5 Taxes business owners should know about — Lionesses of Africa
by Ronel Jooste, CA(SA), Business & Financial Consultant, Speaker and Author of the award-winning book ‘Financially Fit and Wealthy’
For many business owners, the concept of tax and complying with tax rules and regulations can be daunting. Tax compliance however plays a vital role in the success and growth of your business. When you apply for funding, banks and funding houses require a tax compliance certificate. Many bigger organisations that you want to do business with, require a tax compliance certificate. Most tender or business proposal processes require a tax compliance certificate. As business owner you limit your opportunities if you are not submitting your returns and paying your taxes when required. Also remember that SARS keeps you as business owner responsible. Arguing ignorance or blaming your accountant will not set you free as far as SARS is concerned.
Here are 5 taxes that every business owner should know about:
1. Personal income tax
Income tax is paid on your taxable income in your individual capacity. Your taxable income will be calculated by including your personal income – salary (as per your IRP5), commission earned, income from a business if you are a sole proprietor, rental income from properties that you rent out, investment income (also interest on bank accounts), annuity income (like a pension) and capital gains (on investments or investment properties that you sold). You are also allowed certain deductions limited to amounts determined by SARS – contributions to pension funds or retirement annuities, medical aid contributions and expenses, donations to approved section18A organisations (public benefit organisations), valid expenses from a business if you are a sole proprietor and related rental expenses for your rental property. The tax payable will be calculated on your taxable income (income less the allowable deductions) based on the tax tables.
If you earn more than the annual threshold – R91,250 for the year starting 1 March 2022 and ending 28 February 2023 (the limit changes every tax year) – you are liable to pay tax and you should register as a taxpayer. Taxpayers should submit their annual tax returns, referred to as the ITR12 tax form, during tax season which usually opens between July and November each year. If you are doing business as a registered company and pay corporate income tax (business tax), you still need to submit your personal income tax return and pay personal income tax.
2. Corporate Income Tax (CIT) / Companies tax
If you own a company that is incorporated in South Africa (thus a South African resident company) or effectively managed in South Africa, corporate income tax / companies’ tax will be applicable. This applies to private companies, listed / unlisted public companies, close corporations (CC’s), co-operatives, dormant companies and small business corporations qualifying under s12E. If you run your business as a sole proprietor, corporate income tax will not apply, as you will include your business income in your personal income tax return.
When your company earns more than R1,000 gross income or had assets or liabilities exceeding R1,000 during the tax year, the company should submit an annual tax return. The corporate tax rate reduced from 28% to 27% on 1 April 2022. The tax paid will be calculated based on your business income less allowable business expenses. Although most companies are automatically registered with SARS as a taxpayer when the company is registered on CIPC, it is still required to register on e-filing to submit company returns and pay taxes.
3. Provisional tax
Provisional tax is not a separate tax from income tax and can apply to both individuals / sole proprietors and companies. It is a method of paying the income tax liability in advance, to assist the taxpayer with cash flow and to avoid large tax payments becoming due at the end of the year. Provisional tax returns are referred to as IRP6.
Provisional tax will apply:
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When you are an individual / natural person who earns income other than remuneration. Remuneration refers to earning a salary or commission from an employer, which will typically be included on your IRP5. Other income will include business income (sole proprietor), investment income (exceeding the exemption limits) and rental income. Therefore, salaried employees usually don’t qualify for provisional tax. However sole proprietors will most likely qualify and must register as a provisional taxpayer.
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To all companies.
How is provisional tax calculated and when is it due?
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First period – 50% of the total tax estimated for the full year less any employee’s tax paid during the first 6 months. Submit the 1st provisional tax return within six months from the beginning of the year of assessment. For individuals or companies with a February year-end, this will be in August.
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Second payment – 100% of the total tax estimated for the full year less any employee’s tax paid during the full year less the 1st provisional tax payment made. Submit the 2nd provisional tax return on or before the last day of the year of assessment. For individuals or companies with a February year-end, this will be in February.
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Third period – The 3rd payment is voluntary and only applies when there were differences between the estimated tax and the actual tax. The calculation will be based on 100% of the total tax estimated for the full year less any employee’s tax paid during the full year less the 1st provisional tax payment made and less the 2nd provisional tax payment made. The 3rd submission is due seven months after the year of assessment for individuals or companies with February year-end (i.e. September) and six months after year of assessment for all other cases (i.e. August).
4. Value-Added Tax (VAT)
We are familiar with VAT as we pay VAT on many products (goods) and services that we use daily. VAT is an indirect tax that is raised on the consumption of goods and services within the economy. VAT registered entities are required to charge VAT on the goods and services they produce / provide. VAT registered entities are also allowed to deduct the VAT that they have paid for goods and services used by them from the VAT they have charged.
An entity registered for VAT is required to pay the difference between the VAT charged by it (VAT received) and the VAT charged to it (VAT paid); or claim a VAT refund where the VAT charged to it (VAT paid) exceeds the VAT charged by it (VAT received). The standard rate of VAT is 15% (previously 14%), although for certain goods and services a zero VAT rate will apply or can be exempted from VAT.
Any person who performs business activities may qualify to register for VAT. This will apply to individuals (sole proprietors), partnerships and companies. It is compulsory to register for VAT if the value of taxable supplies (basically turnover), exceeds R1 million in any consecutive twelve-month period. Voluntarily registration is possible if the value of taxable supplies (basically turnover), is not more than R1 million in any consecutive twelve-month period. VAT registered individuals or businesses are referred to as VAT vendors. VAT returns should be submitted and payments made / refunds claimed on or before the 25th day or the last business day of the month following the month in which the vendor’s tax period (a tax period of monthly, every 2nd month or every 6th month will be allocated) ends.
5. Pay-as-you-earn (PAYE)
An employer should deduct employees’ tax from an employee’s remuneration (salary) paid or payable. The process of deducting or withholding tax from remuneration as it is earned by an employee is referred to as Pay-as-you-earn (PAYE). An employer who is registered or required to register with SARS for PAYE and/or Skills Development Levy (SDL) purposes, is also required to register with SARS for the payment of Unemployment Insurance Fund (UIF) contributions to SARS.
When you pay yourself a salary from your business or you appoint employees, you should thus register as an employer and PAYE will become applicable, unless the remuneration doesn’t exceed the annual tax threshold (i.e. none of the employees are liable for personal income tax). The amounts deducted or withheld must be paid by the employer to SARS monthly within seven days after the end of the month during which the amount was deducted. The Monthly Employer Return (EMP201) should also then be submitted.
These are the 5 taxes that will / might apply to most business owners. It is important to understand these taxes and to comply with the tax rules and regulations. Tax compliance will be achieved by submitting returns and make payments before the due dates. Not submitting returns timeously, late payments, non-payments, under-estimation of taxable income or non-declaring of income will result in penalties and interest charges, which is a waste of your hard-earned money. Rather comply and pay your taxes when due. Nobody likes to pay tax but paying tax is actually an indication that your business is profitable and performs well.
To educate yourself about finances here are links to subscribe for free to the Ronel Jooste FinanciallyFitLife YouTube channel or download free financial tools:
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