What is Turnover Tax, and How Does It Affect Your Business?

Are you an owner of a small business and wondering if your business is eligible to pay turnover tax? Please don’t fret; we’ve put together this article for people like you. In this blog, we answer some of the most frequently asked questions regarding turnover tax. c As an accounting firm, we’ve noticed that small business owners’ mistake is neglecting tax compliance. They forget that every individual and business entity, regardless of size, is not beneath SARS’s scrutiny. So your goal as an entrepreneur should be to avoid ending up on the wrong size of SARS, which may result in paying penalties.

Every business entity is obligated to do the following:

Get a tax clearance certificate from SARS, which will enable you to do business with large corporations. Do your tax returns annually. Failure to submit tax returns may lead to penalties. SARS has a free basic guide that outlines all you need to know about Provisional Tax, Employee Tax (PAYE), and Turnover Tax to boost your small business tax knowledge. For more information on this, visit the SARS website. Alternatively, you can speak to one of our tax experts to help you.

What is Turnover Tax?

According to SARS, Turnover tax is a simplified system to make it easier for micro business to meet their tax obligations. The turnover tax system replaces Income Tax, VAT, Provisional Tax, Capital Gains Tax, and Dividends Tax for micro-businesses with an annual qualifying turnover of R 1 million or less. However, a micro-business registered for turnover tax can elect to remain in the VAT system.

You calculate turnover tax by applying a tax rate to the taxable turnover of a micro business. Year of assessment ending on any date between 1 March 2021 and 28 February 2022: Who should pay turnover tax?

Microbusinesses with an annual turnover of R 1 million or less. The following taxpayers may qualify: Individuals (sole proprietors) Partnerships Close corporations Companies Co-operatives Turnover tax versus VAT Your business only needs to register for VAT if your taxable funds exceed R1 million in value within 12 months. As a microbusiness, your turnover would generally amount to less than R1 million, so you’re not required to register for VAT.

However, many businesses have sizeable VAT input claims, and it may be more beneficial to follow the VAT system rather than the turnover system. There are many outsourced accountancy firms designed to assist small businesses in calculating the most tax-efficient system to follow. When does the turnover tax apply?

“If your business has a turnover of less than R1 million per annum, you should register for turnover tax with SARS,” Madelein van der Watt, Development Manager at Sage Pastel Payroll & HR, explains. “In this case, the first R335 000 of your annual turnover will be tax-exempt, and after that, you can expect to pay 3% of your annual turnover in tax, instead of having to administer multiple tax obligations like VAT, income tax, provisional tax, or capital gains tax.” Still not sure if you should pay turnover tax or VAT? Reach out to one of our tax experts by emailing info@mgt-accounting.co.za