What small business owners need to know about SME tax

From deciding your business type, registering with SARS, and understanding special taxes and VAT registration, everything you’ve ever needed to know about SME tax can be found right here.

Yes, tax season is not every business owner’s favourite time of year, but submitting returns doesn’t have to be as painful as we know it to be.

By becoming tax-efficient, you’ll be surprised at how much easier it is to get through the process, ensure you avoid any fines or penalties, and get more out of your returns.

What type of business are you?

Different types of businesses come with their own legal and tax obligations, so before you start your business and register for tax, you’ll need to decide what type of entity you want your business to be.

Here are your options:

• Sole proprietorship – Register for Personal Income Tax, declare business income via Income Tax Return for Individuals (ITR12). The payment deadline will be available on your Notice of Assessment (ITA34).

• Partnership – Same applies as per a sole proprietorship.

• Private/public company | Close Corp – Will receive automatic registration for Corporate Income Tax (CIP) when registered with CIPC and must declare CIP annually via ITR14. You will only register for VAT, PAYE or special taxes if you qualify.

• Cooperative – Same applies as per a private/public company.

When do you register for tax?

Once you have registered your company with the CIPC (Company and Intellectual Property Commission), SARS will automatically generate a Company Income Tax reference number.

The company owner must then register on SARS eFiling. SARS has made this process easier by allowing owners to register their businesses via personal eFiling accounts.

Self-Employed, Sole Traders or persons in Partnerships need to register for Personal Income Tax directly with SARS, which can also be completed online.

Special taxes for small businesses

To uplift small businesses, the biggest contributors to our economy, there are several tax incentives available for those who qualify. Here’s what they are and how to qualify:

Turnover tax

• Reduces and simplifies tax compliance for small businesses with an annual turnover of R1 million or less.
• It replaces Income, VAT, Provisional, Capital Gains and Dividends tax.
• Qualifying businesses will declare and pay only one tax (unless with a VAT & PAYE option) and only start paying tax when their annual turnover exceeds R335,000.
• A small business registered for Turnover Tax can apply for VAT as well.

Small Business Corporation (SBC)

• Small businesses with an annual turnover of up to R20 million will qualify for Income Tax at a reduced tax rate.
• If you indicate that you are a small business in your ITR14, and meet all the requirements, the reduced amounts are applied automatically, thus mitigating the need to apply for such reduced rates.

Employment Tax Incentive

• Reduces the cost of hiring young people through cost-sharing with the government. It allows you to reduce the amount of PAYE you pay, while leaving the wage of the employee unaffected.
• Employers can claim if they are registered for PAYE, or are at least eligible to register for PAYE.

Value Added Tax (VAT)

Businesses with an estimated, or actual, turnover of more than R1 million are required to register for VAT and pay 15% VAT on taxable goods and services.

There are two categories for VAT registration:

• Compulsory Registration – you will be required to register for VAT if you expect that your sales will exceed R1 million in any 12-month period.
  
• Voluntary Registration – can be applied for even if your sales are less than R1 million. The requirement is that the sale made must already have exceeded the minimum R500,000, or should likely exceed that in a 12-month period.

Pay-As-You-Earn (PAYE)

• An employer who is registered with SARS for PAYE will also need to register for the Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF).
• Make sure to register with SARS within 21 business days after becoming an employer.
• Payments to SARS must be made within 7 days after month end.
• No PAYE is required if the employee’s salary is below R83,100 per year (2022).

Provisional Tax

• All companies are automatically registered upon registration for Company Income Tax.
• Small business owners who earn an income from the business, other than a salary, must register for Provisional Tax.
• You must submit a Return for Payment of Provisional Tax (IRP6) twice a year unless you are registered for Turnover Tax.

Corporate Income Tax (CIT)

• Companies must declare their income annually by submitting a CIT return (ITR14).
• The declaration must state all income and expenses accurately so that over or under tax assessment is avoided.
• Companies and Close Corporations pay an annual flat tax rate of 28%.

Filing tax returns over and above running the day-to-day of your business can be daunting and stressful. However, business owners have the ability to become tax-efficient, which helps save time, prevents mistakes and mitigates any potential for unforeseen penalties or fines.

Here at Bridgement, our vision is to empower and support SMEs in any way possible. The purpose of this guide is to educate SMEs about tax and the elements that relate to them, thus alleviating the stress we all experience during tax season.