South Africa is brimming with entrepreneurs and small business owners who keep the economy running. These people may or may not be earning a regular salary too, but all of them operate a non-registered business in their own name - a so-called sole-proprietorship. In this blog post we will discuss how such a business pays tax, how it is taxed, and how to separate personal and business affairs to make tax deductions correctly.
To register or not to register as a company?
The choice to operate a business as a company formally registered with CIPC or as a non-registered sole-proprietorship in your own name should always include the amount of tax you would pay as either of these entities. While there is no income threshold above which a small business MUST register as a company, companies do benefit from a lower tax rate on profits than would be paid by an individual in their own name.
Small Business: R100 000 – R63 556 (non-taxable portion) x 7% = R2 551.08
Taxable income / profit: R400 000
Individual: using the tax tables = R99 000
Small Business: R20 051 (tax charged on amounts below R350 000) + R50 000 x 28% = R20 051 + R14 000 = R34 051
If you are prepared to go through the somewhat complicated and lengthy process of registering formally, then this option could be for you. Formal registration will allow you to get a company bank account and eventually sell the business much more easily than if you used your personal account and own name. However, if this option does not appeal to you, don't worry, as an individual who runs their own small business you can benefit from several tax deductions that help you keep more of your profits. In fact, even if you earn a salary and run your business on the side, you will still be entitled to these deductions that reduce the income tax you will have to pay. If this is the case though, and you are making a profit greater than R20 000 per year from your business, you will need to register as a provisional taxpayer with SARS.
Allowable tax deductions for business expenses
One of the basic principles behind income tax is that of only being able to claim a deduction for an expense that was actually incurred in the production of income. Money spent on things for the business that are needed to make money is allowed to be claimed as a deduction in your tax calculation. However ONLY business-related expenses are allowed to be claimed as a tax deduction. A lot of people have expenses that are part-business and part-personal - such as cell phone, rent, and petrol - and try to claim these in their entirety as a deduction. SARS is on the lookout for these claims and will heavily punish any chancers, so make sure only business expenses are claimed.
Perhaps you are thinking, “What if I do use my cell phone for both work and personal use, and I work from an office in my home. How do I deduct those costs?” The first step in good management of your small business’ tax affairs is to keep records of all incomes, expenses and assets that belong to the business. This can be as simple as an Excel spreadsheet on your computer or just a list on a piece of paper - the important thing is to keep a monthly record of everything business-related. Proper financial records will also help should you apply to the bank for business finance one day or if you decide to sell. Make these records based on your actual invoices and expense slips, and then confirm these amounts by checking them against your bank statement. If you can keep a separate business bank account then this process becomes much easier. For those expenses like petrol and cell phone which are mixed, you will need to identify exactly what portion relates to business use and which portion is personal. Ideally a written record or logbook (in the case of a vehicle) should be used for the calculation because SARS might one day want you to prove your estimation. If no records are available you can just make an educated estimate. Once you have decided on the ratio of business to personal use for a particular expense, you can claim the business portion in your ITR12 tax return and in doing so reduce your taxable income :) Doing the above calculation right is a chore, but your business can only stand to benefit, will have a greater valuation, and will allow you ultimate confidence that you have filed your return correctly come tax season.
So remember the following simple guidelines:
1. Keep separate sets of records for business and personal;
2. Keep records of ALL your incomes and expenses;
3. A separate bank account makes things easier;
4. Only business-related expenses, or a portion-thereof can be deducted against income earned.
When to pay:
A sole-proprietor who is NOT registered for provisional tax pays tax manually to SARS once-per year during tax season (1 July to 23 November) while filing their ITR12 return.
A sole-proprietor who IS registered for provisional tax pays tax manually to SARS twice (and optionally a third time) throughout the year (deadline 31 August and end February), then files a single ITR12 return by end of January. Confused? See an in-depth explanation of provisional tax here.
I am an agent that sells someone elses product for commission only. Should i register or not? I earn an average of R 180000 per month?
TaxTimsays: 2 October 2012 at 5:47
If you earn commission only then you are able to deduct most expenditure against the commission to calculate your tax payable. By registering a company you would be able to make the same deductions in the name of the business. If you are earning R180 000 per month then you are paying tax in your personal name at a marginal rate of 40% whereas a company pays tax at 28%. There are a lot of procedures to follow when registering a company and you would need to consider whether it worth while going through all the regulatory requirements before registering a company. From the tax perspective it makes more sense to register a company due to your very high earnings.
Johansays: 2 October 2012 at 14:08
I heard somewhere that temporary employees get taxed at 25% - what is the tax effect of being a temporary employee and how would one qualify for that?
Heather Brownsays: 2 October 2012 at 18:31
Oops!!!! R18 000 per month.... I wish R180 000!!!! :-) Makes a difference to your answer I am sure.
Also, someone else completed my latest return (At much more than you charge.... Guess who is changing to you soon!!) and I am due almost R6000, they say its an audit, but last year I worked in a standard job, standard salary, and was not employed for the whole year. What could they audit?
Where do I find out on the Work page if it IS an audit?
TaxTimsays: 2 October 2012 at 23:07
In most cases, where someone is performing a job as a once off or on a irregular occasion and that person is not registered as a company then the person paying the fee will withhold 25% and pay that over to SARS as PAYE. The person making payment does not know your tax rate and 25% is close to being the average rate of effective tax. When you submit your tax return, depending on the level of your total income for the tax year, you could be entitled to some of this amount back or in fact actually have to pay in due to having a higher tax liability.
TaxTimsays: 2 October 2012 at 23:51
Yes that makes a huge difference:)
You can only register your company to qualify as a Small Business Entity if you are not actively providing a personal service. So depending on the actual nature of your work, you could be seen to be what is called a "personal service provider" in which case the company would be taxed at a flat 28% and there would be no special treatment for being a small business.
So the tax then actually works out to be much higher than the 18%-25% you would pay on R18 000 per month, not to mention all the regulations that go with running a registered business.
SARS randomly select taxpayer assessments for audit, or if something entered disagrees with the information they have, so it could just be that you were randomly selected. If you were requested to submit supporting documentation then it would be in "audit" although don't be alarmed, the use of the word audit is more severe than the actual process. You would find the details, under "Letters" on the top right hand corner of the Income Tax Work Page.
I hope this helps!
Heather Brownsays: 3 October 2012 at 21:52
Thamks so much for your advice. Great site :-)
TaxTimsays: 3 October 2012 at 23:26
Only a pleasure!
Marinasays: 26 November 2012 at 15:15
Hi Tim, I bought my business earlier in the year and run it as a SP. I borrowed funds from my bond and the re-payments are deducted from my business bank account. I rent premises (not a office at home). What I would like to know is whether I'm able to deduct the repayments/interest as a business expense?
Many thanks, Marina
TaxTimsays: 26 November 2012 at 17:49
The rental amount would be deductible for tax purposes as this is a business expense. However the bond repayments and interest are still your "expense" and not the business'. However if the bond is for the premises that you rent out then the interest would be allowed as a deduction as well given that it would be a business expense. If it is your personal bond then this would not be allowed.
Marinasays: 29 November 2012 at 12:37
Thank you Tim, you've been a great help.
TaxTimsays: 29 November 2012 at 16:11
Glad I could help!
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