50 000 has been exceeded in a 12-month period.
Provisional tax requires a periodic payment that is intended to assist taxpayers in meeting their tax liabilities on an ongoing basis instead of paying a big amount once a year on assessment. It is offset against the final income tax that a taxpayer has to pay for a year of assessment.
Capital Gains Tax (CGT)
Capital Gains Tax is part of the income tax system but only comes info effect when the taxpayer disposes of an asset.
Secondary Tax (STC)
Secondary tax is imposed on companies and close corporations registered in South Africa which declare dividends. The tax is therefore levied on the company, not the shareholder(s).
After the 2011 Budget Speech, STC is also now levied on companies at a rate of 10% on all income distributed by way of dividends.
Taxes for Small and Medium-sized Enterprises (SMEs)
In 2009, SARS introduced the turnover tax as a simplified tax system mainly to assist small, more informal businesses. A micro-business is defined as one whose turnover, excluding capital and certain exempt amounts, does not exceed R1 million for the year of assessment.
It is therefore levied on the business’s turnover, not the taxable income like the standard tax system. It was developed to take into account the cost affect of keeping record. For instance, if the cost of hiring a tax professional is too high for your business expenses, you turnover tax can be a good option. Businesses opting for turnover tax also only need to submit two interim returns and a final return for assessment. Income tax and the VAT system require businesses to submit an average of ten returns a year.
This simplified tax system helps small businesses which qualify to replace the typical standard taxes for businesses.
Micro-businesses pay turnover tax as per the following table:
Financial year ending on 29 February 2012
Taxable turnover (R) Rate of tax (R)
0 – 150 000 0%
150 001 – 300 000 1% of the amount above 150 000
300 001 – 500 000 1 500 + 3% of the amount above 300 000
500 001 – 750 000 7 500 + 5% of the amount above 500 000
750 001 and above 20 000 + 7% of the amount above 750 000
These rates were adjusted by the Minster of Finance in the 2011 budget announcement, effective from 1 March 2011.
However, according to Mr. Muneer Hassle, Project Director: Tax at the South African Institute of Chartered Accountants (SAICA), notable exclusions are:
- Companies with a year-end other than February;
- Public-benefit organisations; and
Hassle also states the 2011 budget also confirms that from 1 March 2012, micro businesses
which register for VAT will no longer be barred from registering for the turnover tax, as is presently the case. The three-year bar on voluntary deregistration from turnover tax will also be lifted.
Take SARS’ quick online test to check if your business will qualify and/or benefit from turnover tax.
More on different types of business tax deductions
Your business may also be liable for other taxes, depending on turnover, payroll amounts and whether you are involved in imports and exports. You might therefore also have to pay duties, levies and contributions such as PAYE, Skills Development Levy, Donations tax and UIF contributions.
PAYE (Pay As You Earn)
Employees’ tax, also known as PAYE, is a withholding tax which an employer deducts from the employee’s salary, using the stipulated tax rates issued by SARS. According to law, every employer who pays remuneration to an employee has to register with SARS and deduct PAYE.
Unemployment Insurance Fund (UIF)
Every employer is liable to contribute an amount equal to one percent (1%) of the remuneration it pays to its employees. The contributions are calculated as a percentage of an employee’s salary. An employer who is registered for employees’ tax or the Skills Development Levy is automatically registered for UIF contributions.
Skills Development Levy (SDL)
An employer which pays annual salaries, wages and other remuneration in excess of R500 000 must pay the skills development levy. Employers with an annual payroll of R500 000 or less (whether registered for employees tax purposes with SARS or not) are exempt from this levy.
South African Institute of Chartered Accountants (SAICA)