Many small business owners and start-ups think they’re beneath SARS’ scrutiny. Tax is a strange, foreign world, and so it’s easier to just ignore the whole thing.
To ensure your small business’s success however, it’s important that you don’t end up on the wrong side of SARS.
- As your business grows, you need to obtain SARS tax clearance certificates. As you land bigger and better customers and start attracting top-notch employees, you will need proof that your business is tax compliant.
- It’s cheaper to do things right. It’s much easier (and far cheaper) to get the right foundations in place now, than to try and fix things down the line.
- Avoid penalties. You also don’t want to fall on the wrong side of SARS because you didn’t know what you should (and shouldn’t) be doing.
This basic guide outlines what you need to know about Provisional Tax, Employee Tax (PAYE) and Turnover Tax to boost your small business tax knowledge.
1. Turnover Tax
What it is: If your business has an annual turnover of less than R1 million, you qualify as a microbusiness. This threshold means that your business is eligible for turnover tax, a simplified small business tax system.
Who qualifies for turnover tax?
SARS requirements to register can be found on the website, or in our simple guide to registering your business, How to register a new business in South Africa. Simply put, qualifying turnover for this type of small business tax is calculated by using the total amount your business generates in sales through its activities for the year of assessment.
The R1 million cap to qualify for turnover tax excludes:
- All capital-related receipts, including proceeds from the sale of big business items
- Certain government grants, in terms of the Income Tax Act
Turnover tax versus VAT
Your business only needs to register for VAT if your taxable funds exceed R1 million in value within a 12-month period. 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 calculate the most tax efficient system to follow.
When does 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 thereafter 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.”
When is it payable?
Once registered for turnover tax, your business will need to submit two provisional returns. Small business tax regulation requires you to complete a TT02 twice a year:
- First return is due six months into your current financial year
- Second return is due at the end of your financial year
- There is a third top-up available for any shortfall six months after year-end (this is a TT03 form)
Why is it important?
Just because you’re currently a microbusiness doesn’t mean you’re going to stay in this bracket, particularly if you’re hustling and your turnover is growing.
Wrap your head around tax codes to set your small business up for success.
2. Provisional Tax
What it is: Provisional tax is not a separate tax from income tax. It is a method of paying what you owe in terms of income tax in advance, to ensure that the taxpayer does not remain with a large tax debt on assessment. Provisional tax allows the tax liability to be spread over the relevant year of assessment.
Who pays provisional tax?
Individuals and companies are subject to provisional tax.
Companies: All businesses have to be registered for provisional tax.
- You submit twice a year (six months into your new financial year and at your financial year end) and sometimes have a third top-up.
- This is to ensure you spread your tax payments out over the year instead of needing to pay one large payment at the end of the tax year.
- Payments are based on forecasts, which is why your financial plan is so important.
- You don’t want to overpay (or underpay) SARS. Read our financial planning guide, Supercharge your start-up with a strong financial plan, to assist you.
Individuals: If you’re employed or pay yourself a salary as a business owner, with no additional income streams, you do not need to register for provisional tax as you are already paying PAYE.
- If, however you are employed but have additional income streams, such as from a side business or property, then you need to be registered for provisional tax.
- If you are a business owner who receives dividends and investment income as a result of your business but that is not part of your salary, you also need to register as a provisional taxpayer.
- Provisional taxpayer status allows you to be able to pay your extra tax that you owe SARS outside of the ordinary PAYE tax deduction system.
- Finally, many start-up business owners often cannot afford to draw a formal salary when they launch a new business.
- This is because they’ve invested everything they have in the start-up to cover running costs.
- During this period, it’s possible to establish a loan account against which personal expenses paid by the company are allocated to the owner, or the owner draws down the loan made to the company.
It’s important that all personal expenses are kept separate from actual business expenses. Always remember to follow the SARS PAYE guidelines to make sure that any benefits gained by the taxpayer are taxed accordingly (such as tax-free loans).
It’s important to register as a provisional taxpayer until you can start paying yourself a formal salary and your taxes can be managed through the PAYE system.
3. Employee Tax (PAYE)
What it is: The law requires every employer to register for pay-as-you-earn tax (PAYE), a withholding tax on your employees’ income. The money is considered advance payment of income tax due by the employee. Upon assessment, any excess tax paid above what is owing will be refunded to the taxpayer.
When does PAYE apply?
As a business owner and employer, you should deduct UIF and PAYE tax from your staff’s salary every month. SARS will fine you if your monthly declaration of PAYE, UIF and SDL (EMP201) isn’t submitted on time.
UIF is the contribution you make to the Unemployment Insurance Fund for each staff member. SDL is your Skills Development Levy.
When is PAYE payable?
PAYE is due on the 7th day of the following month, and if that falls on a weekend it is due on the Friday preceding that weekend.
What you need to know about registering and paying for Unemployment Insurance Fund (UIF) and Skills Development Levy (SDL)
Small business tax regulation states that your business is required to register with SARS for PAYE and/or SDL and UIF. Registration for all these types of small business tax can be done at once through the SARS client information system.
Implementing a reliable payroll system gives you peace-of-mind knowing that your PAYE, UIF and SDL are automatically calculated.
4. Dividends Tax
What it is: Dividends tax is required by SARS if your small business has shareholders that earn dividends.
How it works
Dividends tax is required by SARS if your small business has shareholders that earn dividends. The tax is payable by the beneficial owner of the shares. The owner does nothing as the tax is deducted from the dividend payment and paid over by the withholding agent (in this case the company) to SARS.
When the shareholder/s submit their tax returns, the dividends tax paid during the year on their behalf by the agent/company will be taken into account to calculate their taxes (this is important if the share owner qualifies for a reduced tax or full exemption on their dividend receipt).
When is dividends tax payable?
Your business needs to pay the tax withheld to SARS within a month of the dividend being paid, using a DTR01/02 return form. SARS may charge interest if your dividends tax payment or submission is late.