In our previous blog post we outlined some of the differences between traditional company tax and the new turnover tax that SARS recently introduced. Now that we’ve covered the basic differences between these two types of tax, let’s get down to the difficult part – choosing which type of tax to register for.
Companies with smaller turnover have the most choice
It’s important to note that companies with an annual turnover of R 1 million or more may not register for turnover tax. This means that any business with a turnover over R 1 million has no choice but to register for the traditional SARS company tax.
If your business turns over less than R1 million a year, you have a choice between registering for turnover or company tax – the rest of this blog post will help you to weigh up the pros and cons of each one.
Turnover tax – easy and simple, but no room for deductions
A lot of small business owners have a built-in fear of taxes – and with the penalties and paperwork that are involved, who can blame them? SARS is promoting their new turnover tax as a simple solution for businesses with smaller turnovers, taking away some of the red tape involved in tax returns, reducing accounting fees, and offering low rates of taxation.
In addition to these benefits, the tax-free ceiling for businesses registered for turnover tax is R150 000 a year, compared to R70 700 for company which pay regular income tax. This makes turnover tax the obvious choice for very small businesses, but what about companies with turnovers closer to (but below) the R1 million mark?
On paper, turnover tax still seems to be the best option for companies turning over between R700 000 and R 999 999 per year. The taxation rate of R15 500 plus 6% of every Rand above R750 000 is much lower than the taxation rate for company tax, but there is something else to keep in mind – turnover tax doesn’t allow businesses to claim any deductions.
Why company tax could be a better option
If your business is approaching the R 1 million per year turnover mark, you need to think carefully (and consult with your financial advisor) before opting for turnover tax.
At a higher level of turnover, there are many company expenses that you can claim as deductions from SARS to reduce your tax bill – but these also require more financial admin and accounting time.
If you are comfortable with accounting and taxation matters, or if you have a good accounting or financial planner, it may be a wise decision to opt for company tax. You may end up paying less tax after deductions, and you’ll have less paperwork to do if your turnover exceeds R 1 million per year anytime soon.
Before you make your decision…
Any decision relating to SARS should be carefully thought out with the advice of a trusted and qualified financial planner. Contact Northwood today for a taxation planning session and our team will advise you on the best path forward.