Small businesses will reap the benefit of a simplified, turnover-based tax system and an increased value-added tax (VAT) threshold, Finance Minister Trevor Manuel announced in his Budget speech this week.
The turnover-based system will be elective and can be used by businesses with a turnover of up to R1 million a year. After joining the turnover-based system, a small business will be required to continue to use this system for a minimum of three years, provided its turnover remains below R1 million a year (See accompanying table).
However, if a small business owner decides not to use the turnover-based system for his or her business and rather to be taxed according to the traditional tax system, he or she will not be allowed to switch to the turnover-based system for five years.
Manuel says the turnover-based system is intended to reduce the tax compliance costs for very small business, not necessarily their tax liability.
This means you will be encouraged to practise regular record-keeping in your small business and to migrate to the normal income tax system over time.
Robin Beale, a consultant and tax specialist at PKF, a chartered accounting and business advisory firm that specialises in servicing growing and entrepreneurial companies, says the simpler tax matters are for small businesses, the better.
The new turnover-based tax proposed for these businesses removes the need for income tax returns. Business owners will now pay tax on their total turnover without making any deductions for expenses.
"There was previously a danger that small, unsophisticated businesses could unwittingly miscalculate their taxes with the new simplified tax forms, therefore a simpler turnover system is preferable," Beale says.
Businesses with an annual turnover of below R100 000 a year will not be liable for tax. Businesses turning over between R100 000 and R300 000 a year will pay two percent tax on each R1 above R100 000.
If the business turnover is between R300 000 and R500 000 a year, the owner will pay tax of R4 000 plus four percent of the amount above R300 000. Businesses turning over between R500 000 and R750 000 annually will be charged R12 000 plus 5.5 percent of the amount over R500 000 in tax.
A business that has an annual turnover of between R750 000 and R1 million a year will pay tax of R25 750 plus 7.5 percent of the amount above R750 000.
The compulsory VAT-registration threshold has been increased from R300 000 to R1 million, so small businesses with an annual income under R1 million will no longer have to register as VAT vendors.
Small businesses with an annual gross income of R14 million or less and that are not in the manufacturing industry will now be able to write off equipment at the general depreciation rates. Instead of writing off equipment at a rate of 50:30:20 over a period of three years, small businesses can write off small assets at 100 percent.
Small and medium-sized businesses will also find they have improved access to equity finance as a result of a venture capital tax incentive introduced this year.
Government is targeting high-growth and high-tech companies with an annual turnover of up to R14 million or gross assets of up to R7 million. General venture capital investments will qualify for a 30-percent up-front deduction, with annual deductions capped at R500 000 for individuals, R750 000 for corporations and R7.5 million for venture capital funds.