Turnover Tax is a simplified tax system designed for small businesses with a turnover (annual gross income) of R1 million or less. It provides an alternative to the standard income tax system, simplifying tax compliance for small businesses by taxing based on a business’s turnover rather than its net income.
Key Features of Turnover Tax:
- Eligibility Criteria:
- Annual Turnover: Your business’s turnover must be R1 million or less per year.
- Business Type: You must be a sole proprietor, partnership, close corporation (CC), or private company (Pty) Ltd.
- Certain Exclusions: Turnover tax is not available to businesses involved in certain activities, such as:
- Holding companies or businesses with passive income (e.g., rental income, dividends).
- Businesses earning income from certain sectors like mining, farming, or financial services.
- You cannot be registered for VAT, but if you are registered for VAT, you will need to deregister for VAT if you opt for turnover tax.
- How Turnover Tax Works:
- Taxation Based on Turnover: Instead of calculating tax based on the profits (income minus expenses), turnover tax is calculated as a percentage of the business’s total turnover (gross income).
- Tax Rates: The turnover tax system applies a progressive tax rate, which means that the more your turnover, the higher the rate you pay.
Note: Turnover tax does not apply to businesses earning more than R1 million in turnover; such businesses must comply with regular income tax.
- Filing and Compliance:
- Annual Filing: Businesses using turnover tax are required to file annual returns to SARS, typically by 28 February each year.
- Simplified Compliance: Unlike regular income tax, turnover tax simplifies compliance by not requiring businesses to track expenses and deductions, meaning the tax calculation is easier. You just need to report your gross turnover.
- Tax Payment: You can make payments on a monthly or quarterly basis, and your final tax payment will be made when you submit your annual return.
- Advantages of Turnover Tax:
- Simplicity: It’s much easier to comply with, as businesses do not need to keep detailed records of expenses or deductions.
- Lower Compliance Costs: Because there is less paperwork and simpler calculations, the overall cost of managing tax compliance is reduced.
- Predictable Tax Liability: Since it’s based on turnover, the tax liability is easier to predict and plan for, with no complex calculations or adjustments for deductions.
- Disadvantages of Turnover Tax:
- No Deductions: Unlike the regular income tax system, where businesses can deduct expenses from their taxable income, turnover tax businesses cannot deduct any business expenses. This means that if your expenses are high, turnover tax could result in higher effective tax rates compared to regular income tax.
- Limited Applicability: It’s only available to businesses with turnover under R1 million, so it’s not an option for businesses looking to expand past this threshold.
How to Register for Turnover Tax:
To register for turnover tax, businesses must:
- Register with SARS: You must register for turnover tax via SARS eFiling or at your local SARS office.
- Meet Eligibility Requirements: Your business needs to meet the eligibility criteria (gross turnover under R1 million).
- Deregister for VAT (if applicable): If you are currently VAT-registered, you must deregister for VAT to qualify for turnover tax.
- Complete Annual Tax Returns: After registering, you will need to file annual tax returns with SARS, which will calculate your final turnover tax liability.
Summary:
Turnover Tax is a simplified tax system for small businesses with a turnover of R1 million or less. It is designed to make tax compliance easier by taxing a business based on its total turnover instead of net profit. While it simplifies the process and reduces administrative burden, it also comes with limitations, such as the inability to deduct business expenses.
For small businesses looking for simplicity, turnover tax can be a great option, but it’s important to ensure your business qualifies and that the lack of expense deductions is manageable for your business. If your turnover is close to the R1 million threshold, turnover tax can be a useful way to streamline your tax obligations.