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SARS Issues Micro-Business Tax Guide

July 2011 - Tax & Private Client. Legal Developments by Hassans.

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The South African Revenue Service (SARS) has issued a tax guide containing information about the operation of the simplified tax system for micro-businesses.

The system, for businesses with a yearly turnover up to ZAR1m (USD148,000), provides for a single turnover tax as a substitute for income tax, under which companies do not pay capital gains tax (CGT) in most circumstances, and are exempt from secondary tax on companies (STC).

SARS emphasized that, as the system is optional, it is important that entrepreneurs should review their businesses when deciding on whether to switch, or not, to the system. Factors such as the profit margin of each business, its expected tax contributions and ? most importantly ? its tax compliance costs should be taken into account in making the decision.

It was also said that, unlike the income tax system that makes use of comprehensive inclusion rules and a reduction process that requires proof of expenditure to be maintained, turnover tax will be calculated by simply applying a tax rate to a taxable turnover. For the 2011/12 tax year, no tax is payable on turnover up to ZAR150,000, while a progressive scale increases the tax rate to a maximum of ZAR15,500 plus 6% for all turnover above ZAR750,000 (increased from a tax-free threshold of ZAR100,000 and a maximum rate of ZAR20,500 plus 7% in the 2010/2011 tax year).

Turnover tax will be levied annually on a year of assessment that runs from the beginning of March of the one year to the end of February of the following year. It will include two six-monthly interim (provisional) payments. An existing micro-business that opts for turnover tax must apply to do so before the beginning of a year of assessment and remain in the system for at least three years. A new micro-business can register for turnover tax within two months from commencing business activities.

Micro-businesses that choose turnover tax will be specifically exempt from CGT. However, the taxable turnover must include 50% of the amounts received from the disposal of immovable property mainly used for business purposes, other than trading stock; and any other asset used mainly for business purposes, other than any financial asset.

Businesses that choose turnover tax will also be exempt from STC (to be replaced by a dividend withholding tax) to the extent that their dividend distributions do not exceed ZAR200,000 a year. Any excess will be subject to STC.

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