As an entrepreneur, you need to be aware of the tax obligations of running your business. This includes everything from understanding what taxes apply to your business, to taking advantage of tax incentives and reducing the administrative requirements associated with tax compliance. In this blog post, we will provide an introduction to small business tax in South Africa. We will discuss the different types of businesses, as well as the various options entrepreneurs have when it comes to making tax compliance easier. We will also touch on the different tax rates that may apply in certain instances. Finally, we will provide some tips on how entrepreneurs can reduce their tax liability.
South Africa has a progressive tax system, which means that the more you earn, the higher your marginal tax rate will be. However, there are several ways in which entrepreneurs can reduce their overall tax liability. One of these is by taking advantage of small business tax incentives. The South African government offers a number of tax incentives to businesses that meet certain criteria. These include deductions for research and development expenditure, as well as reduced corporate income tax rates for companies that are registered as “small business corporations”.
It’s important to understand what type of small business tax you qualify for. All businesses need to maintain clear, accurate financial records throughout each year of assessment. To do this, they should be using the right small business accounting software. In order to qualify as a small business corporation (SBC) by SARS, you will need:
Your business turnover is less than R20 million per year
All shareholders in the business are natural persons
You only own the one business
Less than 20% of the business turnover comes from “investment” income
Less than 20% of your income comes from rendering a “personal” service
In order to qualify as a small business for tax purposes, you will need:
The turnover of the business is less than R1 million per year
The business is not a “personal service provider” or a “labour broker”
The business trades as either a sole proprietor, a partnership, a close corporation, a co-operative, or a company
All partners in a partnership are individuals throughout the year of assessment
The business is not a public benefit organisation, a recreational club, an association of persons, or a small business funding entity
The business owner, partners shareholders, members, and the business do not hold any shares or interests in a close corporation, company, or cooperative
Small business tax does not need to be paid by any business that earns below the tax threshold. As an SBC, you won’t have to pay income tax if you make a profit of less than R70 700 per year. If you qualify as a micro business for turnover tax, you will be exempt from paying tax if your turnover is less than R335 000 per year. Besides getting lower tax rates, small business tax benefits allow SBC’s to appreciate their assets at a faster rate than other businesses. This reduces your profit, in turn reducing your tax. SBC shareholders who pay the maximum small business tax rate on their income can access a tax benefit through a combination of salary and dividends.
Another way to reduce your tax liability as an entrepreneur is to choose the right business structure for your business. The most common business structures in South Africa are sole proprietorships, partnerships and companies. Each of these has different tax implications, so it is important to choose the one that best suits your needs. For example, a sole proprietor will be taxed at their personal marginal tax rate, while a company will be taxed at a flat corporate income tax rate of 28%.
If you are just starting out in business, or if your business is not yet generating an income, you may be eligible for the “start-up deduction”. This deduction allows entrepreneurs to deduct up to R500 000 of start-up expenditure from their taxable income in the first year of operation. This deduction is only available for businesses that have been in operation for less than 24 months.
There are a number of other deductions and allowances that entrepreneurs can take advantage of to reduce their tax liability. These include deductions for travel and entertaining expenses, as well as allowances for the purchase of equipment and machinery.
Finally, it is important to note that entrepreneurs who are registered as VAT vendors must charge VAT on all supplies of goods and services made by their businesses. The standard rate of VAT in South Africa is 15%. However, certain items are exempt from VAT or subject to a reduced rate of VAT. These include foodstuffs, medical supplies and books.
Entrepreneurs need to be aware of their tax obligations when starting a business in South Africa. There are a number of ways in which entrepreneurs can reduce their overall tax liability, including taking advantage of small business tax incentives and choosing the right business structure for their business. It is also important to note that entrepreneurs who are registered as VAT vendors must charge VAT on all supplies of goods and services made by their businesses.
This concludes our introduction to small business tax in South Africa. We hope that this blog post has provided you with some useful information and that you now have a better understanding of your tax obligations as an entrepreneur. If you have any questions, please do not hesitate to contact our office. Our team of experienced accountants will be happy to assist you.