New tax amendment: Simpler may not always be better

2008-10-15 00:00

In the hope of simplifying the administration of taxes for small businesses, the Revenue Laws Amendment Bill, 2008, has proposed that a sixth schedule to the Income Tax Act be introduced.

The sixth schedule deals with the determination of a turnover tax payable by small businesses.

The turnover tax regime is a simplified tax system with reduced compliance requirements.

So, who will qualify as a very small business? The provisions of the sixth schedule will apply to companies, close corporations, co-operatives and natural persons who trade as sole proprietors or partnerships. Where the qualifying turnover of a small business does not exceed R1 million in any year of assessment, it will be able to elect to be taxed in terms of this regime.

There is an anti-avoidance rule in place to ensure that businesses do not get broken up into smaller components and claim that each component is a legitimate business just to ensure that each component is within the R1-million threshold.

There are two circumstances when a very small business can deregister from the turnover tax regime: voluntary deregistration and compulsory deregistration. Deregistration, for example, will be compulsory where the turnover exceeds R1 million. If a very small business is deregistered from the turnover tax system, it may not re-enter the system for a period of three years.

The rates of tax applicable to a very small business range from zero percent on turnover up to R100 000, to 38% on a turnover of R1 million.

So is it better for a small business to take advantage of the turnover tax system? The advantages and disadvantages of the turnover tax system need to be carefully weighed up before electing to be taxed in terms of it, as once in the turnover tax system, the small business must remain in that system for a minimum period of three years, unless the provisions of the sixth schedule no longer apply to it.

While the turnover tax system has its benefits in that the administration is easier, it could be a more expensive tax regime. For example, a business that operates on low gross profit margins, is likely to benefit more from the normal income tax and VAT systems than the turnover tax system. It will be able to claim back input VAT, whereas with the turnover tax, the input VAT becomes part of the cost of the goods or services. In addition, even if the business makes a net loss, in the turnover tax system, tax would still be payable.

In addition, it should be noted if the turnover of a very small business exceeds R750 000, the marginal tax rate on turnover is greater than the current normal tax rate on companies of 28%.

The small business that is in the turnover tax system cannot register for VAT. This may pose a problem in trying to grow the business, as customers may not be willing to trade with a non-VAT vendor as they cannot claim any input tax on their purchases.

Another problem is that if a business is already registered for VAT and wants to migrate to the turnover tax system, the business will have to deregister from the VAT system and will have to pay output tax on the value of the assets held before deregistration.

Small businesses should therefore take care to analyse their businesses carefully before opting to elect the turnover tax system. After all, simpler may not always be better (or cheaper)!

Anushka Thilakdari

Senior tax consultant

Corporate tax & legal, KPMG

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