Starting your own Small Business? Know your Taxes!

Small Business Registrations

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There are many daunting tasks for entrepreneurs when starting or managing a Small Business, but none seems more daunting than navigating one’s way through the world of TAX.

As Benjamin Franklin was so rightly quoted saying,

“In this world, nothing can be said to be certain, except death and taxes”

Tax is something that everyone has to pay and is levied on income and profit received by a taxpayer.

Taxes are the government’s main source of income and to that end, individuals and companies that do not comply with tax regulations are severely dealt with.

Entrepreneurs who want to start a business need to be aware of the tax obligations of running a business whether it is in the form of a legal entity or in a personal capacity.

Tax

Business entities and Tax

Once you have decided to start a business, you must also decide what type of business entity to use.

There are legal, tax, and other considerations that can influence this decision.

There are several different types of business entities in South Africa. Each of these has different tax responsibilities.

It is also important to note the various options with regards to reducing some of the administrative requirements to make tax compliance easier as well as the different tax incentives and rates that may apply in certain instances.

Once you have decided on the type of business entity that is to be established and it is a legal entity, you must FIRST register with the

Companies and Intellectual Property Commission (CIPC).

The following legal entities are required to register at CIPC and as a taxpayer for corporate income tax purposes:
  • Listed public companies
  • Unlisted public companies
  • Private Limited companies
  • Close corporations (Note that from 1 May 2011, no new close corporations will be registered)
  • Co‐operatives
  • Non-profit companies
  • State-owned companies
  • Collective investment schemes
In the case of starting a business that is not a legal entity, it can be done in the form of the following:
  • A sole proprietorship (taxed on profits in an individual capacity)
  • A Partnership (note that each partner is taxed on their share of taxable profits in an individual capacity, as a partnership is not registered separately for income tax purposes)

If your Small Business is registered as a

  1. close corporation,

  2. co-operative, or

  3. a private company, you may qualify for certain tax incentives and preferential rates in terms of the small business corporation (SBC) incentive.

Alternatively, if your Small Business is a natural person or a company and you meet specific requirements, you may qualify for the turnover tax system.

Once a taxpayer is registered with CIPC, SARS will automatically generate an Income Tax reference number.

Taxpayers must then register on eFiling to transact electronically.

Small Business Taxation

Turnover tax is a simplified tax system for Micro Small Businesses with a qualifying turnover of less than R1 million per annum.

It is a tax based on the taxable turnover of a business and is available to

  1. Sole Proprietors (individuals),
  2. Partnerships,
  3. Close Corporations,
  4. Companies, and
  5. Co-operatives

Turnover tax takes the place of the following Tax Type Profiles:

  • VAT (in the instance that you have not decided to elect back into the VAT system),
  • Provisional Tax,
  • Income Tax,
  • Capital Gains Tax,
  • Secondary Tax on Companies (STC), and
  • Dividends Tax

So qualifying businesses pay a single tax [max 3%] instead of various other taxes

It’s elective – so you choose whether to participate. For Tax Tables visit here.

As a Small, Micro, or Medium Enterprise (SMME), at some point or another, you will be required to provide/confirm/share your Tax Clearance information with another entity. This could be to apply for a tender, new contract, good standing, or in respect of Foreign Investments.

To obtain your Tax Clearance Certificate from eFiling, you can request the help of an expert professional such as a Tax Practitioner or you can view the steps here on how to do it yourself.

Corporate Income Tax [ITR]

What is Corporate Income Tax?

Corporate Income Tax (CIT), also known as a business tax, is a tax imposed on businesses incorporated under the laws of the Republic of South Africa and which derive income from within the Republic or through a branch or permanent establishment within the Republic.

Who is it for?

CIT is applicable (but not limited) to the following businesses which are liable under the Income Tax Act, 1962 for the payment of tax on all income received by or accrued to them within a financial year:

  • Listed public companies
  • Unlisted public companies
  • Private Companies
  • Close Corporations
  • Co-operatives
  • Collective Investment Schemes
  • Small Business Corporations (s12E)
  • Body Corporates
  • Share Block Companies
  • Dormant Companies
  • Public Benefit Companies.

Every registered taxpayer is required to submit an Income Tax return declaring the income received over a twelve-month period at the end of the financial year, in the prescribed form.

Tax on Assessment

Payment of tax upon an assessment notice issued by SARS must be done within the period specified in such notice.

Corporate Income Tax is payable at a rate of 28%

Provisional tax [IRP]

As soon as you commence with business, you will become a Provisional Taxpayer and will be required to register with your local SARS office as a provisional taxpayer within 30 days after the date upon which you become a provisional taxpayer.

Companies are automatically regarded, and often automatically registered as provisional taxpayers.

In addition to annual returns, every business is required to submit provisional tax returns.

The payment of provisional tax is intended to assist taxpayers in meeting their normal tax liabilities.

This occurs by the payment of two installments in respect of

estimated taxable income that will be received or accrued during the relevant tax year and an optional third payment after the end of the tax year

thus obviating, as far as possible, the need to make provision for a single substantial normal tax payment on assessment after the end of the tax year.

  • The first provisional tax payment must be made within six months after the commencement of the tax year.
  • The second payment not later than the last day of the tax year.
  • The optional third payment is voluntary and may be made within six months after the end of the tax year if your accounts close on a date other than the last day of February.

For a tax year ending on the last day of February, the optional third payment must be made within seven months after the end of the tax year.

Value Added Tax [VAT]

a) Compulsory registration

Any person who owns or manages a Small Business and whose total value of taxable supplies (taxable turnover) exceeds, or is likely to exceed, the compulsory VAT registration threshold must register for VAT. The threshold is currently R1 million in any consecutive 12-month period.

b) Voluntary registration

A person can register as a vendor if that person runs a Small Business in which the total value of taxable supplies (taxable turnover) exceeds R50 000 (but does not exceed R1 million) in the preceding 12-month period.

A small business that is registered as a micro-business under the Sixth Schedule of the Income Tax Act may also register for VAT and may elect to submit returns and payments every four months, ending on the last day of June, October, and February

Top Tip: VAT liability date backdating requests submitted at the SARS branch will only be considered for new and existing registration if the vendor can provide sufficient supporting documents proving the backdated liability. For VAT liability date backdating requests specifically, you will be expected to provide invoices, signed contracts, or financial statements to motivate the backdating.

Employee’s Tax [Pay-As-You-Earn (PAYE)]

Registering as an Employer

According to law, an employer must register with the South African Revenue Service (SARS) within 21 business days after becoming an employer, unless none of the employees are liable for paying normal tax.

Registration for SDL and UIF

An employer, who needs to register with SARS, for PAYE and/or SDL, also needs to register to pay UIF contributions.
Registering for SDL purposes
Where an employer is liable to pay SDL, the employer must register with SARS and show the jurisdiction of the Skills Education and Training Authority in South Africa (SETA) within which they must be classified.
Although some employers are exempt from paying SDL, all employers must be registered.
Registering for UIF Contribution purposes
Where an employer is liable to pay UIF contribution, the employer must register with either SARS or the UIF office (whichever is applicable) for the payment of the contributions.

If you need further advice on how to start your Small Business and to ensure you register for all the required TAX profiles, do reach out to me for assistance, advice, and ways I can help you manage your Small Business.

You are also extremely welcome to join my FREE Facebook Group, EXCELSIOR, for a community of Entrepreneurs and Small Business Owners to help, support, and empower each other!

Also do not miss out to subscribe to receive our newsletters for regular valuable business insights.

Hope to see you soon!

Shalom!

Yvette

 

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