Turnover Tax - The Ultimate Cheat Code for Small Business

It’s 1am, you can’t sleep so you stay up watching infomercials when the next ad comes on:

Sick and tired of paying too much tax? Is the government getting you down? Do you want to pay less tax? If you said “yes” to any of these questions, then I have a deal for you! It’s called…

TURNOVER TAX! It’s the brand new (actually entered into legislation in 2012), tax system for qualifying small businesses!

If your business qualifies, you pay R 0 in tax for the first 335k of turnover you make! Isn’t that amazing?

Register now!

What is Turnover Tax?

Turnover Tax is a simplified form of income tax which is levied on Turnover, rather than on Taxable Income and the total turnover must be less than R 1 million over a year of assessment.

What are the Turnover Tax Rates?

0 – 335,000              0%

335,001 – 500,000          1%

500,001 – 750,000          1,650 + 2% of the amount above R500,000

750,001 – 1,000,000        6,650 + 3% of the amount above R750,000


Here’s a few scenarios:

Scenario 1 (2022 tax tables)

Let’s imagine you’re a graphics designer (individual) with the following scenario:

  • Registered for Turnover Tax
  • Turnover/Revenue/Sales 300k
  • Expenses 75k
  • Taxable Income of 225k

Your tax, on the graphics designing income, is R 0.

Zero. Zilch. Nada. Nothing. Niks.

Because 300k is less than 335k and therefore has 0% turnover tax.

Scenario 2 (2022 tax tables)

  • NOT registered for Turnover Tax
  • Turnover/Revenue/Sales 300k
  • Expenses 75k
  • Taxable Income of 225k

Because you aren’t registered for Turnover Tax, you are taxed on your Taxable Income:

225k @ 38,916 + 26% over 216,200 

= 38,916 + (8,800 x 26%)

= 38,916 + 2,288

= 41,204

In both scenario 1 and scenario 2, their net profits before tax was the same: 225k. But scenario 1 is registered for turnover tax and pays no tax. Scenario 2 is NOT registered for turnover tax and pays 41k in individual tax.

Scenario 2 & 3: The photographer

A CIPC registered photographer in Cape Town has a turnover of 850k and has expenses of 200k (for 2020). They go to two accountants. The first accountant doesn’t suggest Turnover Tax as a potential solution. The second accountant does and registers the company for turnover tax immediately (for 2021):

Advice from accountant 1:

Taxable profit: 650k @ 28%

= 182k in tax…

So either the photographer pays himself a salary to lower the company tax, or take an “after-tax dividend” which has 20% tax!

Advice from accountant 2:

Turnover: 850k

Turnover Tax: ((850,000 - 750,001) x 0.03) = 3,000 + 6,650 = 9,650

= 9.6k in tax

Accountant 1 failed to register the photography company for turnover tax. As a result, the company had to pay 182,000 in tax to SARS. Accountant 2 registered the company immediately for Turnover Tax and saved them 172,350 in taxes

Sounds too good to be true? 

Limitations

In order to qualify for Turnover Tax, there are a number of limitations:

  1. Turnover must be below R 1,000,000. If it goes past that point, it loses both Turnover Tax privileges, AND they’ll have a compulsory VAT registration to deal with as well.
  2. Only a company or individual can register for turnover tax
  3. The company or individual can’t have shares / interest in other private companies or CC’s. 
  4. 20% or more of the turnover, can’t be from professional services:

Professional services are defined as: accounting, actuarial science, architecture, auctioneer, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science.

Any business that does NOT fall into these services above, can therefore register for turnover tax, provided that they meet the other 3 requirements as well.

Okay, so it looks like I can register for Turnover Tax, now what?

Complete the TT01 registration form correctly, make an appointment with SARS, submit the completed TT01 registration form together with a copy of your ID or CIPC document.

But here’s the tricky bit… If you already started your qualifying business (more than two months ago), but have NOT registered for turnover tax yet, the turnover tax rates will only apply from the next year of assessment.

Otherwise, you have a two month window to register your qualifying business for Turnover Tax. If the registration is successful, the turnover tax rates will apply with immediate effect.

Anything else we should know?

1. Record keeping: A turnover tax entity doesn’t need much accounting records:

  1. Amounts received
  2. Dividends declared
  3. Fixed Asset Register
  4. Liabilities

All other bookkeeping requirements are dependent on whether it’s a CIPC registered company, which would require signed financial statements

2. You can’t claim expenses. This means that if your small business is making large losses, Turnover Tax isn’t for you.

3. Be careful of putting on your “big boy pants”. This is when you’re doing 975k turnover and heading towards that magical 1 bar in turnover.

   The 1 bar turnover is a “big boy pants” move, but it comes with two problems:

  1. You lose your turnover tax privileges and go back to normal taxes; and
  2. You become compulsory to register for VAT.

So there you have it. The 8th world wonder called Turnover Tax.

If you’re a qualifying small business, perhaps ask your accountant or tax person why they haven’t suggest this to you! And if you don’t have a tax person… well.

We can fix that.

4. Companies or individuals that make large losses won’t benefit much from Turnover Tax, because you can’t claim expenses. The tax is calculated on turnover, not net profit…

5. Putting on your “big boy pants”. Doing 1 million in turnover / sales is amazing, but it comes with two big drawbacks:

  1. You lose your turnover tax privileges and have to pay normal tax again
  2. It becomes compulsory for you to register for VAT

My advice: If you’re closing in on the million per annum turnover, consider whether you want to swim with the sharks and wrestle with alligators. If not, slow down. Bigger doesn’t necessarily mean better.

In closing

If turnover tax sounds like the right tax for you, don’t delay, register today! Beware of the pitfalls, limitations and that big one million turnover mark.

Tell your accountant the Tax Maverick says hello.


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