The Tax Implications to Consider When Starting a Business

When you’re running a business, whether as a legal entity or a sole propritor , there are tax implications to keep in mind. 

If you’re aware of the tax implications before you kick things off, it can really help with your cash flow planning. Plus, handling the administration and compliance of your company will be a lot smoother down the road.

Depending on the type of business entity you set up, you’ll encounter different tax rates and rules. On the bright side, there might be some tax incentives and chances to lighten the administrative load.

When private companies and non-profits register with the Companies and Intellectual Property Commission (CIPC), they automatically get registered with SARS for corporate income tax. If you decide to operate as a sole proprietor or partnership, it is important to ensure you are registered for personal income tax and provisional tax.  

There are some tax rebates and credits that could help lower your overall tax liability. Depending on your situation, legal entities might be eligible for various tax incentives and preferential rates, such as the turnover tax system, the small business corporation (SBC) incentive, or even accelerated depreciation relief if you’re in an Urban Development Zone.

Corporate Income Tax (CIT)


Every business, whether a legal entity or an individual, is liable for income tax. However, the rates of taxation and the applicable rules can vary significantly.

1. Turnover Tax is a simplified system designed to make it easier for micro businesses to meet their tax obligations. This system replaces Income Tax, VAT, Provisional Tax, Capital Gains Tax, and Dividends Tax for micro businesses with a qualifying annual turnover of R 1 million or less. A micro business registered for turnover tax may choose to remain in the VAT system (effective from 1 March 2012). Notably, the first R335,000 of annual turnover is tax-exempt, and the highest tax rate is only 3%.
   
   

   The R1 million cap to qualify for turnover tax excludes:
   • All capital-related receipts, including proceeds from the sale of significant business assets.
   • Certain government grants as outlined in the Income Tax Act.

   Impact on Other Taxes
   Micro businesses registered for Turnover Tax are exempt from Capital Gains Tax (CGT). However, 50% of the proceeds from business asset sales must be included in the calculation of “taxable turnover.” This provision acts as a substitute for CGT, ensuring that substantial capital gains are not routed through the turnover tax system to intentionally avoid CGT.

   Registered Turnover Taxpayers are also exempt from Dividend Withholding Tax (DWT) on dividend distributions up to R 200,000 per year. Dividends exceeding R 200,000 are subject to DWT at the standard rate of 20%.

   Companies are only required to register for VAT if the value of their taxable supplies exceeds R 1 million within a 12-month period. Therefore, micro businesses, by definition having turnover less than R 1 million, will not need to register for VAT.

   Eligible Taxpayers
   The following taxpayers may qualify, subject to the requirements:
   • Individuals (sole proprietors)
   • Partnerships
   • Close corporations
   • Companies
   • Co-operatives

   Please note: A trust cannot qualify as a micro business.
   Micro businesses registered for turnover tax must prepare two provisional returns per year to support their provisional payments: TT02 in August and February, along with a final tax return, TT03, annually. The provisional returns are based on estimated turnover for the year, with actual turnover calculated when the final tax return (TT03) is submitted, and the taxpayer is assessed.

   The criteria for identifying persons that do not qualify as micro businesses:

   • A natural person or company does not qualify if they hold any shares or interests in other companies, except for shares or interests in:
   –  Listed companies or portfolios in collective investment schemes
   –  Body corporates or share block companies
   –  Venture capital companies
   –  Co-operatives (limited to 5%) or friendly societies
   
   • For a natural person: If more than 20% of receipts during the year of assessment consist of income from the rendering of a professional service.
   • For a company: If more than 20% of receipts during the year of assessment consist of investment income and professional service income.
   • If its year of assessment does not end on the last day of February
   • If any of its shareholders is not a natural person
   • If any of its shareholders held shares or interests in another company at any time during the year of assessment, other than those allowed as per the list above, and other than shares or interests in a company that has not carried on any trade or owned assets with a total market value of more than R 5,000, or a company that has taken steps to liquidate, wind up, or deregister
   • If it is an approved Public Benefit Organisation, Recreational Club, Association, or Small Business Funding Entity
   • Personal service providers are excluded.
   • Labour brokers without an exemption certificate do not qualify.
   • If the total receipts from the disposal of fixed property and other capital assets used mainly for business purposes exceed R 1.5 million over three years (current and two prior years of assessment), they do not qualify

2. If your company qualifies, you can register as a Small Business Corporation (SBC) and enjoy some great tax incentives. This includes a tax exemption for the first R95,750 of your annual taxable income and a reduced corporate tax rate for income up to R550,000.

   
   Here’s what you need to keep in mind to qualify:
   • All shareholders or members must be individuals or natural persons throughout the fiscal year.
   • No shareholders or members can hold shares or have any interest in another business, except for small businesses as defined in section 12E(4).
   • Your firm’s annual income should not exceed R20 million.
   • Investment income, including dividends and rental income, can’t make up more than 20% of your total receipts and credits (excluding capital gains)
   • Lastly, your business shouldn’t offer personal services, as defined in section 12E(4) – essentially, it shouldn’t be a personal service provider.

3. For companies (including CCs) that do not qualify as a micro business or a small business corporation, the standard corporate tax rate is 27%).

Companies need to file an annual return and also submit provisional tax returns twice a year. It’s important to make those payments on time!

Employee taxes (PAYE)

Employers need to register for pay-as-you-earn (PAYE) and make sure to deduct it from what they pay their employees. They also have to contribute to the Unemployment Insurance Fund and pay everything over to SARS. If annual salaries, wages, and other payments go over R500,000, then the Skills Development Levy (SDL) becomes applicable as well. Employers should submit monthly returns and payments to SARS, and there are two mandatory reconciliations to complete during the year. On the bright side, there’s some relief available through the Employment Tax Incentive (ETI), which helps qualifying companies that hire young people by reducing their PAYE obligations.

VAT (Value Added Tax)


If the value of invoices your business raises (or is expected to raise due to a written contract) goes over R1 million in any 12-month period, you’ll need to register for VAT. However, you can also choose to register voluntarily, which could be a great move if your business has substantial VAT input claims.

Keep in mind that new businesses should consider the extra administrative tasks that come with VAT registration and compliance. Plus, there are cash flow implications to think about, since you’ll have a VAT liability before you actually receive payments on those invoices. This can be a significant risk if payments come in later than you anticipated.

Here are some other taxes that you might want to keep in mind:

When your shareholders earn dividends, the company has to withhold a 20% dividends tax and pay it to SARS.

Depending on your industry and what your business does, there could be additional taxes like carbon tax, sugar tax, transfer duties, and Capital Gains Tax (CGT) that apply.

If your company imports or exports goods, you’ll need to be registered for customs and excise taxes, and you’ll be responsible for those.

Business owners should also consider the following tax implications:


If you have income coming in from sources beyond your salary, like another job, dividends, or investments, you might want to think about registering as a provisional taxpayer if you fit the criteria.

Also, for new business owners, it’s common not to be able to draw a salary right away. In those situations, personal expenses paid by the company can be put into a loan account, or you can take out a loan. Just keep in mind that those expenses won’t be deductible for Corporate Income Tax (CIT) purposes.

Starting a business? Tax planning is super important! It can really add value and help protect you from any surprise tax bills. Our team is here to help you figure out the best tax-efficient structure for your new business, and we’ll make sure you stay tax-compliant.