South Africa’s tax season is officially open, and most South Africans are preparing to submit their tax returns. For many, tax season brings significant capital returns, but for some it does not. Small to medium-sized enterprise (SME) founders need to prepare for tax season by knowing what the difference is between personal tax and business tax.
Knowing which type of tax you fall into is important. It helps keep you compliant with the South African Revenue Service (SARS) and ensure you don’t have hefty penalties to pay in the long run.
In this article, we look at what personal and business taxes are, who they apply to, and what the compliance requirements are for each.
What is Personal Tax?
Personal tax or personal income tax is a direct tax levied by the government on the earnings of individuals. This includes money from salaries, wages, investments, rental properties, and business activities. It is calculated on a sliding scale based on your total taxable income.
What is Business Tax?
Business tax refers to the various mandatory levies and contributions imposed on commercial entities based on their income, payroll, property, or sales. In South Africa, these primarily include Corporate Income Tax (CIT), Value-Added Tax (VAT), and payroll taxes like PAYE and UIF.
To reduce the costs of compliance for small businesses, a turnover-based presumptive tax is available. It applies to companies with a turnover of less than R2,3 million per year. These companies can elect to pay this instead of the normal CIT, at a rate of 0% to 3%, depending on the level of turnover.
How does Personal Tax Work in South Africa
In South Africa, personal/income tax uses a progressive tax system, meaning the more you earn, the higher the percentage of tax you pay. If your earnings fall below the minimum threshold, you are not liable to pay. For individuals younger than 65 years, the annual tax-free threshold is R95 750. For those aged 65 to 74, it is R148 217, and for those 75 and older, it is R165 689.
How You Pay Income Tax
There are two ways in which personal income tax is paid/collected.
- Salaried Employees (PAYE): If you are formally employed, your employer deducts tax automatically every month using the Pay-As-You-Earn (PAYE) system. This is visible on your monthly payslip and yearly IRP5 certificate.
- Freelancers and Business Owners (Provisional Tax): If you are self-employed or earn additional non-salary income (like rent), you must register for Provisional Tax. You will be required to estimate your income and make tax payments to SARS twice a year (August and February) using an IRP6 form.
How does Business Tax Work for SMEs?
Tax obligations for SMEs depend on the legal structure of the business. SMEs can interact with the tax system in a few ways:
Small Business Corporation (SBC)
Companies with a turnover not exceeding R20 million that meet specific criteria, such as being a privately held company and deriving less than 20% of its income from investment or personal service activities, among other requirements. One of the benefits of SBC status is the ability to deduct common operating expenses, including rent for office space, employee salaries, marketing costs, and Internet services. These allowable deductions reduce taxable income, thereby lowering the overall tax liability.
Additionally, small businesses can benefit from accelerated depreciation allowances for assets like equipment and machinery. This provision enables businesses to write off the cost of such assets more quickly, freeing up capital to reinvest in growth and development.
Turnover Tax
Turnover tax is designed for micro-businesses with an annual turnover of up to R2,3 million. It taxes the actual money coming in, rather than profit, and replaces Income Tax, VAT, Provisional Tax, Capital Gains Tax, and Dividends Tax. Turnover tax returns must be filed in line with your company’s financial year between 1 July and 31 January of the following year.
Standard Corporate Income Tax (CIT)
Companies that do not qualify for SBC pay the flat corporate tax rate of 27%. While the rate applies to the majority of companies, the government applies special considerations for certain industries. For example, companies mining for gold are subject to special rates based on a standard formula. Long-term life insurance companies follow a “five-funds approach”, where policies are divided into different funds, each taxed at specific rates depending on the nature of the beneficiary.
Key Steps for Tax Filing
Small businesses that want to be compliant with tax and be ready for filing need to prepare in time. The following are key steps to follow for seamless tax filing.
Step 1: Get Organised and Compile Documents
The basis of good tax filing is meticulous preparation and organisation. Ensure that your bookkeeping is accurate and updated, as this will simplify the process of compiling your financial records.
Additionally, leverage cloud-based account software to track invoices, expenses, and receipts in real-time. Having a digital record minimises the risk of errors, facilitates easy retrieval of documents, and provides a clear picture of your financial situation, which will help you in preparing your returns.
Step 2: Know Your Deadlines
Meeting deadlines is crucial to avoiding penalties and interest charges. Keep the following dates in mind:
- Monthly submission: You must submit your EMP201 submissions by the 7th of each month. An EMP201 is used by employers to summarise payroll taxes deducted from employee salaries and declare the corresponding payments for PAYE, unemployment insurance fund (UIF) and skills development levy (SDL).
- Bi-monthly/Monthly VAT submissions: All manual submissions are due by the 25th, eFiling submissions must be done by the last business day of the month.
- Biannually: Provisional tax (IRP6) first payment is due six months from the start of your financial year. The second payment is due on or before your financial year-end.
- Annually: Annual tax returns and EMP501 reconciliations must be submitted between 1 April and 31 May each year. The EMP501 is an Employer Reconciliation Declaration submitted to SARS. It reconciles the payroll taxes you declare and pay monthly with the individual tax certificates (IRP5/IT3a) issued to employees.
Step 3: Leverage Your SARS Dashboard
Make it a habit to regularly log in to your SARS eFiling dashboard and review your ‘My Compliance Profile’. The tools available on the dashboard provide a real-time summary of your submission status and highlight any outstanding returns or payments.
By staying on top of your tax compliance and proactively addressing potential is key to avoiding hefty fines and maintaining compliance with SARS.
