Turnover Tax is a simplified tax system for small businesses with a turnover of up to R1 million per annum. It is a tax based on the turnover of a business and is available to sole proprietors (individuals), partnerships, close corporations, companies, and co-operatives.
Turnover Tax is a substitute for VAT, Provisional Tax, Income Tax, Capital Gains Tax and Secondary Tax on Companies. So qualifying businesses pay a single tax instead of five other taxes. It’s elective – so you choose whether to participate!
- How does Turnover Tax work?
Turnover Tax is calculated by simply applying a sliding tax rate to the “taxable turnover” of a business. The “taxable turnover” consists of the turnover of the business for the year of assessment with a few specific inclusions and exclusions.
- R0 – R100 000:0%
- R100 001 – R300 000:1% of each R1 above R100 000
- R300 001 – R500 000:R2 000 + 3% of the amount above R300 000
- R500 001 – R750 000:R8 000 + 5% of the amount above R500 000
- R750 001 and above:R20 500 + 7% of the amount above R750 000
- Will you pay less tax with the Turnover Tax system?
Whether or not you will pay less tax with the Turnover Tax system depends on the unique factors of the business including the profitability of the business and whether or not it is in a tax loss position in the standard income tax system. But remember that the Turnover Tax system is primarily designed to reduce your administrative burden – so you need to factor in all the costs associated with meeting your current or future tax obligations.
Like how many hours you spend completing and submitting VAT and income tax returns, and calculating the relatively involved income tax that is payable for provisional tax and final assessment purposes
Use the following quick analysis to see whether switching to the Turnover Tax will benefit you or not.
- Step 1: In one column take your estimated turnover for the financial year for which you want to register for the Turnover Tax.
- Step 2: Calculate the tax you will pay for the year.
- Step 3: Add your estimated cost of completing one simple Turnover Tax return and making two six-monthly interim payments for each year of assessment (if liable).
- Step 4: Now in another column write down the income tax, CGT, STC, your business paid for the last financial year (or estimate for the coming financial year).
- Step 5: Add all the costs associated with the completion and submission of your two or three provisional income tax returns, the final income tax return, STC returns, VAT Returns, and other tax obligations.
- Step 6: Now simply compare the costs in column A and B.
A small business that chooses to join the Turnover Tax system must remain in the system for at least three years unless it is specifically disqualified (for example if the turnover exceeds R1 million during this period).
Equally, a small business that exits the Turnover Tax system will not be allowed to re-register for a period of three years. This is to stop businesses from chopping and changing between the tax systems because of the administrative burden of registration and de-registration for the various taxes each time and the potential to abuse the systems to pay less tax.