Turnover Tax - Everything You Ever Wanted To Know About Turnover Tax But Didn’t Dare Ask! Turnover Tax - Everything You Ever Wanted To Know About Turnover Tax But Didn’t Dare Ask! What is a turnover tax? This simplified tax package is essentially a substitute for income tax, capital gains tax (CGT), secondary tax on companies (STC), and an increase in the value-added tax (VAT) compulsory registration threshold from R300 000 to R1 million. Turnover tax is optional, meaning that a Micro business can decide if it wants to use it or the current tax system. It is available to sole proprietors (individuals), partnerships, close corporations, co-operatives and companies with effect from 1 March 2009. When and how will turnover tax be payable? Turnover tax will be levied annually on a year of assessment that runs from the beginning of March of the one year to the end of February of the following year. It will include two six-monthly interim (provisional) payments. An existing Micro business that opts for turnover tax must apply to do so before the beginning of a year of assessment and remain in the system for at least three years unless it is specifically disqualified. Equally, a Micro business that exits the turnover tax system will not be allowed to re-register for turnover tax for three years commencing from the beginning of the year of assessment following the year of assessment during which it is deregistered. A new micro business can register for turnover tax with in two months from commencing business activities. Internationally, it is generally recognised that payroll taxes affect on smaller firms more than larger firms in terms of administration and cost. How will turnover tax offer relief in this regard? The simplified tax system does not provide specific relief in respect of payroll taxes or levies such as employees ’tax, unemployment insurance fund (UIF) contributions, and the skills development levy (SDL). In terms of existing law, however, businesses whose employees are not liable for employees’ tax will not be required to register for employees’ tax, and businesses with a payroll of up to R500 000 a year will not be liable for the SDL. What is the interaction and relationship between VAT and turnover tax? The compulsory VAT registration threshold is R1 million. The turnover tax system is a package that aims to reduce record-keeping, a micro business that is registered for turnover tax will not be permitted to register for VAT, which requires careful record-keeping. What are the tax consequences when departing from VAT to turnover tax? How will this benefit the microbusiness community? A vendor that deregisters from the VAT system is required to pay VAT (exit VAT) on the lesser of the cost or market value of the assets held before deregistering on which input vat had been claimed. Vendors that apply to deregister from the VAT system in order to register for turnover tax will be allowed to pay the exit VAT over six (6) months. Further relief will be granted by way of a deduction of up to R100 000 from the value of the assets held by that vendor before deregistration. Is the turnover tax a blessing or a clever and disingenuous sham by SARS? The OECD issued a detailed report on turnover tax around 2005; many countries were concerned about high compliance cost and high administrative burdens that micro businesses all over the world reportedly encountered. The search for a more appropriate tax regime for micro businesses culminated in `turnover’ tax. Many countries have lower tax rates for micro businesses and there is no reason why South Africa should not follow suit. So, If SARS is so disingenuous, it continues to make the turnover tax more attractive to appropriate taxpayer as witnessed by the additional flexibility introduced in the current draft tax legislations. It is likely that the introduction of turnover tax has more to do with SARS encouraging voluntary tax compliance rather than with `coercion’, encouraging taxpayers to participate in the `tax net’ rather than to remain aloof from the tax system. The appropriate question that should be raised is: can a tax system, such as turnover tax, provide a win-win situation both for the taxpayer as well as the revenue authority? With reference to SAIPA, the question that should be raised is: how would tax practitioners benefit from the turnover tax dispensations? What is the additional benefit from registering for this tax benefit for the taxpayer in terms of the current draft legislation as at 15 October 2011? Zero-rate band – has increased from R100 000 to R150 000, VAT vendors may also register for turnover tax 3-year locked-in period removed Taxpayers may voluntarily exit the turnover tax but no longer allowed to re-enter the turnover system. Micro business (Turnover tax) - for financial year ending 28 February 2011: R 0 - R100 000 0% R100 001 - R300 000 1% of the amount above R100 000 R300 001 - R500 000 R2 000 + 3% of the amount above R300 000 R500 001 - R750 000 R8 000 + 5% of the amount above R500 000 R750 001 and above R20 500 + 7% of the amount above R750 000 Micro business (Turnover tax) - for financial year ending 31 March 2012: R 0 - R150 000 0% R150 001 - R300 000 1% of the amount above R150 000 R300 001 - R500 000 R1 500 + 2% of the amount above R300 000 R500 001 - R750 000 R5 500 + 4% of the amount above R500 000 R750 001 and above R15 500 + 6% of the amount above R750 000 From the above tables at the financial year ending 2011 and 2012 it is clear that the taxes payable have been substantially reduced, which should benefit the turnover taxpayer. How can the turnover tax system provide a win-win situation for both the taxpayer and revenue authority? The administrative responsibility is reduced for the taxpayer; it is also possible for the taxpayer to incur a lower tax liability if the aforementioned tax table for turnover is implemented. SARS would benefit by increasing its registration of taxpayers without introducing punitive measures. Therefore, it can be argued that the turnover tax is mutually beneficial. How would the tax practitioner a SAIPA member –benefit from turnover tax? From SAIPA tax-desk’s experience, it is realised that it is usually a one-person tax practitioner that is saddled with voluminous late / delayed tax returns. Small-scale tax practitioners with many small clients – in terms of business size – but who constitute a large volume of a tax practitioners’ client base will benefit to a great extent. The turnover tax system will allow these tax practitioners to spendless of the valuable time in `administering ‘small clients (who are enrolled for the turnover tax system) and allow them to spend more of their valuable time in servicing their larger and more-time demanding clients; this tax system could allow the tax practitioners to retain the existing clientele base and also improve the service delivery to larger clients. What pitfalls are there, if any, in this system of taxation? A turnover tax is a tax on turnover that the taxpayer is required to pay. It means that even if the taxpayer’s company is not making a profit, turnover tax has to be paid. If, for example,the turnover is R750 000 in the year of assessment ending 31 March 2012, and the taxpayer’s business shows a loss of R75 000, the taxpayer is still liable for turnover tax of R15000. If the taxpayer did not subscribe to the turnover tax regime, the taxpayer would have recorded an assessed loss which is carried over to the next period of assessment. Micro businesses with uncertain profit margin should be cautious when selecting this system of tax administration. Micro businesses always resent the complexity of their tax system. To keep records in order to develop an income and expenditure statement as well as to calculate a taxable income for a micro business is complex, administratively difficult and an expensive exercise. In order to develop as implified option for micro business one tries to reduce such complexities and minimise administration, the consequence is that compromises are inevitable. The turnover tax, as such, is no exception. This tax is instituted to address a particular concern of the micro business community, that is, to provide a simplified system of taxation. It is beyond doubt that turnover tax reduces complexity. However, the development of simple tax systems contain inevitable trade-offs. Precise calculations are done away with. This is unfortunately what happens in such instances and that is why a taxpayer cannot claim a loss since the regime is based on turnover. It is not possible to have the benefit of precision as well as the benefit of extremely simple record keeping. The question of potential tax savings by opting for the normal tax system should thus be weighed up against the costs of preparing records, financial statements and returns for the normal tax system. In any event, at a turnover of R750 000 a business falls into the highest bracket for turnover tax and should consider making the transition to the normal tax system. Source: By Mahomed Kamdar, Technical Advisor, SAIPA (Tax Professional) thesait.org.za/news/96623/Turnover-Tax---Everything-You-Ever-Wanted-To-Know-About-Turnover-Tax-But-Didnt-Dare-Ask.htm
Posted on: Sun, 06 Jul 2014 15:04:29 +0000