In this blog post, we look at how starting your own business, requires you to know your Taxes!

There are many daunting tasks for entrepreneurs and business owners when starting a new business.

Managing a business can become overwhelming, but not more daunting than navigating one’s way through the world of TAX.

“In this world, nothing can be said to be certain, except death and taxes”

bENJAMIN FRANKLIN

Tax is something that everyone has to pay and is levied on income and profit received by a taxpayer.

Taxes are the government’s main source of income. Individuals and companies that do not comply with tax regulations are penalized.

Entrepreneurs who want to start a business need to be aware of their tax obligations. Running a business requires tax savvy knowledge. It does not matter whether it is in the form of a legal entity or in a personal capacity.

STARTING A BUSINESS, KNOW YOUR TAXES

Once you have decided to start a business, you must also decide what type of business entity you will use.

There are legal, tax, and other considerations that can influence your decision. Your business model will determine the tax obligations to adhere to.

There are several different types of business entities in South Africa. Also in every other country in the world and this complicates corporate taxes globally.

Each of these entity types has different tax responsibilities.

It is also important to note the various options to reduce administrative requirements. This is to ensure tax compliance is easier. Different tax incentives and rates may also apply in certain instances.

In South Africa, you have to choose the business model you would like to establish. Then decide if it is a legal entity, before you can understand its tax obligations.

Once you decided to register a legal entity, the FIRST STEP is to register your business entity with the Companies and Intellectual Property Commission (CIPC).

Legal entities required to register at CIPC:

• Listed public companies
• Unlisted public companies
• Private Limited companies
• Close corporations (Note that from 1 May 2011, no new close corporations are registered)
• Co‐operatives
• Non-profit companies
• State-owned companies
• Collective investment schemes

The SECOND STEP is to register this legal entity as a Taxpayer for Corporate Income Tax purposes.

When registered with CIPC, SARS automatically generates an Income Tax reference number.

In the case of starting a Business that is NOT a legal entity, operate as follows

• A sole proprietorship (taxed on profits in an individual capacity)
• A Partnership (note: each partner is taxed on their share of taxable profits, a partnership is not registered separately for income tax purposes)

Starting a Business registered as a

• Close Corporation,
• Co-Operative, or a
• Private Limited Company,

you may qualify for certain tax incentives and rates in terms of the Small Business Corporation incentives.

Alternatively, if your business operates as a natural persona or a micro company and you meet specific criteria requirements, you may also qualify for the Turnover Tax System (Micro Entity)

After receiving a Tax Registration Reference number, taxpayers must then register on eFiling to transact electronically.

Turnover tax is a simplified tax system for Micro Small Businesses with a qualifying turnover of less than

R1 million per annum.

It is a tax based on the taxable turnover of a business and is available to

1. Sole Proprietors (individuals),
2. Partnerships,
3. Close Corporations,
4. Companies, and
5. Co-operatives

Turnover tax takes the place of the following Tax Type Profiles:

• VAT (in the instance that you have not decided to elect back into the VAT system),
• Provisional Tax,
• Income Tax,
• Capital Gains Tax,
• Secondary Tax on Companies (STC), and
• Dividends Tax

Qualifying businesses pay a single tax [max 3%] instead of various other taxes

SARS

It’s elective – so you choose whether to participate. For Tax Tables visit here.

In the future, as a Small, Micro, or Medium Enterprise (SMME), providing your Tax Clearance information to another entity is required.

This could be to apply for a tender, new contract, good standing, or in respect of Foreign Investments.

To obtain your Tax Clearance Certificate from eFiling, you can request the help of an expert professional such as a Tax Practitioner or you can view the steps here on how to do it yourself.

Corporate Income Tax [ITR]

What is Corporate Income Tax?

Corporate Income Tax (CIT) also known as Business Income Tax, imposing on businesses incorporated under the laws of the Republic of South Africa. These entities derive income locally or globally but operates within the borders of South Africa.

Who is it for?

CIT is applicable (but not limited) to the following businesses and liable under the Income Tax Act, 1962 for the payment of tax on all income received by or accrued to them within a financial year:

• Listed public companies
• Unlisted public companies
• Private Companies
• Close Corporations
• Co-operatives
• Collective Investment Schemes
• Small Business Corporations (s12E)
• Body Corporates
• Share Block Companies
• Dormant Companies
• Public Benefit Companies.

Every registered taxpayer should submit an Income Tax return. This is to declare the income received over a twelve-month period at the end of the financial year, in the prescribed form.

Tax on Assessment

Payment of Tax upon an assessment notice issued by SARS is payable within the period specified in the notice.

Corporate Income Tax is payable at a rate of 28%

sars

Provisional tax [IRP]

As soon as business commences, you become a Provisional Taxpayer. Your business then registers with a local SARS office as a provisional taxpayer. This registration happens within 30 days after the date upon which you become a provisional taxpayer.

Companies are automatically registering as provisional taxpayers.

In addition to annual returns, every business submits a provisional tax returns.

The payment of provisional tax intended to assist taxpayers in meeting their normal tax liabilities.

• This occurs by the payment of two installments in respect of
• The estimated taxable income receiving or accrued during the relevant tax year and an optional third payment after the end of the tax year
• The first provisional tax payment is due within six months after commencing of the tax year.
• The second payment not later than the last day of the tax year.
• The optional third payment is voluntary and due within six months after the end of the tax year if your accounts close on a date other than the last day of February.

NOTE: For a tax year ending on the last day of February, the optional third payment is due within seven months after the end of the tax year.

Value Added Tax [VAT]

a) Compulsory registration

Any person who owns or manages a Business and whose total value of taxable supplies (taxable turnover) exceeds, or is likely to exceed, the compulsory VAT registration threshold must register for VAT.

The threshold is currently R1 million in any consecutive 12-month period.

b) Voluntary registration

A person can register as a vendor if that person runs a Business in which the total value of taxable supplies (taxable turnover) exceeds R50 000 (but does not exceed R1 million) in the preceding 12-month period.

A small business that is registered as a micro-business under the Sixth Schedule of the Income Tax Act may also register for VAT and may elect to submit returns and payments every four months, ending on the last day of June, October, and February

Top Tip: VAT liability date backdating requests submitted at the SARS branch will only be considered for new and existing registration if the vendor can provide sufficient supporting documents proving the backdated liability.

sars

NOTE: For requesting VAT liability date backdating, expect to provide invoices, signed contracts, or financial statements to motivate the backdating.

Employee’s Tax [Pay-As-You-Earn (PAYE)]

Registering as an Employer

According to law, an employer must register with the South African Revenue Service (SARS) within 21 business days after becoming an employer, unless none of the employees are liable for paying normal tax.

There you have it, all the important taxes for running your business efficiently and keeping it compliant.

If you need the help of a Tax Practitioner to register your business for any of these tax types at SARS, you are welcome to reach out to me for a free discovery session to determine the right compliance route for your business.

Because I am a heart-centered entrepreneur, passionate about helping other entrepreneurs build profitable online businesses, I created a 6-Step Roadmap to more clients, cash and confidence.

You can grab this free training here.

See you online!