SARS: A Look At The Benefits for Small Business – Part 1/3

Welcome back to another Did You Know? Chapter where we breakdown everything business and finance simply for SMEs to understand. We continue breaking down our Entrepreneurship for Dummies miniseries, if you have not read it yet click here for Part 1, Part 2 & Part 3 for context on how we are delivering quality information about being an entrepreneur in South Africa as well as the tools you can use to optimise your business.

You have probably noticed a pattern in how we structure our chapters.  We begin with a brief history lesson about the institution itself and then go on to share information with you that can be used to grow and give you balls of steel to break down walls, overcome obstacles and redefine your industry.

History of Tax:

Records put China as one of the longest of all written records, and we know that taxes were levied there some 3,000 years ago as the Empire was being established.  Powers (usually military) that were able to impose taxes created the first bureaucracies to collect and administer them. Under the Egyptian Pharaohs, scribes were charged with raising funds in any way practical, including a tax on household cooking oil. Regular audits were conducted to ensure that oil was not recycled perhaps the first historical record of avoidance. The Book of Genesis in The Bible suggests that a fifth of all crops should be given to the Pharaoh. The city-states of Ancient Greece imposed eisphora (a general word for payment) to pay for numerous wars, but once the war was over any surplus had to be refunded. Athens imposed a monthly poll tax on foreigners. Imperial Rome used tribute extracted from colonised people to multiply the bounty of the empire. Julius Caesar imposed a one-percent sales tax; Augustus instituted an inheritance tax to provide retirement funds for the military. However, human bondage remained the most lucrative form of tribute for both Greece and Rome.

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History of SARS:

Before the establishment of SARS, the tax-collecting agency was called the Receiver of Revenue. The first income Tax Act in South Africa was introduced in 1914.  From 2012 to the present Tax collection has totalled R6.1 Trillion.

Following South Africa’s transition from apartheid to democracy in the early 1990s, the South African Revenue Service (SARS) was established as an autonomous agency in terms of the South African Revenue Service Act 34 of 1997, responsible for administering the South African tax and customs service.

The South African Revenue Service (SARS) is the revenue service (tax-collecting agency) of the South African government. It was established by legislation to collect revenue and ensure compliance with tax laws.  Its vision is to be an innovative revenue and customs agency that enhances economic growth and social development and supports South Africa’s integration into the global economy in a way that benefits all citizens.

Under the South African Revenue Service Act 34 of 1997, the service is an administratively autonomous organ of the state: it is outside of the public service, but within the public administration. So although South Africa’s tax regime is set by the National Treasury it is managed by SARS.

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 SARS Functionality:

• Collection and administration of all taxes types;
• Protect against the illegal importation and exportation of goods, duties, and levies;
• Facilitate trade, and advise the Minister of Finance on all revenue matters.

We’ll start with the first function of SARS and that is the collection of your hard-earned money as well as the explanation of the different tax types that make up the South African tax structure. We begin our journey with SBC which stands for Small Business Corporation Tax. It is important to understand the small business tax structure as it allows the maximisation of profit – a legal way to not pay huge amounts of taxes to the government.

What is Small Business Corporation tax (SBC) and how does it affect you?  It is a tiered tax structure that helps to determine how much is going to the taxman and how much stays in the business at the end of the financial year.

R0 – R67 111	0%
R67 112 – R365 000	7% Above R67 111
R365 001 – R550 000	21% Above R365 000
R550 001 and above	28% Above R550 000

There are 4 tiers to SBC tax and it scales from 0% to 28% respectively. It is fairly simple to understand as SARS provides a table. The example values indicate profit before tax (Income – Expenses = Gross Profit) – this changes every year immediately after the Finance Minister delivers his Budget Speech.

The table is fairly straightforward to understand and indicates how to calculate the liability percentage. If the Gross Profit earnings fall into level 4, then all the previous levels are included (not straight to 28% as is normally the case).

Clause s12E is a detailed explanation of what qualifies and disqualifies a business for SBC tax and includes the definition of a Personal Service Provider?

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List of the various tax types:

• Personal Income Tax

  • What is it? – Income tax is the normal tax that is paid on your table of income: Remuneration (Income from employment) such as salaries, wages, bonuses, overtime pay, taxable (Fringe) benefits, allowances, and certain lump-sum benefits.

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• Value Added Tax (VAT)

  • What is it? – VAT is an abbreviation for Value-Added Tax, it is an indirect tax on the consumption of goods and services in the economy. Revenue is raised on behalf of the government by requiring certain businesses to register and to charge VAT on the supply of goods and services. These businesses become vendors that act as an agent for the government in collecting the VAT.
  • Who is it for? – It is mandatory for a business that earns income, more than R1 million in any consecutive twelve-month period to register for VAT. The business must complete a VAT101 application form to register and submit it to their local SARS branch within 21 days from the date of exceeding R1 million.

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• Capital Gains Tax

  • What is it? – Capital Gains Tax is not a separate tax but forms part of income tax, Capital Gain arises when you dispose of an asset on or after 1 October 2001 for proceeds that exceed its base cost. Capital gains are taxed at a lower effective tax rate than ordinary income. Pre-CGT capital gains and losses are not taken into account. Not all assets attract CGT and many capital gains and losses are disregarded. A withholdings tax is applied to non-resident sellers of immovable property. The amount withheld by the buyer serves as advance payment towards the seller’s final income tax liability.

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• Provisional Tax

  • What is it? – Provisional tax is not a separate tax it is merely a system that requires taxpayers to provide for their final tax liability in advance, by paying at least two amounts in the year of assessment, which is based on estimated taxable income. Final liability, however, is determined upon assessment. The aim is to help taxpayers meet their liabilities in the form of two payments, instead of in the form of a single, large sum on assessment. A third payment after the end of the tax year, but before the issuing of the assessment is optional.

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• Pay-As-You-Earn (PAYE)

  • What is it? – Employee tax which comprises Pay-As-You-Earn (PAYE) and Standard Income Tax on Employees (SITE) refers to the tax required to be deducted by an employer from any applicable remuneration paid or payable. The SITE element ceased being applicable 1 March 2012. Tax tables are specifically calculated to ensure that only the mandatory deduction is withheld – these change annually after the Minister of Finance gives his budget speech. The process of deducting or withholding tax from remuneration as it is earned by an employee is commonly referred to as PAYE.  An employer is required to register with SARS for PAYE, UIF (Unemployment Insurance Fund), and SDL.

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• Unemployment Insurance Fund (UIF)

  • What is it? – The payment of contributions to cover workers within the labour market in South Africa was introduced as early as 1946 but has changed quite a lot since then. Currently, the Unemployment Insurance Fund (UIF) provides short-term relief to workers when they become unemployed or are unable to work because of maternity, adoption leave, or illness. It also provides relief to dependents of a deceased contributor.
  • How does it work? – This is a mandatory deduction of 1% of an employee’s gross monthly/weekly/fortnightly income. There are a few exemptions i.e. when a person works less than 24 hours in a month, or when a person is a Personal Service Provider.  The registration can be done at the same time as for PAYE and the contributions paid to SARS on the EMP201 monthly return.  There is an additional 1% payable by the employer.  The threshold for deductions is R148 720 per annum – this means that when an employee earns above the threshold, they only pay R148.72 per month.  The registration can also be done with the Department of Labour

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• Skills Development Levy (SDL)

  • What is it? – It is a levy imposed to encourage learning and development in South Africa and is determined by an employer’s salary bill.
  • What is it for? – The funds are meant to be used to develop and improve the skills of employees. Under the Skills Development Levy (SDL) Act, registered employers are required to pay the levy for every employee they hire. The SDL collected is channelled to the Skills Development Fund (SDF), which provides grants to employers who send their employees for training under the National Continuing Education Training system.
  • Who is it for? – The following employers are exempt from paying SDL: those whose annual salary bill for the coming 12 month period won’t exceed the prescribed amount of R500 000 – there is no need for these employers to register.

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• Transfer Duty

  • What is it? – Transfer Duty is a tax that is levied on the value of any property that is acquired. The property includes amongst other things, land and fixtures, real rights in land, rights to minerals, a share or interest in a residential property company, or a share in a share block company.

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• Customs Duties

  • What is it? – Custom Duties are levied on imported goods to raise revenue and protect the local market. They are usually calculated as a percentage of the value of the goods (set in the schedules to the Customs and Excise Act). However meat, fish, tea, certain textile products, and certain firearms attract rates of duty calculated either as a percentage of the value or as cents per unit (for example per kilogram or metre).
  • Additional ad valorem customs duties are levied on a wide range of luxury or non-essential items such as perfumes, firearms, and arcade games to name a few.

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• Corporate Income Tax

  • What is it? – Corporate Income Tax (CIT) also known as business tax is imposed on businesses incorporated under the laws of the Republic of South Africa and which derive income either through a branch or permanent establishment within the Republic. We have recently launched a new dynamic ITR14 return as part of the modernisation of Corporate Income Tax aimed at improving efficiency and compliance.

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• Dividend Tax

  • What is it? – Dividends Tax is imposed on shareholders (at 20%) on the receipt of dividends from companies. It is calculated and withheld from their dividend payment and payable to SARS within 30 days of the Dividend disbursement.

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• Donations Tax

  • What is it? – Donation Tax is payable at a flat rate of the value of property disposed of by donation. A donation includes property disposed of for inadequate consideration.
  • Exemptions – Section 56 (1) contains a list of exempt donations which include amongst others donations between spouses and approved public benefit organisations.
  • Annual Exemptions – A donation will be exempt if the total value of donations for a year of assessment does not exceed:
    • Casual gifts by companies and trusts: R10 000.00
    • Donations by individuals: R100 000.00 – tax of 20% is levied on any amount above the threshold and must be covered by the donor. The rate increases to 25% on the cumulative value exceeding R30 million.

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• Estate Duty Tax

  • What is it? – Estate Duty is levied and collected in respect of the estate of every person who dies on or after 1 April 1955. Estate Duty is charged at the rate of 20% upon the dutiable amount of the estate calculated in terms of the Estate Duty Act. The threshold is R30 million whereafter the rate of 25% is applicable.

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• Excise Duties & Levies

  • What is it? – Excise duties and levies are imposed mostly on high-volume consumable products (e.g. petroleum, alcohol, and tobacco products) as well as certain non-essential or luxury items (e.g. electronic equipment and cosmetics). The primary function of these duties and levies is to ensure a constant stream of revenue for the State, with a secondary function of discouraging consumption of certain harmful products; i.e. harmful to human health or the environment.
  • In addition to duties and levies, there is the Diesel Refund System for qualifying entities

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• Retirement Tax

  • What is it? – This is a tax payable on the withdrawal of funds from either Pension or Pension Preservation Funds or a Retirement Annuity.

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• Securities Transfer Tax

  • What is it? – It is a tax levied on every transfer of security and what do I mean by security?
  • Security, in essence, means; any share or depository receipt in a company or members interest in a close corporation (CC)

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• Turnover Tax

  • What is it? – Turnover tax is a simplified tax system aimed at making it easier for small businesses to comply with their tax duties. The turnover tax system replaces Income Tax, VAT, Provisional Tax, Capital Gains Tax, and Dividend Tax. A small business that is registered for the turnover tax can however choose to remain in the VAT system.

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• Double Taxation Agreements

  • What is it? – Double Taxation Agreements (DTA) are internationally agreed on legislation between South Africa and another country. A DTA ensures that taxpayers are not unfairly taxed in both South Africa and the corresponding country dealt with in any specific DTA. It thus provides a defense to double taxation and sets out various requirements that a taxpayer must meet to understand where that taxpayer falls as a tax resident.
  • Double Taxation Agreements with other countries to avoid double taxation include:

South Austria, Belgium, Canada, Cyprus, Denmark, France, Germany, India, Ireland, Israel, Italy, Japan, Korea, Malta, Mauritius, the Netherlands, Norway, Singapore, Sweden, Switzerland, Taiwan, Thailand, Hong Kong, Kenya, the UK, and the United States.

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We can finally discuss the allocation of your hard-earned money:

• Roads
• Schools
• Hospitals
• Child Welfare
• Social and Disability Grants
• Other government services

We end the first part of this article with the following in mind, this chapter was about highlighting the taxes we pay whether we are an individual or business so that when you read the next chapter you can so how these taxes are applied in the business environment whether you are a micro, macro or medium-size business.  You cannot escape paying your taxes or dying so stay tuned for Parts 2 and Part 3 of this exciting look into SARS and the South African tax structures.