Tax is a subject that, at best, will illicit yawns and cause eyes to glaze over and, at worse, cause stress, anger or panic. But whatever your opinions on the subject, it’s something you simply can’t avoid.
You may be surprised to learn that it’s not all-bad and not all-boring. Especially if you’re a small business owner.
In this blog, we’ll give you the full run-down to help you digest some of the serious but important tax tips that will help you save money, access benefits and comply with the law.
1. Register Your Business With SARS
It’s true. You can’t avoid taxes. Well, you can. But you’ll probably end up on the wrong side of the law and end lose much more than you would registering with SARS (South African Revenue Service) and paying your dues.
First things first, you’ll need to register with the Company and Intellectual Property Commission (CIPC). It isn’t a complicated or expensive process, and you can do it online via their website. The minimum registration fee is R125 with an additional R50 to reserve a chosen name for your company.
Once registered, the CIPC will issue you with a Company Income Tax reference number that you will use with SARS, including when you register for eFiling.
Read more: How to Register a Business in South Africa
2. Pay on Time to Avoid Back Taxes Penalties
Once you’ve registered your business, you need to make sure you file your tax returns before the deadline to avoid penalties and ensure your business is complaint with the law.
The tax season for personal income tax begins in July and usually ends in November. Provisional taxpayers need to pay their first instalment in February and their second one in August.
Those who qualify and register for turnover tax will need to file their returns within two months of the company’s financial year end.
Under the Tax Administration Act, SARS can charge penalties for unfiled tax returns. Previously, SARS was only allowed to issue penalties if there were two or more outstanding returns between 2007 and 2020. Since the end of 2021, the law has been amended and SARS is allowed to penalise those with only one outstanding return.
Penalties range from R250 for taxable income loss of less than R250 000 to a fine of R16 000 for taxable income loss of more than R50 million – these are monthly penalties and can quickly add up.
These numbers sound a bit scary, but don’t worry about them too much. As long as you stay in the clear and pay your taxes, you won’t need to even think about these penalties.
3. Register for Turnover Tax
The less you make, the less you pay – and some even qualify for exemptions. Micro businesses with an annual turnover of less than R1 million qualify for turnover tax, which is a simplified tax system designed to free you from a lot of the red tape that could be challenging for small businesses to manage. Think of turnover tax as SARS lending a helping hand to small businesses to reduce their tax expenses.
Turnover tax basically replaces income tax, VAT, provisional tax, capital gains tax and dividends tax. Instead of the normal business tax system where tax is calculated against a percentage of profit, this is calculated against the turnover of a business.
Under this system, businesses still need to pay employee tax and unemployment insurance fund (UIF) contributions.
Another benefit of turnover tax is that the record-keeping requirements are significantly reduced.
4. Take Advantage of Tax Benefits for Small Businesses
The saying “more money, more problems” is certainly true when it comes to business tax. SARS views businesses with a turnover of less than R20 million per year as a small business corporation (SBC).
While companies are usually subject to an income tax rate of 27%, SBCs qualify for significantly reduced rates. For example, you’ll have a 0% tax rate if your income is R91 250 or less.
5. Take Advantage of Deductibles
Claiming deductible business expenses is one of the best ways to reduce your tax bill, but you have to be clued upabout what expenses qualify as a deductible. These deductibles are related to all the running costs incurred by a business from equipment and rent to entertainment and office supplies.
These expenses fall into five rough categories:
Day-To-Day Expenses
These include expenses like:
- Rent
- Water
- Electricity
- Telephone bills
- Internet
- Office equipment
- Stationery
- Cleaning costs
- Software subscriptions
- Staff salaries
- Travel and transport
- Marketing and advertising costs
- Accounting fees
- Legal expenses
Educational Expenses
This is pretty self-explanatory and includes any costs related to upskilling yourself or your employees. For example, online courses and seminars.
Want to grow your skills as an entrepreneur? Check out Online Business Courses for South African Small Business Owners to get started!
Entertainment Expenses
This is quite a controversial category, and many people attempt to claim non-business-related entertainment expenses falsely. SARS requires you to prove that these expenses are indeed business-related. Some common examples of entertainment expenses include meeting a client at a restaurant or costs related to the catering of a business event.
Capital Expenses
These are once-off expenses as opposed to the recurring costs in the day-to-day category. Capital expenses include expensive equipment, furniture, cars or other vehicles and even renovating your office.
Other Expenses
Some lesser-known deductibles include:
- Start-up expenses, which can be anything you spent on starting your business before it became active.
- Donations to charities with a Public Benefit Organisation number.
- Contributions you made to saving for your retirement, such as retirement annuities.
6. Solar Tax Break
South Africa’s energy crisis has hit businesses incredibly hard. As of 1 March 2023, businesses qualify for a 125% tax deduction on assets used in generating renewable energy. This means businesses can reduce their taxable income by 125% of the cost of an investment in renewable energy. This can be claimed over a one or three-year period.
7. Stay Above Board with Employee Taxes
Pay As You Earn (PAYE) is an income tax system where the employer deducts tax from their employee’s income on a monthly basis and pays it to SARS. It limits the administrative burden on employees and helps prevent fraud.
It can become complicated, especially if you have to factor in other sums in addition to the basic salary such as overtime, bonuses and commission. All employees younger than 65 who earn more than R91 250 a year are required to pay tax.
It’s important to remember to issue your employees with payslips, since it’s actually a legal requirement in South Africa.
This process can be time consuming if you decide to do it manually and it might be worth considering paying for an automated payroll system, especially if your business is growing.
Deducting PAYE from the salaries of your staff but failing to pay this sum to SARS will result in heavy penalties, such as a fine or even imprisonment.
8. Don’t Try to Avoid Paying Tax
Those convicted of tax crimes in South Africa can face serious consequences. But what’s a tax crime?
Here are some examples:
- Failing to declare income or failing to pay tax on this income
- Lying about expenses
- Deducting tax from employee salaries and failing to pay it to SARS
- Failing to submit tax returns
- Charging VAT but failing to it over to SARS
- Submitting fraudulent invoices
- Failing to register for tax purposes
SARS states clearly on its website that those who cheat the tax system “will face criminal prosecution and maximum non-compliance penalties… It’s simply not worth the risk”.
Tax Season, We’re Ready for You!
Now you know a little bit more about what you need to do and how the system can benefit you as a small business owner. Remember, paying taxes is not just a legal requirement, it's also a way to contribute to the growth and development of your community. So don't let taxes stress you out, embrace them as a part of your business journey and take the necessary steps to stay compliant.
