Turnover tax is a simplified tax system developed for micro businesses. Tax is calculated on the turnover of the business (revenue + VAT – refunds) for the financial year albeit at more favourable rates. This tax regime replaces income tax, capital gains tax and dividends tax. It does not include amounts accrued to the business or any receipts of a capital nature and the deduction of expenses against income is not permitted. The business is therefore taxed on gross income instead of net taxable income. There are furthermore certain other inclusions and exclusions which apply. In this article we will take a brief look at the benefits, requirements, workings and pitfalls of Turnover Tax.
Benefits of Turnover Tax
Firstly, let us take a look at the benefits:
| 1 | It is a simplified tax system for micro businesses where income tax, dividends tax and capital gains tax are replaced. |
| 2 | A reduced tax rate applies. |
| 3 | There is a reduced administrative burden in terms of record keeping. Records to be retained by the micro enterprise include: records substantiating all amounts received, information regarding dividends declared, a list of all assets with an individual cost of more than R10 000 at the end of the year of assessment, a list of all liabilities exceeding R10 000 at the end of the year of assessment. |
Below is a summary of the latest Turnover tax rates for financial years ending between 1 March 2021 and 28 Feb 2022:
| Taxable Income (R) | Rate of Tax (R) |
| 1 – 335 000 | 0% of taxable turnover |
| 335 001 – 500 000 | 1% of taxable turnover above 335 000 |
| 500 001 – 750 000 | 1 650 + 2% of taxable turnover above 500 000 |
| 750 001 and above | 6 650 + 3% of taxable turnover above 750 000 |
Let us look at an example of this tax regime in practice:
Normal tax
| Turnover | R 800 000 |
| Expenses | R 500 000 |
| Taxable income / Profit (Income – Expenses) | R 300 000 |
| Tax payable | R 300 000 x 28% = R 84 000 |
Turnover tax
| Turnover | R 800 000 |
| Expenses | R 500 000 (excluded) |
| Taxable income (Turnover / all receipts) | R 800 000 |
| Tax payable | R 800 000 – R 750 000 x 3% + R 6 650 = R 8 150 |
Requirements to qualify for Turnover Tax
| 1 | Sole proprietors, partnerships and incorporated businesses qualify to benefit from this tax regime. |
| 2 | The annual turnover of the business may not exceed R1 million for the financial year. |
| 3 | Members / shareholders / partners of the business must be natural persons. |
| 4 | A micro business must be registered in terms of Part II of the Sixth Schedule to qualify. The normal income tax, capital gains tax and dividends tax rules will apply. |
| 5 | If a person or entity qualifies as a micro business, an application to register with SARS must be made prior to the beginning of a year of assessment (1 March); or before a date during the year of assessment prescribed by the Commissioner; or within 2 months from the date of commencement of business activities if the micro business commenced trade during the year of assessment. |
How Turnover Tax works
Registration for turnover tax will be effective from the 1st day of the year of assessment (1 March). As it is a voluntary system, the enterprise can exit the system however, re-entering is not permitted. Once a business’ turnover exceeds R1 million, the micro-business is obliged to exit the system. Therefore, it is possible that during a year of an assessment, a portion of an entity’s turnover is subject to turnover tax and a portion to normal tax.
As with provisional tax, a first tax payment is due on the last business day of August and the second on the last business day of February. Final payment is due after the annual TT03-Turnover Tax Return is submitted and processed between 1 July and 31 January of the following year.
Pitfalls
Some of the pitfalls business should be aware of before registering for Turnover Tax include:
| 1 | Persons holding any shares or having any interest in the equity in any other companies, excluding shares in listed companies, collective investment schemes and in body corporates do not qualify to register for turnover tax. |
| 2 | Natural persons who are partners in numerous partnerships do not qualify to register for turnover tax. |
| 3 | Incorporated businesses with an aggregate income derived from investment income and professional services exceeding 20% of the total receipts do not qualify to register for turnover tax. |
| 4 | Natural persons with an aggregate income derived from professional services exceeding 20% of the total receipts do not qualify to register for turnover tax. |
| 5 | In the event the proceeds from the sale of capital assets which was mainly used for business purposes exceed R1.5 million over a 3-year period, the business / individual does not qualify to register for turnover tax. |
| 6 | Labour brokers do not qualify to register for turnover tax. |
| 7 | PBOs, recreation clubs, associations and small business funding entities do not qualify to register for turnover tax. |
| 8 | Businesses where any of its partners, members or shareholders are not natural persons do not qualify to register for turnover tax. |
| 9 | Businesses where the year of assessment does not end on the last day of February do not qualify to register for turnover tax. |
The full guide on small business tax as released by SARS can be accessed here.
Conclusion
The requirements to qualify for Turnover Tax are stringent and could potentially preclude a business from qualifying for this tax type. Furthermore one should be mindful of the fact that the full turnover of the business will be taxable under this tax type, unlike only profits under normal income tax rules and SBC tax rules. Keeping this in mind, with turnover tax the maximum tax liability in a year of assessment will be R 14 150 (R 1 000 000 – R 750 000 x 3% + R 6 650) since R 1 000 000 is the maximum turnover allowed under this tax regime. If the business turnover exceeds R1 million though, it must exit the system and will continue to incur tax at a rate of 28% on profits. Both regimes could potentially be applied in one year of assessment if the turnover exceeds the stipulated threshold.
For more information regarding Turnover Tax, please contact us here.
Liza Moorcroft SAIBA – BA (SA); SAIT – GTP (SA); SARS – TP
