The turnover tax regime: peering through the murk

The turnover tax regime, designed mainly for “survivalist or micro businesses”, has been criticised for the fact that these start-ups are paying tax, even though they are making losses.

Commentators say if they remained in the normal tax regime they would have paid no tax and they would be able to carry the losses forward to offset against future profits or income.

The turnover tax regime is available for micro businesses with a qualifying turnover of R1 million or less. The system provides for a single tax in the place of normal (income and corporate) tax, capital gains tax (CGT) and dividends tax.

Tax rates for qualifying micro businesses range between 1% of the amount above R150,000 up to R300,000 and R15,500 plus 6% of the amount above R750,000.

Liandor Financial Accountants Director Rodney Smith says they have seen instances where unincorporated persons (the owner carries all the risks and liabilities) are paying turnover tax for a few years before it is forced to close because of losses.

“Under the turnover tax regime the accumulated losses are lost forever. In the normal tax regime the unincorporated individual would have closed the business with personal accumulated tax losses to be utilised going forward,” he says.

In some instances the turnover may be relatively high, but the cash available to the owner is low. This could be due to a variety of reasons such as high rentals, high overheads, or high labour costs.

Smith gives an example where turnover is R1 million, but cash available to the owner amounts to R240,000. Normal personal income tax (before medical and pension deductions) would be R34,591, whereas turnover tax would be R30,500.

“If there are any pension or medical deductions it is likely that the normal tax regime would result in less tax payable, and thus creating a better cash flow for the owner,” Smith concludes.

He emphasises that nobody starting a new business, who has other taxable income such as rental or pension income, should be in the turnover tax regime.

“In the conventional tax regime any losses incurred from the new business could be offset against such income. Many persons have opted in not understanding the implications.”

The turnover tax regime forms part of government’s efforts to encourage entrepreneurship and to create an “enabling environment” for small businesses to survive and grow.

It became effective in 2009. Latest figures indicate that South Africa has less than 10,000 active micro businesses.

Nico Theron from Tax Consulting, a firm offering tax services to small accounting and auditing firms, recently commented that the rules governing the regime remains rather complicated, which increase compliance cost.

Communication and education from the South African Revenue Service (SARS) also remain insufficient.

“The very comprehensive updated guide on the regime issued by SARS earlier this year is welcomed. However, I am of the view that more needs to be done to educate taxpayers actively, rather than taking what appears to be a mainly passive approach through the issue of guides and website questionnaires.”

The Davis committee’s recommendation, to remove the “restrictive requirement” that the business remain locked-in for three years once it has opted for the turnover tax, was accepted.

Mr Theron says this addressed, to some extent, a major draw-back of the regime that saw registered micro businesses paying more tax than they would have, had they not opted for the turnover tax regime.

Before 1 January 2016, a business that registered as a micro business had no choice but to stay in the regime for three years.

“If you opted into the micro business regime and made losses, you would still be liable to tax on your turnover provided turnover exceeds R335,000 and you would have been stuck in that tax paying position for three years,” he says.

Theron, who is also a member of the South African Institute of Tax Practitioners (SAIT), says with the lock-in period now removed, these cases may be avoided, although not completely.

The optimal solution would have been to allow taxpayers to opt in and out of the system, however, such approach will open the door for evasion and would likely complicate the legislation even further.

Royden Whitfield, director at Whitfield Fintax, an independent firm specialising in accounting, taxation and estate planning, says they currently have over a thousand clients, yet only one is registered for turnover tax.

He believes government should rather increase the benefits of the Small Business Corporation (SBC) tax benefits and expanding the qualifying criteria.

“I think the SBC tax regime have been far more successful and beneficial to the SA economy than turnover tax,” says Mr Whitfield.

Companies with a turnover of less than R20m qualify for the small business corporation tax relief regime, which provides for progressive tax rates of 0%, 7%, 21% and 28%.

National Treasury last year withdrew a proposal that these reduced tax rates be scrapped in favour of a flat corporate tax rate of 28%, and that SBCs would receive an annual R15,000 rebate for compliance cost.

Additional source: Bates Wells Braithwaite

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