The commencement of a business in South Africa as an entrepreneur may be a daunting task more especially navigating through the various tax obligations flowing through the ownership of a business.

In certain circumstances, there may be tax relief measures and incentives that aid in the easing of complexities of managing your tax affairs as a business owner/entrepreneur.

It is important to note that small medium and micro enterprises (“SMME”) are not excluded from the SA tax cycle, therefore in certain instances, the same process applies to large businesses shall be applicable to an SMME. Businesses are generally required to pay provisional tax, submit two provisional tax returns, and one annual tax return as detailed below.

For ease of reference we highlight the below terms that small businesses will need to be cognisant of:

Year of Assessment:A year of assessment for natural persons, deceased estates, insolvent estates, and trusts covers 12 months which commences on the first day of March of a specific year and ends on the last day of February of the following year. Natural persons and trusts may be allowed to draw up their financial statements in respect of their businesses to dates other than the last day of February”.

Provisional Tax:Provisional tax is not a separate tax but refers to payments made or to be made by a provisional taxpayer to the Commissioner in a manner provided for by the Act. A “provisional taxpayer” is defined in paragraph 1 of the Fourth Schedule as any person (other than a company) who derives income that is remuneration from an employer that is not registered for PAYE, or that does not constitute remuneration or an allowance or advance under section 8(1) and any company as well as any person notified by the Commissioner that such person is a provisional taxpayer.

Provisional tax payments are based on a taxpayer’s estimated taxable income for a year of assessment. The final normal tax liability for that year will be determined upon assessment.

Provisional tax is split into two payments, the first of which is made within six months from the beginning of the year of assessment and the second payment on or before the last day of the year of assessment. These payments alleviate the burden of one large amount being payable on assessment as it spreads the income tax burden over the year of assessment. An optional third payment (known as a “top-up payment”) may be made after the end of the year of assessment to prevent the accrual of interest on underpayment of provisional tax when the assessment for that year is raised

 

Below we summarise types of organisations and tax implications

Sole Proprietor
TAXES APPLICABLE DETAILS

Income Tax 

Every person who at any time becomes liable for tax or who becomes liable to submit a tax return must apply to SARS to register as a taxpayer. Should you be registered with SARS in your personal capacity then your business as a sole proprietor shall also be registered.

Provisional tax will be applicable where a person earns in excess of R83 100 and has business operations apart from his/her normal employment.

Value Added Tax

Compulsory registration: A person becomes liable to register for VAT purposes in SA if they carry on an enterprise and makes taxable supplies of goods or services in excess of the VAT registration threshold. The current threshold for VAT registration is R1 million during a 12 month period.

Voluntary registration: a taxpayer/business may also register voluntarily if the income earned in the past 12-month period exceeded R50 000.

Employees Tax

If you employ people in your business or you pay yourself a salary you may be required to register for employee’s tax. Employees tax is payable every month within 7 days following the month-end in which the salary was paid or became payable.

Employees Tax

Every employer is required by SARS to register for Employees tax, this shall entail the declaration of PAYE, UIF and SDL. The related registration may be performed on efiling.

PAYE
The purpose of PAYE is to ensure that an employee’s income tax liability calculated on remuneration is settled simultaneously when the employee receives remuneration.

It should be noted that PAYE aims to achieve the payment of the employees' tax liability over the course year rather than one single lump sum at the end of the year of assessment.  

Partnership
Taxes Applicable Details

General

Taxes applicable under a sole proprietorship will be applicable to a partnership, bearing in mind the income and expenses related to the business must be taken into account on each partner's individual basis.

 

 

Independent contractor
TAXES APPLICABLE

DETAILS

PAYE

An amount paid for services rendered by a person, as a result of his/her trade carried on independently of the party by whom the amount is paid should be excluded from remuneration for PAYE purposes. 

There is an instance where SARS may require your employer to deduct PAYE at 25%. Should the latter be a requirement the income earned should be coded to 3616 on your IRP5. It should be noted that your business-related expense shall be deductible.

Furthermore, similar to a sole proprietor it is a requirement by law to register for provisional tax. The completion and submission of tax returns as an Independent contract may be cumbersome, therefore it is recommended that you partner with a Tax Professional.

VAT

For VAT purposes, an independent contractor who carries on the enterprise is liable to register as a VAT vendor if the registration threshold of R1 million is exceeded
Labour Broker
Taxes applicable Details

PAYE

Remuneration paid to persons who render services to or on behalf of a labour broker is subject to the deduction of PAYE by the labour broker. For VAT purposes, the payments made to a labour broker who is carrying on enterprise are subject to tax at the standard rate (15%) and the full amount received is treated as consideration despite the PAYE being deducted on that full amount.
Personal Service Provider
Taxes applicable Details

PAYE

Payments made to a personal service provider are subject to the deduction of PAYE. For VAT purposes, any payment made to a personal service provider who is carrying on an enterprise will be subject to VAT at the standard rate. This rule applies even if such payments have been subject to the deduction of PAYE.

Private Company
TAXES APPLICABLE DETAILS

Income Tax

The holder of shares in a company and the company itself are separate taxable entities. In addition, ownership of the company (ownership of the shares), and management of the day-to-day activities of the company are usually separate.

Companies pay tax on their taxable income at a rate of 28%.[1] In cases, where your company qualifies as a “small business corporation your company shall be taxed at a lower rate. For further details on small business corporations please see below heading “Small business Corporations”.

 

Provisional Tax

A “company” as defined in section 1(1) is a provisional taxpayer, unless it is specifically excluded from the definition of “provisional taxpayer” in paragraph 1 of the Fourth Schedule

Small Business Corporation(SBC’s)
Taxes applicable Details

General

The first concession is that the entity will be taxed at a progressive rate. Please refer to the small business corporation tax rates below, for progressive tax rates applicable to SBC’s.

The second concession is the immediate write-off of all plant or machinery brought into use for the first time by the entity for purpose of its trade (other than mining or farming) and used by the entity directly in a process of manufacture or similar process in the year of assessment

 

Micro Business
TAXES APPLICABLE DETAILS

General

Microbusiness means a natural person or a company whose turnover excluding capital receipts, amounts received or accrued from small funding institutions and government grants does not exceed R1 million for a period of 12 months subject to a number of terms and conditions.

If you operate your business for a period of less than 12 months the revenue referred to above will need to be apportioned.

The business will generally not qualify as a micro business if 20% of the turnover relates to investment income, income from professional services

Turnover Tax

Microbusinesses have a simplified tax system (turnover tax) and serve as an alternative to income tax, provisional tax and CGT. Turnover tax is a tax system that aims to make it easier for small corporations to meet their tax obligations.

For small businesses which qualify for Turnover tax, it should be noted that the system is replacement of Income Tax, VAT, Provisional Tax, Capital Gains Tax and Dividends Tax. A small business that is registered for a turnover tax can, however, choose to remain in the VAT system. Turnover tax is calculated by applying a tax rate to the turnover of a business

Click to download a free template you can use to calculate the turnover and turnover tax for your business.

VAT

A micro business may, however, be registered for VAT whilst registered under the tax regime for micro-businesses. Please refer to point 3 for rates applicable and payment options.
Special Economic Zone Business
Taxes applicable Details

GENERAL

The Special Economic zones (SEZ) tax incentive was introduced to promote investment, growth, and job creation in the South African manufacturing sector as well as development in designated regions. In the event that a taxpayer’s business or enterprise is located in a customs-controlled area within a designated SEZ, the taxpayer may claim certain VAT and customs relief, provided that such taxpayer is registered with SARS for VAT and customs purposes.

In addition, if the taxpayer is a qualifying company as defined under section 12R(1), the following income tax incentives are available if the necessary requirements are met:

  • A reduced corporate income tax rate of 15% instead of the current rate of 28% for companies.
  • An accelerated depreciation allowance of 10% under section 12S on the cost of any new and unused building or improvement owned by the qualifying company.
  • Furthermore, an employer who operates through a fixed place of business located within a designated SEZ may claim the employment tax incentive allowed for under the ETI Act for employee rendering services to the employer mainly within that SEZ. Note that there are other requirements under the ETI Act that should be met in order for an employer to claim the incentive[1]  
Urban Development Zone Businesses
Taxes applicable Details

GENERAL 

Taxpayers investing in one of the demarcated urban development areas may claim special depreciation allowances for the construction or refurbishment of commercial and residential buildings located in these areas which are used solely for trade purposes. The allowance also relates to low-cost residential buildings that are within an urban development zone.

Please refer to https://www.sars.gov.za/AllDocs/OpsDocs/Guides/LAPD-IT-G12%20-%20Guide%20to%20the%20Urban%20Development%20Zone%20Allowance.pdf  for further details regards allowances that may be claimed.

These areas are located within the boundaries of the municipalities of Buffalo City, City of Cape Town, Ekurhuleni, Emalahleni, Emfuleni, eThekwini, Johannesburg, Mahikeng, Mangaung, Matjhabeng, Mbombela, Msunduzi, Nelson Mandela, Polokwane, Sol Plaatje and Tshwane[1]

 

Franchise businesses
Taxes applicable Details

GENERAL

Different tax consequences may attach to amounts received by a franchisor and a franchisee. A receipt of an amount by a franchisee or franchisor may constitute “gross income” as defined in section 1(1)

All amounts that the resident franchisor or franchisee receives will thus fall into gross income, with the exception of those of a capital nature

As regards expenses or losses to be deducted from a franchisor’s or franchisee's “income” (gross income after deducting any amounts exempt from tax), the requirements set out in section 11(a) read with section 23(g) (the general deduction formula) must be complied with. The business can claim all allowances and deductions available to those carrying on a trade.

It is important to note a recent case between SARS and a franchisee pertaining to section 24C allowance claimed on future costs of revamping restaurants in terms of the franchise agreements.

The Commissioner for the South African Revenue Service (SARS) disallowed the allowance claimed by the franchisee, on the basis that an allowance in terms of section 24C can only be claimed in respect of income that accrued in terms of the same contract that imposes the future expenditure for the allowance being claimed. The income in respect of which the franchisee was claiming the allowance was income that accrued in terms of contracts concluded by it with individual patrons at its restaurants and the future expenditure is not imposed by those contracts. SARS argued that the future expenditure was imposed by different contracts, these being the franchise agreements between the franchisee and the Franchisor'

For more information please visit the SARS website: 

Dividends Tax

Section 10(1)(K) of the Income-tax Act, provides for the exemption of dividends received or accrued subject to certain exceptions, where dividends are declared and paid by a business owner certain provisions need to be considered.

Any distribution made in the form of a dividend by the company will be subject to dividends withholding tax (“DWT”) at 20%. With regards to a distribution of an asset in specie in terms of section 64E(3), the amount of the dividend shall be the market value of the asset on the date that the dividend is deemed to be paid.

Furthermore, Prior to making a dividend distribution, the Company’s Act requires the board of directors to pass a resolution declaring or confirming that a company will be solvent and liquid immediately after making a distribution. Such a resolution should be completed and signed on the date the dividend is declared.

For more information please visit:

https://www.sars.gov.za/TaxTypes/DT/Pages/default.aspx

Small business Corporation Tax rates:

SBC tax rates for financial years ending on any date between 1 April 2021 and 31 March 2022:

Taxable Income (R) Rate of Tax (R)
1 -83 100 0 % of table income
83 101 -365 000 7% of taxable income above 83 100
365 001 - 550 000 19 733 + 21% of taxable income above 365 000
550 001 and above 58 870 + 28% of the amount above 550 000

 

Microbusiness tax rates

Turnover tax is worked out by applying a tax rate to the taxable turnover of a micro business. The rates are applicable for any year of assessment ending during the period of 12 months ending on 28 February 2022:

 

Taxable Income (R) Rate of Tax (R)
1 -335 000 0 % of taxable turnover
335 001-550 000 1% of taxable turnover above 335 000
550 000 - 750 000 1 650 + 2% of taxable turnover above 500 000
750 001 and above 6 650 + 3% of taxable turnover above 750 000