Tax amnesty for small businesses

The May 31 deadline is now less than three months away. Make sure you know what the amnesty is about so that you don't miss this opportunity.

What the small business tax amnesty is all about

- Why there is an amnesty

In the past, many small businesses operated outside the tax system. Other businesses under-paid tax and/or did not declare all their earnings.

All businesses are supposed to pay taxes, such as income tax, Pay As You Earn (PAYE) - employees tax that businesses who employ people must collect and pay over to the South African Revenue Services (SARS) - and value added tax (VAT).

But many small businesses have never registered with SARS to pay tax.

This means these businesses are breaking the law and therefore fear that they will be liable for fines or will be prosecuted.

Many of these small businesses have shown an eagerness to put their tax affairs in order but they fear they will be prosecuted.

As a solution, Finance Minister Trevor Manuel announced in February last year that SARS would offer a tax amnesty to small businesses, including taxi operators. The amnesty period runs until May 31 this year.

This means that you can register for the 2005/6 year of assessment and put your affairs in order without being punished for not paying in the past.

Small businesses play a vital role in helping our economy to grow. They create jobs, help to overcome poverty and improve the living standards of our people.

The government is committed to helping small businesses grow.

- What the amnesty means

If you apply and are granted amnesty, SARS will cancel the taxes - income tax and tax on dividends - that you or your business are liable for, as well as the penalties and interest for the tax years ending on or before March 31, 2005.

You can also receive amnesty for other taxes, such as VAT and PAYE, that you should have paid but have not for any tax period ending on or before February 28, 2006.

- Why you should apply

Small businesses who do not pay tax cannot make use of many of the opportunities and support offered by the government.

For example, these businesses cannot bid for government contracts for small businesses, make use of the government's financial and training support programmes, or, if they are taxi businesses, make use of the taxi recapitalisation programme.

This amnesty allows small businesses to register for tax and to make their business affairs legal. This means that as these businesses expand they can enjoy the benefits of a growing economy.

The government uses tax money to provide social services for all South Africans. Our tax money pays for education, health care and policing. It pays for grants for poor people and is used to build roads, power stations and dams. Without taxes, the government cannot build a better life for all.

SARS is responsible for collecting taxes. It would like to make it easy for people to start paying tax - even if they evaded it in the past. The more people who pay, the more money government will be able to spend on providing services for the people of South Africa.

The amnesty will make it easy for you to pay tax and to obey the law. It also allows taxi operators to sort out their tax so they can participate in the government's taxi recapitalisation programme.

- Where you can apply

You can apply for the amnesty at any SARS branch office around the country, except offices that deal only with customs or excise matters.

Who can apply

You can apply for amnesty for your small business as long as your business had a turnover (gross income) of less than R10 million in 2006.

You can own the business as an individual (including the insolvent or deceased estate of an individual), or through a close corporation (CC), an unlisted company, a co-operative or a trust. If the business is owned by a CC, an unlisted company or a co-operative, the shares in it must be held by individuals.

A similar rule applies to a trust.

Any small business that has not yet registered for the 2006 tax year can apply for the amnesty. If you are registered but did not declare all your income or taxes, you can also apply for amnesty.

The 2006 tax year (year of assessment) is defined as a year that ended during the period of 12 months from April 1, 2005 to March 31, 2006. You must apply for the amnesty before May 31 this year.

Withdrawal of the amnesty

The amnesty will be withdrawn if you:

- Do not pay the full amount of the tax amnesty levy within 12 months;

- Did not give full and honest information or amounts, including a statement of assets and liabilities, as at February 28, 2006; or

- Made an estimate that is not reasonable.

Amnesty checklist

Checklist for eligibility for amnesty

Objection and appeal

If the South African Revenue Service denies your application for amnesty, you may object and appeal against that decision. In this case, the process to be followed is the normal dispute-resolution procedure provided for in the Income Tax Act. Refer to SARS's website www.sars.gov.za for more information.

What if you do not use the amnesty?

The amnesty is your only opportunity to put your tax affairs in order in terms of the law. If you do not use the amnesty:

- You will always owe the South African Revenue Service (SARS) taxes from past years;

- When you do register as a taxpayer, or if SARS catches you or you come forward voluntarily in the future, you will have to pay additional tax, penalties and interest;

- SARS may take action against you and you could be charged with a crime; or

- You could lose out on opportunities offered by the government.

How does the R10 million turnover limit work if you own more than one business?

Many people run more than one business - for example, someone may have three taxis and a spaza shop. If these businesses are close corporations (CCs) or companies, they can be registered as separate businesses.

If they are registered in your name, the total turnover for all of them cannot be more than R10 million for the tax year that ended on February 28, 2006, if you want to benefit from the amnesty.

Turnover is the total amount that you receive from all the goods or services you sell in your business - it is also called gross or total income. Here are some examples of how the turnover limit of R10 million works for:

1. A number of businesses run by one individual - NOT as separate legal entities

A person may run different businesses, such as a taxi, a hair salon and a spaza shop, or be an employed professional with a business on the side. In this case, the turnover for all the business activities must be added together to work out whether the person is within the R10-million limit, as these examples show.

* Leila Magubane runs two taxis, a spaza shop and a hair salon. The turnovers of her businesses for the 2006 tax year are:

- Taxi business:R600 000

- Spaza shop:R900 000

- Hair salon:R600 000

- Total turnover:R2 100 000

The total amount of turnover for all the businesses is not above R10 million for the 2006 tax year - so Leila can apply for the small business tax amnesty.

* James Naidoo, a sole proprietor, runs a pool-cleaning business, a gift shop and a transport business. The turnovers of his businesses for the 2006 tax year are:

- Pool-cleaning business:R2 000 000

- Gift shop:R4 500 000

- Transport business:R6 000 000

- Total turnover:R12 500 000

As the total turnover from his businesses is more than R10 million for the 2006 tax year, James does not qualify to apply for the small business tax amnesty.

2. A number of businesses run by one person as separate legal entities

A person can run two or more businesses as separate legal entities, such as a company or CC. In such a case, the turnover limit will apply separately to each business. The example below shows how this works:

* Dr Eddie van Schalkwyk is the sole (only):

- Member of Dr Van Schalkwyk and Associate Physicians CC, with a turnover of R4 200 000 for the 2006 tax year; and

- Shareholder of Van Schalkwyk Property Investments (Pty) Ltd, with a turnover of R6 000 000 for the 2006 tax year.

The above businesses are separate legal entities, and each will qualify for the small business tax amnesty, because:

- Each entity carries on a separate business;

- The total gross income (turnover) of each business during the 2006 tax year was not more than R10 million; and

- In the case of the company and the CC, all the shares were held directly by an individual throughout the 2006 tax year.

How do you work out a reasonable estimate of your taxable income?

If you do not have documents to prove your taxable income, you have to make a reasonable estimate. Here are two examples of how to do this:

Example 1. Reasonable estimate of taxable income based on possessions and monthly expenses

As at February 28, 2006, Sipho Cele, who was not registered with the South African Revenue Service (SARS), owned the following businesses:

- A cellphone business, which cost R110 000 (in 2005); and

- A motorbike delivery business, which cost R50 000 to start and stock.

Sipho also owned the following:

- A house at a cost of R250 000 that was bought before the 2005 tax year;

- A car at a cost of R75 000 that was bought during the 2006 tax year;

- A savings bank account with R20 000;

- Personal possessions, including furniture, that cost R25 000; and

- An outstanding mortgage bond (debt) on the house of R150 000.

During the 2006 tax year, Sipho spent R5 000 monthly on himself and his family, and paid R1 500 a month towards his bond.

He wants to expand his delivery business and tender for a government contract, which means that he will have to be registered with SARS as a taxpayer.

Sipho wants to apply for the small business tax amnesty but has kept no accounting records for his cellphone and delivery businesses.

Sipho will have to estimate the taxable income from his businesses. These estimates must be on a reasonable basis, taking into account his possessions, lifestyle and living expenses.

Calculation

Based on the above figures about Sipho's finances, his assets and liabilities at February 28, 2006 were worked out like this.

- Assets are the value of things you own, or money that is owed to you.

- Liabilities are the debts or outstanding accounts you still have to pay.

- Net assets are the difference between the assets and the liabilities.

So Sipho's net assets at February 28, 2006 were R380 000.

He has not kept any accounting records. He can make a reasonable estimate of his taxable income by adding up the money he spent on his family budget, his house and his car in 2006.

- Cash paid for car R75 000

- Monthly expenses of R5 000 x 12 months R60 000

- Bond payments R1 500 x 12 R18 000

- Total estimated income for 2006 R153 000

Sipho will need to pay a tax amnesty levy (see "What you will pay to receive amnesty") on his taxable income of R153 000 plus the normal income tax payable for the 2006 tax year. Click here for the calculation.

Sipho will pay no taxes for all the tax years before February 28, 2005. Sipho will also not have to pay any other taxes, interest and penalties for not disclosing his taxable income for these years.

From 2006 onwards, Sipho will have to keep proper accounting records for the 2007 tax year and future years, and submit his tax returns.

Sipho's participation in the small business tax amnesty has helped him to normalise his tax affairs, and he can now tender for government contracts.

Example 2. A typical business in the construction industry

Isaac Pietersen is the sole owner of a carpentry business that operates in the construction industry.

He employs a number of people doing carpentry work at a number of construction sites at any point in time.

Isaac submitted the following list of income and expenses for the 2005/6 year to his bank for a loan application, but he has not submitted this information to the South African Revenue Service (SARS) and is not registered for tax.

Income and expenses for Isaac Pietersen for the period March 1, 2005 to February 28, 2006

What will you pay to receive amnesty?

- You will pay a small levy and you will have to pay income tax for 2006.

You will pay a small levy to receive amnesty. This clears all your taxes from the past. The levy will be between two percent and five percent of your 2006 profit (taxable income). If your profits are less than R35 000, you will not pay a levy.

The levy you will pay will be worked out using the scale in the table based on how much profit (taxable income) you made.

For example, if you made R50 000 profit (taxable income), you will have to pay a levy of R300, calculated as follows:

R50 000 - R35 000 = R15 000 x 2% (multiply by two, then divide by 100) = R300

The tax amnesty levy is based on the taxable income of your business only and any other taxes are not included. When you work out the levy, you cannot bring forward any losses from previous financial years.

The levy must be paid within 12 months from the date you have been granted amnesty.

Apart from the levy, you will still have to pay income tax on the profit you made for the 2006 tax year.

Here is an example of how the levy is calculated for someone who paid income tax, but did not pay value added tax (VAT) and Pay As You Earn (PAYE) for 2006.

FACTS:

- For the 2006 tax year, Juanita Arendse, a sole trader in sports goods, submitted her 2006 income tax return and declared a taxable income of R550 000.

- Juanita did not declare VAT amounting to R25 000 to SARS for the various periods of the 2006 tax year.

- She also did not deduct PAYE of R10 000 from three of her employees, and deducted, but did not pay over to SARS, PAYE of R5 000 from two of her employees.

RESULT:

- Juanita will pay her normal tax on the R550 000 taxable income for the 2006 tax year. She will also pay a tax amnesty levy of R18 300 (R15 800 plus five percent of R50 000).

- She will receive amnesty for the VAT and PAYE up to February 28, 2006 and will not pay those taxes.

- Juanita will have to register and pay PAYE and VAT from March 1, 2006 onwards.

- You cannot make future claims for losses brought forward.

If you receive tax amnesty, you cannot in future tax years claim for any losses you made during the years for which you received amnesty. Furthermore, when you are working out how much VAT you owe after the amnesty period expires, you cannot claim for VAT you paid during the time covered by the amnesty.

What can you do if your business owes tax?

The South African Revenue Service (SARS) recently published draft regulations in terms of which it will waive additional tax, penalties and interest added on to the tax you owe up to R1 million.

The regulations are still subject to parliamentary scrutiny and the Minister of Finance's approval and the approved regulations will be published on SARS's website, www.sars.gov.za

Once approved this is likely to mean that if you have been submitting tax returns for your small business and/or your tax return has been assessed, but you still owe tax that you have unable to pay, it is likely that you will be able to apply for a waiver of some of your debt.

The small business tax amnesty does not apply to a person or a business that has already submitted a tax return or been assessed. For this reason SARS decided to make another arrangement to assist small businesses that are struggling to pay what they owe. SARS believes that this R1 million limit should be sufficient to cover the penalties and interest of most small businesses.

You will have to pay what you owe in tax, but any penalties you owe - for example, for not submitting your returns on time - and the interest that has been added to the outstanding amount will be waived.

This applies to income tax and secondary tax on dividends that you owe for periods up to February 28, 2005, and to value added tax, Pay As You Earn, skills development levies and withholding tax on royalties that you owe up to February 28, 2006. These penalties and interest must still have been outstanding on July 31, 2006, which is the day before the amnesty period opened.

The conditions of applying for this waiver of debt are that:

- You must submit a statement of all assets (at cost) and liabilities for your business as at the end of the 2006 tax year;

- You must submit all the returns that were outstanding up to December 31, 2006; and

- You must apply for the waiver by May 31 this year.

- You must settle what you owe in tax within six months of being granted the waiver of interest and penalties, or longer if SARS allows this, failing which the penalties and interest will be reinstated.

You cannot apply for a waiver of the interest and the penalties you owe if:

- The Sheriff of the High Court has attached your assets or those of your business in terms of a writ of execution obtained on behalf of SARS;

- If sequestration or liquidation proceedings against you or your business have begun; and

- If SARS has notified you or your business that an audit investigation will be conducted into your financial affairs, unless this notice has been withdrawn or you have been informed that the audit investigation has been completed.

What taxes can you be granted amnesty for?

Some taxes up to the 2005 year of assessment

Up to this date you can get amnesty for:

- Income tax on profits (taxable income). This is the income from your business after you have deducted the expenses you are allowed to deduct in terms of the law.

- Secondary tax on companies. Businesses that declare dividends are liable for tax on these dividends at 12.5 percent of the dividends paid.

(Note that the tax year-end dates for companies and close corporations may differ.)

Some taxes up to February 28, 2006

Up to this date you can get amnesty for:

- Value added tax (VAT). You are required to register for VAT and to collect and pay over VAT if your turnover exceeds R300 000 a year.

- Pay As You Earn (PAYE), which is the tax you should have deducted from your employees' earnings and paid to the South African Revenue Service (SARS).

- Contributions on payroll to skills development levies (SDLs). You must pay into the SDL fund if your small business pays remuneration of more than R500 000 a year.

- Contributions to the Unemployment Insurance Fund (UIF). You must pay contributions to the UIF for any employee who works more than 24 hours a month.

- Withholding tax on royalties. Twelve percent of copyright, patent and know-how payments to foreigners must be withheld - this tax mostly applies in the publishing and entertainment industries.

You will not have to pay any fines, interest and penalties on the tax you owe, because the amnesty covers these. Once you receive amnesty, SARS may not make a criminal case against you - as long as you have been honest about your income.