“A goal without a plan is just a wish.” (Antoine De Saint-Exupery, author of The Little Prince)
Want to start a business? SARS warns you to be aware of the tax obligations of running a business, whether it’s in the form of a legal entity or in your personal capacity.
Considering the tax implications before starting a business will result in substantial benefits down the line. These include better budgeting and cash-flow planning, cost savings, and easier administration and compliance.
Pound of flesh
Depending on the type of business entity you establish, different tax rates and rules apply. On the flip side, certain tax incentives and opportunities to reduce the administrative burden may be available.
Legal entities like private companies, close corporations (CCs) and non-profits are automatically registered with SARS for corporate income tax when they register with the Companies and Intellectual Property Commission (CIPC).
This is not required for a non-legal entity like a sole proprietorship or partnership. In these cases, the owner or partners are taxed in their individual capacities on their share of taxable profits. Certain tax rebates and credits apply, which can reduce overall tax liability.
Legal entities may qualify for different tax incentives and preferential rates like the turnover tax system, the small business corporation (SBC) incentive, or accelerated deprecation relief available in Urban Development Zones.
Corporate Income Tax (CIT)
Every business (legal entity or individual) is liable for income tax. But the rates of taxation – and the rules – can vary widely.
- For companies (including CCs) the standard corporate tax rate is 27%. In addition to filing an annual return, companies are required to submit provisional tax returns twice a year – and to make the required payments on time.
- Turnover tax is a possible alternative for sole proprietors, partnerships, CCs and companies with a qualifying annual turnover not exceeding R1 million. This simplified annual tax, calculated on your turnover, replaces income tax, provisional tax, VAT, capital gains tax and dividends withholding tax (if the annual dividend does not exceed R200,000). This substantially reduced administrative burden is a significant benefit for small businesses. The first R335,000 of annual turnover is tax exempt – and the highest tax rate is just 3%.
- Qualifying companies may register as a small business corporation (SBC) for additional tax incentives, including a tax exemption for the first R95,750 of annual taxable income, and a reduced corporate tax rate up to a taxable income of R550,000.
Employee taxes
Every employer must register for pay-as-you-earn (PAYE), deduct it from remuneration paid to employees (along with Unemployment Insurance Fund contributions) and pay it over to SARS. Once annual salaries, wages and other remuneration exceed R500,000, the Skills Development Levy (SDL) also becomes payable.
As an employer, you must submit monthly returns and payments to SARS. There are also two compulsory reconciliations during the year.
Some relief is available through the Employment Tax Incentive (ETI), allowing for a reduction in PAYE for qualifying companies that employ young people.
VAT (Value Added Tax)
VAT registration becomes compulsory if the value of invoices raised by an entity (or is expected to be raised due to a written contractual obligation) exceeds R1 million in any consecutive 12-month period.
Your business can also choose to register for VAT voluntarily. This will benefit businesses with sizeable VAT input claims.
New businesses should factor in the increased administrative requirements of VAT registration and compliance. There are also cashflow implications as your business has a VAT liability before payments on invoices are received – a significant risk if invoices are paid later than expected.
Other taxes that may apply
- Companies that import or export goods must be registered (and will be liable) for customs and excise taxes.
- A dividends tax of 20% must be withheld by the company and paid to SARS when its shareholders earn dividends.
- Depending on the industry and the specific business activities, further taxes such as carbon tax, sugar tax, transfer duties, and Capital Gains Tax (CGT) may be applicable.
Tax implications for business owners
Business owners who pay themselves a salary will already be paying PAYE. If there are no additional income streams, they don’t need to register for provisional tax.
If, however, a business owner receives any other income in addition to this salary, whether from another source, or dividends or investment income from the business, registration as a provisional taxpayer may be necessary if the requirements of the provisional taxpayer definition are met.
New business owners often can’t draw a salary for some time. Personal expenses paid by the company can be allocated to a loan account, or the owner can draw down a loan. These expenses will unfortunately not be deductible for CIT purposes.
The most tax-efficient solutions for your new business
When starting a business, tax planning is critical. It adds significant value and protects you against unexpected tax liabilities.
Our team can help you determine the most tax-efficient structure for your new business – and we can ensure it remains tax-compliant. We’re passionate about saving you time, reducing costs, and contributing to the success of your new venture…
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
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