Small businesses play a key role in the South African economy, creating jobs and contributing to poverty reduction. Yet, the administrative burden of tax compliance can be a significant obstacle. The South African Revenue Service (SARS) introduced the turnover tax system to provide a simpler and more manageable alternative for eligible micro businesses, those with an annual turnover of up to R1 million. Here’s what you need to know to determine if turnover tax could benefit your business.

What Is Turnover Tax?

Turnover tax is a simplified tax regime specifically for qualifying micro businesses. It replaces multiple taxes – income tax, capital gains tax (CGT), dividends tax, and value-added tax (VAT) – with a single, simplified tax calculation based on annual turnover.

Key points of turnover tax include:

• Single tax payment: Reduces compliance complexity.
• Reduced record-keeping: Fewer documentation requirements, reducing costs.
• Cost-effective: Less demand for accounting services.
• Custom tax scales: Uses unique tax rates designed for smaller businesses.

However, it's important to note that turnover tax does not cover payroll taxes like PAYE and UIF contributions, which are still required.

Eligibility Criteria: Not all small businesses are eligible for turnover tax. To qualify, your business must:

1. Be a micro business with an annual turnover of R1 million or less.
2. Not provide “professional services” (defined below).
3. Meet other criteria set forth in the Income Tax Act No. 58 of 1962, under section 48 and the Sixth Schedule.

What Are ‘Professional Services’?

Under the Sixth Schedule, certain “professional services” are excluded from the turnover tax system. This exclusion is intended to protect the income tax base, as these services typically have higher profit margins and may already benefit from tax structures designed for higher earners.

SARS defines “professional services” broadly, including fields such as:

• Accounting, actuarial science, and auditing
• Consulting and management
• Information technology, law, journalism
• Engineering, architecture, and real estate

This list is extensive but also somewhat ambiguous. Without clear guidelines on what qualifies as “professional,” this exclusion creates some grey areas for businesses that may fall within these fields.

"Professional" Services: Defining a Complicated Exclusion

The definition of "professional" in the context of turnover tax remains a significant point of confusion. The Sixth Schedule broadly lists certain fields – such as consulting, IT, and journalism – as “professional,” but provides no detailed criteria for what qualifies as professional work within these sectors. This leaves small business owners in ambiguous situations, as even minimal engagement in one of these fields could disqualify their business from using turnover tax. For instance, does providing occasional consulting or IT support render a business "professional"? How qualified or licensed must an individual be for their work to be categorized as professional?

The vague wording creates further complications, as it does not account for the range of qualifications, skill levels, or income brackets within these fields. As a result, some businesses may unintentionally lose out on the benefits of turnover tax simply because their industry falls under a loosely defined "professional" label. SARS has acknowledged the need to revisit these definitions to reduce ambiguity and support clearer eligibility determinations. Until then, small businesses must carefully assess their services considering the existing criteria or seek expert advice to avoid potential misclassification.

Potential Benefits of Turnover Tax:

If your business qualifies, turnover tax offers several benefits:

• Streamlined tax obligations: By consolidating multiple tax types, turnover tax can free up resources that would otherwise go to administrative tasks.
• Lower cost burden: With reduced need for record-keeping, turnover tax can also lower the cost of hiring accountants.
• Potential tax savings: The unique turnover tax scales could lead to a lighter tax burden.

Is Turnover Tax Right for Your Business?

If your business meets the eligibility criteria, turnover tax can simplify your tax obligations, potentially saving you time and money. However, the complexity around professional service exclusions may require additional consideration or professional advice.

For further details on turnover tax, read the article by Leonard Willemse entitled "The turnover tax system: Barriers to small businesses".

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DISCLAIMER:

Nothing in this article and/or post should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure accuracy, Tax A Sured (Pty) Ltd. does not accept any responsibility for consequences of decisions taken based on this article and/or post. It remains your own responsibility to consult the relevant primary resources when taking a decision.