It seems the tax is very much founded on pragmatism rather than being any form of incentive
On March 1 2009, the presumptive turnover based tax for micro businesses was eventually introduced.
The grounds for the new tax are very much founded on pragmatism rather than being any form of incentive. According to a survey conducted by Sars a small business would typically spend in excess of R7 000 per annum on basic tax compliance whereas related services such as accounting services, which are necessary to meet one's tax compliance burden exceed, on average, R36 000 per annum. It is, in fact, acknowledged by the policymakers that many taxpayers are overwhelmed by the tax system.
The turnover tax is elective and eligible individuals or corporate entities may elect this basis so long as their turnover does not exceed R1m.
The turnover tax, which replaces normal income tax on taxable profits, is levied at the following rates:Turnover Tax Liability
First R100 000 0%
R100 001 to R300 000 1% of each R1 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 - R1 000 000 R20 500 + 7% of the amount above R750 000
Where a business has a very low overhead structure, such as in the case with many service industries, the above rates would be a very attractive alternative to income tax, but here comes the catch:
Firstly, any business which looks like employment (that is, if you are a personal service provider) is disqualified.
A broad spectrum of "professional services" are also automatically disqualified.
Disqualified professional services include any services in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftsmanship, education, engineering, entertainment, health, information technology, journalism, law, management, performing arts, real estate, research, secretarial services, sport, surveying, translation, valuation or veterinary science.
Given the breadth of the above list, it is difficult to conceive of many pure service activities which would qualify. The aim was to exclude what government regards to be the more sophisticated services. One notable exception is that transport services, such as that offered by a taxi operator, are not excluded from this list. A taxi business would, however, have significant costs in the form of leasing charges or wear and tear, insurance, repairs, maintenance, wages, if not on an owner driver basis, and not least of all, fuel, which would significantly dilute any benefit.
Take for example, a small retail business which generates a profit amounting to 20% of turnover.
In the main, the turnover tax exceeds the income tax. According to the motivation put forward by Sars, the additional tax burden is worthwhile due to compliance cost savings.
If one increases the gross profit percentage the turnover tax system becomes more attractive. This would suggest that the turnover tax would favour the wealthier, "non-professional" taxpayers with a higher value added component to their business. Based upon an income of R500 000 the results are as follows for varying cost structures
When one reflects upon the above results the inequities become apparent. A self employed teacher, nurse, musician or secretary would be excluded from the above system and would not enjoy the reduced liability. A plumber, garden service provider or repair man could certainly capitalise on these benefits. On the other end of the spectrum, however, a small vendor with a low mark-up on his or her goods can potentially pay more tax.
There are certainly positives to be taken from this system, such as bridging the gap for taxpayers who have previously been outside of the taxing net. Whether this will assist in bringing a significant number of taxpayers into the net is debateable. It will be interesting to see whether services on the fringe of the defined professional services will benefit significantly and time will tell whether this system proves to be effective.
This article first appeared in BDO's Tax Flash
Comments