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Johannesburg - Not all good things comes to those that wait, especially if you are an owner of a very small business (VSB) in South Africa.
Tax relief for VSBs contained in the Revenue Laws Amendment Bill has still not been promulgated, even though industry experts thought it would be finalised by last week.
In addition, the various definitions and exclusions included in the draft bill will only favour a select few.
The draft rules state that a business with a turnover of R1m or less will be able to select in which manner they will be taxed: either on its turnover or its operating profit.
The catch is that a VSB that chooses the turnover tax option is bound to that decision for at least three years before it can opt out - and will have to wait another three years after that to opt back in.
Research done by the South African Revenue Service (SARS) states that very small businesses pay up to R7000 per annum on tax compliance and the simplicity of the turnover tax can curb such cost.
However, before small business owners rush to SARS to change their status, they should be aware of various disqualifications. This includes:
- Persons should not be shareholders in other investments or companies.
- VSB investment income is limited to 10% of total income.
- Personal service providers (e.g. personnel companies) and professional services providers (e.g. legal firms) are excluded.
- Business owners must be natural persons.
- The VSB must not be registered for Value Added Tax (VAT).
- The VSB must not be Public Benefit Organisation (PBO) or recreational club.
- The VSB must have a February year-end.
Tax authorities have, however, been lenient when it comes to the R1m turnover requirement. Turnover may be more than R1m over a three year period, thus an once-off occurance of exceeding the R1m limit will not jeopardise the firm's tax status.
According to Johan Troskie, tax director at Deneys Reitz, it may not beneficial for very small businesses to opt for the turnover tax system when turnover ranges between R750 000 and R1m.
"The effective tax rate on turnover may be more than the tax rate on the normal tax calculation," he says.
For example - a small company has a turnover of R1m and the net profit margin is 13%. Assuming a tax rate of 28%, that company would pay tax of R36 400. On the turnover basis, the tax payable would be R38 000.
However, where the company is a small business corporation as defined in the Income Tax Act, the tax payable will only be R8 400 in this example.
"Furthermore, where the company has an assessed loss, it may well be cheaper to remain on the normal tax basis until the tax loss has been utilised in full," he adds.
- Fin24.com