2. Micro businesses: Turnover tax

3. Advantages of the turnover tax According to SARS ‘the all-in-one tax that is simple and saves you time and money’ (?) ‘Small businesses have the potential to grow the economy, generate jobs and reduce poverty. With this initiative in mind and in line with Government’s commitment to reducing the administrative burden on small businesses and cultivating an environment for entrepreneurship, SARS has designed a new single tax system as a tool for small businesses to help streamline their tax obligations.’

4. Disadvantages of the turnover tax VAT deregistration Assessed losses A person might be subject to the turnover tax as well as normal tax. The disposal of certain capital assets might disqualify a person from being registered for the turnover tax.

5. Taxable turnoverRate of tax Not exceeding R100 000 0% of taxable turnover Exceeding R100 000, but not R300 0001% of taxable turnover exceeding R100 000 Exceeding R300 000, but not R500 000R2 000 + 3% of taxable turnover exceeding R300 000 Exceeding R500 000, but not R750 000R8 000 + 5% of taxable turnover exceeding R500 000 Exceeding R750 000, but not R1mR20 500 + 7% of taxable turnover exceeding R750 000 Micro business tax rates

6. Taxable turnover (R)Taxation (R) Tax % of turnover 100,000 Nil0% 200,000 1,0000.5% 300,000 2,0000.7% 400,000 5,0001.3% 500,000 8,0001.6% 600,000 13,0002.2% 700,000 18,0002.6% 750,000 20,5002.7% 800,000 24,0003.0% 900,000 31,0003.4% 1,000,000 38,0003.8%

7. Qualifying turnover may not exceed R1m (excludes amounts of a capital nature) Who could qualify as a micro business? Natural person (including a partnership), or a company (including a close corporation). “qualifying turnover” means the total receipts from carrying on business activities, excluding any amount of a capital nature and certain amounts that would have been excluded from normal tax.

8. In the case of a company (or CC) the shareholders (or members) must all be natural persons. The natural person or shareholders (in the case of a company or CC) may not at any time during the year of assessment hold any share or an interest in the equity of other company (there are exceptions). Who could qualify as a micro business?

9. The person may not be rendering a professional service during the year of assessment. “professional service” means a service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftsmanship, education, engineering, entertainment, health, information technology, journalism, law, management, performing arts, real estate, research, secretarial services, The person may not be a personal service provider or a labour broker without an exemption certificate.

10. Who could qualify as a micro business? Not more than 10% of the person’s total receipts may be from investment income. Investment income is defined as dividends, royalties, rental derived in respect of immovable property, annuities or income of a similar nature, any interest, any proceeds derived from investment or trading in financial instruments, marketable securities or fixed property. Total amount received from disposal of immovable property and business capital assets may not exceed R1,5m during a three year period. The three year period comprises of the current year of assessment and the immediately preceding two years of assessment, or such shorter period during which that person was a registered micro business.

11. Who could qualify as a micro business? In the case of a company, its financial year must end on the end of February. If the person is a partnership: All partners must be natural persons Partners may not be partners in more than one partnership Qualifying turnover of the partnership may not exceed R1m

12. What is qualifying turnover? The taxable turnover of a registered micro business in relation to any year of assessment consists of all amounts not of a capital nature received by that registered micro business during that year of assessment from carrying on business activities in the Republic. Including: 50% of receipts of a capital nature from the disposal of immovable property to the extent that it was used for business purposes and other assets mainly used for business purposes Allowances granted in a previous year that should be added to income in a subsequent year to the extent that it exceeds the balance of assessed loss that is prevented from being carried forward in terms of s 20 in the case of a company, investment income as defined in section 12E (other than dividends);

13. What is qualifying turnover? Excluding: In the case of a natural person, investment income (as defined in s12E) Amounts exempt from normal tax: certain government grants; certain export incentive rebates; state subsidies for the promotion of film production Amounts received by the micro business that accrued to it before registration as micro business if the amount was subject to income tax

14. STC – first R200 000 dividend declared exempt VAT (may not be registered) Turnover tax Payroll taxes (PAYE, UIF, SDL) Normal tax (including capital gains tax) – Natural person Dividends tax – first R200 000 dividend declared exempt (s 64f(h)) Donations tax Normal tax (including capital gains tax) – Company Interaction with other taxes

15. Section 10(1)(zJ) exempt micro business income received or accrued from normal tax Natural person - Investment income NOT exempt (section 12E definition) Natural person -Remuneration NOT exempt (Fourth Schedule definition) Par 57A of the 8 th Schedule disregard capital gain or loss -from the disposal of immovable property to the extent that it was used for business purposes and -other assets mainly used for business purposes Where a person is registered as a micro business, it may not register as a VAT vendor (s 23(8)) Interaction with other taxes

16. Mr X (50 years) has registered micro business as from 1 March 2009. Info for 2010 year of assessment as follows: R Payments from outstanding trade debtors as on 28 February 2009 20 000 Business non capital receipts 745 000 Capital receipt (house – 10% as offices) 2 300 000 Doubtful debt allowance for 2009 7 500 Dividend income 5 000 Interest income 35 000 Example 1 – natural person

17. Turnover taxNormal tax Business non capital receipts R745 000Exempt s 10(1)(zJ) Capital receipt house (10% offices) R115 000 (R2,3m x 10% x 50%) 90% of capital gain/loss (10% disregarded – par 57A) Add back: doubtful debt allowance 2009 R7 500 Par 6(c) inclusion Exempt s 10(1)(zJ) Dividend incomePar 7(a) exclusionExempt s 10(1)(k) Interest incomePar 7(a) exclusionR14 000 (35 000 less R21 000) Payment of old debtorsPar 7(c) exclusionExempt s 10(1)(zJ) Example 1 – Natural person (cont)

18. Taxable income as % of turnover Turnover 10%20%30%40%50%60%70%80%90%100% 100,000TT - - - - - - - - - - SBC - - - - - 580 1,580 2,580 3,580 4,580 200,000TT 1,000 SBC - - 580 2,580 4,580 6,580 8,580 10,580 12,580 14,580 300,000TT 2,000 SBC - 580 3,580 6,580 9,580 12,580 15,580 18,580 21,580 24,580 400,000TT 5,000 SBC - 2,580 6,580 10,580 14,580 18,580 22,580 30,180 41,380 52,580 500,000TT 8,000 SBC - 4,580 9,580 14,580 19,580 24,580 38,580 52,580 66,580 80,580 600,000TT 13,000 SBC 580 6,580 12,580 18,580 24,580 41,380 58,180 74,980 91,780 108,580 700,000TT 18,000 SBC 1,580 8,580 15,580 22,580 38,580 58,180 77,780 97,380 116,980 136,580 800,000TT 24,000 SBC 2,580 10,580 18,580 30,180 52,580 74,980 97,380 119,780 142,180 164,580 900,000TT 31,000 SBC 3,580 12,580 21,580 41,380 66,580 91,780 116,980 142,180 167,380 192,580 1,000,000TT 38,000 SBC 4,580 14,580 24,580 52,580 80,580 108,580 136,580 164,580 192,580 220,580 Small businesses Tax rates: Turnover tax vs Small business corporation`

19. Natural personCompany Taxable turnoverR900,000 ProfitR300,000 Salary or dividend-Paragraph (c)? Normal tax? STC (10/110)-10/110 - R9 090 Dividends tax (10%)-10% - R10 000 OR Salary vs dividends Turnover tax

20. Voluntary deregister after period of three years. Compulsory deregister when exceed R1m threshold or is disqualified from being a micro business. Payment of turnover tax 01/03 31/08 28/02 Turnover tax on 50% of estimated taxable turnover May generally not be less than previous year Turnover tax on estimated taxable turnover 20% penalty if estimate less than 80% of actual 6 months Administration of turnover tax system Turnover tax

21. VAT compulsory registration threshold Threshold for compulsory VAT registration increased to R1m from 01-03-2009. If a person ceases to be a VAT vendor a deemed supply takes place in terms of s 8(2) of the VAT Act: All goods (excl goods iro which an input tax was denied) All rights capable of assignment AND Are deemed to be supplied immediately before person cease to be a vendor Consideration for deemed supply is lesser of: Cost Open market value s 8(2) OR VAT deregistration

22. If a vendor has not fully paid the supplier of the goods or services but originally claimed an input tax, output tax on the unpaid balances will also become payable if he ceases to be a vendor (s 22(3)(b) and 22(3) proviso (ii)(dd)). VAT deregistration

23. VAT on deemed supply is payable in six equal monthly instalments (or period that CIR allows) If a person ceased to be a vendor because of the sole reason that: The person registered as a micro business The person’s taxable supplies are less than R1m s 8(2D) The value of the deemed supply must be reduced by R100 000 s 10(5A) VAT on deemed supply is payable in six equal monthly instalments (or period that CIR allows) s 8(2C) The person ceases to be a vendor before 30-06-2009 AND VAT deregistration

24. A client has registered as a vendor during 2001 when his taxable supplies exceeded the R300 000 threshold. At present his taxable supplies is about R800 000 per annum. The client carries on a manufacturing enterprise. He considers to register as a micro business and has to deregister for VAT. His balance sheet shows the following assets (at cost): Land and buildingsR500 000 Machinery R800 000 Trading stockR250 000 DebtorsR150 000 CreditorsR120 000 What are the VAT consequences if the client deregisters as a vendor? EXAMPLE VAT deregistration

25. Balance sheetCost (incl. VAT) Market value (incl. VAT) Lesser of cost / market value Land and buildings R500 000R570 000R800 000R570 000 MachineryR800 000R912 000R600 000 Trading stockR250 000R285 000R350 000R285 000 DebtorsR150 000 R130 000 CreditorsR120 000 TOTALR1 705 000 The cost and open market value of the clients assets are as follows: EXAMPLE VAT deregistration

26. The VAT consequences from the deregistration as a VAT vendor is as follows: Lesser of cost / open market value of assetsR1 705 000 Output VAT liability (R1 475 000 x 14/114)R181 140 The supply of debtors is however an exempt supply (s 2(1)(c) and s 12(a))(R130 000) Section 10(5A) reduction(R100 000) EXAMPLE VAT deregistration Standard rated suppliesR1 475 000