Turnover Tax – A quick test from SARS for individuals and companies

This article summarizes a test created by SARS to assist individuals and companies in determining whether they qualify for Turnover Tax registration.

Sources: SARS.GOV.ZA
Tax Guide for Micro Businesses
Income Tax Act, Sixth Schedule and Part IV (sections 48 to 48C)
A previous article of March 2022 by Fincor; https://fincor.co.za/turnover-tax/
A previous article of May 2021 by Fincor; https://fincor.co.za/small-businesses-and-taxation/

Turnover tax is a simplified system aimed at making it easier for micro business to meet their tax obligations. The turnover tax system replaces Income Tax, VAT, Provisional Tax, Capital Gains Tax, and Dividends Tax for micro businesses with a qualifying annual turnover of R 1 million or less. A micro business that is registered for turnover tax can, however, elect to remain in the VAT system (from 1 March 2012).

Qualifying businesses will declare and pay one (1) tax (unless with a VAT or PAYE option) and only start paying tax when their annual turnover exceeds R335 000.

A micro business is not exempt from the duty to withhold payroll and other taxes, such as employees’ tax, skills development levies (SDL), and unemployment insurance fund (UIF) contributions, or to account for VAT (if voluntarily registered as a VAT vendor).

A person who commences business activities in a year of assessment and applies to be registered as a micro business must be registered as a micro business from the beginning of that year of assessment. Such a person would, by default, satisfy the qualifying turnover threshold requirement since they would not have previously traded and derived receipts from business activities in excess of the qualifying turnover threshold. In these instances, even though SARS is required to register a person as a micro business at the beginning of a year of assessment, that person’s qualifying turnover must not exceed the prescribed threshold of R1 million in that year of assessment (“pro-rata” if the person traded for less than a full year of assessment) in order to qualify as a micro business for that year of assessment.

Although the qualifying turnover of a micro business may be below the R1 million qualifying turnover threshold at the beginning of a year of assessment, it is in the best interests of a micro business to calculate its qualifying turnover on a regular basis so as to ensure it is within the required threshold at all times. Penalties and interest may be levied against taxpayers that account for tax on the basis that they qualify as a micro business but do not qualify as such.

A distinction must be drawn between “qualifying turnover” and “taxable turnover” since these concepts have different meanings and applications. Taxable turnover (subject to specific inclusions and exclusions) is concerned mainly with amounts received from carrying on business activities in South Africa and is the amount on which turnover tax will be levied.

The Specific anti-avoidance rule for qualifying turnover

An anti-avoidance rule to guard against income-splitting by a micro business has been provided for in the Sixth Schedule. This rule caters to circumstances in which the micro-business is split between connected persons in order to ensure that the qualifying turnover of each separate business remains within the R1 million qualifying turnover threshold.

For purposes of determining the qualifying turnover of any person, the total amount received by a connected person from carrying on business activities must be included in the qualifying turnover of the person seeking to be registered as a micro business if:

  • the connected person carries on business activities that should properly be regarded as forming part of the business activities carried on by that person; and
  • the main reason or one of the main reasons for “splitting” the business activities is to ensure that the qualifying turnover of that person is below the qualifying turnover threshold.

The qualifying turnover of a person seeking registration as a micro business should therefore be combined with the business receipts of connected persons in relation to that person. If the combined qualifying turnover exceeds R1 million, none of the connected parties will qualify as a micro business.

This article has reference to the Sixth Schedule and Part IV (sections 48 to 48C) of the Income Tax Act which regulates the turnover tax system available to micro businesses and will provide a basic overview of Turnover Tax.

Who can qualify for Turnover Tax?

Individuals (sole proprietors)
Partnerships
Close corporations
Companies
Co-operatives

If the answer to any of the questions is “NO”, the business will not qualify for turnover tax registration for that year of assessment.

A partner in more than one partnership will not qualify for “turnover tax”. The other partners may still qualify if they are only partners in a single partnership and do not answer “No” to any of the questions below. Please refer to the Tax Guide for Micro Businesses for further assistance with completing the test.

Will the “qualifying turnover” of the business be less than or equal to R1 million for the year of assessment?
​Do you declare that the business is not a “personal service provider” or a “labour broker” without a SARS exemption certificate?
​Does the business trade in one of the following forms: sole proprietor, partnership, close corporation, co-operative, or company?
​If the business is a partnership, do you declare that all the partners will be individuals throughout the year of assessment?
​If the business is a close corporation, co-operative, or company, do you declare that all of the shareholders/members will be individuals throughout the year of assessment?
​Do you declare that the business is not a public benefit organisation, recreational club, association of persons, or a small business funding entity?
​Does the business have a year of assessment that ends on the last day of February?
Do you declare that the owner, any partner, shareholders, members, and the business do not hold shares/interests in a close corporation, company, or cooperative other than the following exceptions:

Listed South African companies;
Collective investment schemes;
Body corporates and share block companies;
Venture capital companies;
Less than 5% in social or consumer co-operatives;
Less than 5% in cooperative burial societies or primary savings co-operative banks;
Friendly societies;
Any other company that did not trade during any year of assessment and which did not own assets with a total market value that exceeds R5 000 during any year of assessment;

Any company that has taken steps to liquidate, wind up or deregister?

​a) If you are a natural person, do you declare that the income from “professional services” is not expected to exceed 20% of your total receipts during the year of assessment
b) If the business is a company, close corporation, or co-operative, do you declare that income from “professional services” and “investment income” is not expected to exceed 20% of the total receipts for the year of assessment?
​Do you declare that the income from the disposal of assets by the business over the year of assessment and the past two years of assessment is not expected to exceed R1.5 million in total?
​Do you declare that the business was not previously registered for the Turnover Tax?