Turnover tax harms SMEs

File picture: Ziphozonke Lushaba/Independent Media

File picture: Ziphozonke Lushaba/Independent Media

Published Oct 5, 2016

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Pretoria - A turnover tax regime that is simply unhelpful and a harsh documentary proof system is at odds with government's stated intention to assist micro and small businesses.

Tax practitioners and small business advisors have asked for an increase in the R1 million threshold for the turnover tax and a lesser onus of documentary prove on micro businesses to aid tax compliance.

Nyasha Musviba, tax consultant at SA Tax Guide, says the threshold of R1 million in today's terms is unrealistic. A small contractor lands one big contract in the year he registered for turnover tax and he is pushed out of the system.

"The turnover tax system is simple, but might even be too simple," he said at the recent Tax Indaba in Midrand.

South African Revenue Service (SARS) representative Narcizio Makwakwa said at the indaba it was National Treasury which set the threshold. He said it was worth suggesting an increase.

He said the current uptake for the regime has been minimal with not more than 8 000 businesses opting for the "simple" tax regime.

The turnover tax regime is available for small businesses with a qualifying turnover of R1 million or less. The system provides for a single tax, based on turnover in place of the usual income, corporate, capital gains and dividends taxes.

The turnover tax rates for the 2016-17 tax year are 1 percent above R335 000, 2 percent above R500 000 plus R1 650, and 3 percent above R750 000 plus R6 650.

Major problem

Nico Theron, Tax Consulting manager and member of the South African Institute of Tax Professionals (SAIT), said a major problem with the turnover tax was that a small business would pay tax on its income, despite making losses.

"The main idea with the micro business tax regime (turnover tax) is to make compliance easier, not to make it more tax efficient for the small business."

SAIT CEO Keith Engel pointed out that many start-ups remained in a loss making position for at least the first two to three years. He said the current regime was not helpful to small businesses.

Small businesses, once in the tax net, are surprised by the amount of documentation about their business they were supposed to have kept.

PKF tax partner Paul Gering said it was more than simply providing documentation. It was about the principle of a balance of probability.

"The courts take a broad view (on required documentation) where SARS takes a narrow view." The perception is that SARS requires documentary prove that is almost "beyond reasonable doubt", which is the kind of prove reserved for criminal cases.

SizweNtsalubaGobodo tax director Veli Ntombela referred to a taxi driver, who ended up on the wrong side of the tax compliance fence.

When he tried to set his affairs in order, his "documentation" turned out to be less than helpful. He had traffic tickets, but no invoices despite having had legitimate expenses.

Ntombela said many of these such businesses did not have the cash flow to service their taxis at dealerships, and the small businesses performing the service were not in the habit of issuing receipts.

Gering said on a "balance of probability" the taxi owner would have changed tyres at least once a year, would have had one major service and certainly would have filled up with fuel.

"On a balance of probability he should be allowed to deduct some of the expenditure despite not having the actual underlying documentation."

Musviba said senior SARS officials have discretionary powers to allow certain deductions, but choose not to use it.

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