Again excessive tax sometime in the form of double taxation has been identified as killing young business in most African countries. The turnover tax regime, designed mainly for “micro businesses”, has been criticised because the start-ups are paying tax, even though they are making losses.
Commentators say if these companies remained in the normal tax regime they would have paid no tax and they would be able to carry the losses forward to offset against future profits or income.
The turnover tax regime is available for micro businesses with a qualifying turnover of R1 million or less. The system provides for a single tax in the place of normal (income and corporate) tax, capital gains tax (CGT) and dividends tax.
Tax rates for qualifying micro businesses range between 1 percent of the turnover above R150 000 up to R300 000 and R15 500 plus 6 percent of the amount above R750 000.
Liandor Financial Accountants Director Rodney Smith says it has seen instances where unincorporated persons (the owner carries all the risks and liabilities) are paying turnover tax for a few years before it is forced to close because of losses.
Addressed, to some extent, a major drawback of the regime that saw registered micro businesses paying more tax than they would have, had they not opted for the turnover tax regime.
Before January 1, a business that registered as a micro business had no choice but to stay in the regime for three years.
“If you opted into the micro business regime and made losses, you would still be liable to tax on your turnover provided turnover exceeds R335 000 and you would have been stuck in that tax paying position for three years,” he says.
Theron, who is also a member of the South African Institute of Tax Practitioners (SAIT), says with the lock-in period now removed, these cases may be avoided, although not completely.
The optimal solution would have been to allow taxpayers to opt in and out of the system; however, such approach will open the door for evasion and would likely complicate the legislation even further.
Royden Whitfield, director at Whitfield Fintax, an independent firm specialising in accounting, taxation and estate planning, says they currently have over a thousand clients, yet only one is registered for turnover tax.
He believes government should rather increase the benefits of the Small Business Corporation (SBC) tax benefits and expanding the qualifying criteria.
“I think the SBC tax regime have been far more successful and beneficial to the SA economy than turnover tax,” says Mr. Whitfield.
Companies with a turnover of less than R20m qualify for the small business corporation tax relief regime, which provides for progressive tax rates of 0 percent, 7 percent, 21 percent and 28 percent.
National Treasury last year withdrew a proposal that these reduced tax rates be scrapped in favour of a flat corporate tax rate of 28 percent, and that SBCs would receive an annual R15 000 rebate for compliance cost.