Before you think that you will miss out on the benefits that SARS will treat you to as a micro business, beware not to trick yourself into not registering for the new Turnover Tax.
Turnover Tax (introduced in the Sixth Schedule to the Income Tax Act No 58 of 1962) is a new tax system that taxes turnover and not taxable income. It is effective as from 1 March 2009 and focuses only on receipts and not on “receipts and accruals” as in a normal income tax calculation.
Only registered micro businesses are allowed to trade in their normal income tax liability (including capital gains tax and provisional tax) and Value Added Tax for the lighter administration burdens and lower tax rate benefits of the new and more simplified turnover tax system.
A person who wants to qualify as a micro business must meet two main criteria as required by paragraph 2 of the Sixth Schedule to the Income Tax Act No. 58 of 1962. Firstly the person must be a natural person or a company and secondly the person’s qualifying turnover may not exceed R1 million during a year of assessment that does not end on a date other than the last day of February (starting with 28 February 2010). These two requirements seem very simple at first but they get trickier as soon as one tries to apply them practically. This is explained by the following example:
Mr Joe Public carries on a trade as a caterer (excluded from the term ‘professional service’ as defined in paragraph 1 of the Sixth Schedule) in his own name and operates as a sole proprietor. He also owns a fixed property from which he earns rental income and also receives dividends on shares held in his own name.
As Mr Joe Public is a natural person, the first requirement to qualify as a micro business is met. The problem kicks in where Mr. Joe Public’s qualifying turnover needs to be determined. Paragraph 1 of the Sixth Schedule defines qualifying turnover as follows:
‘ “qualifying turnover” means the total receipts from carrying on business activities, excluding any-
1. amount of a capital nature; and
2. amount exempt from normal tax in terms of section 10(1)(y), 10(1)(zA), 10(1)(zG), and 10(1)(zH);’
The fact that the words ‘business activities’ are used in the plural form instead of ‘business activity’ indicates that a person should add all receipts of a non-capital nature from all business activities to determine qualifying turnover. It is uncertain whether additional receipts such as rental income and dividends will qualify as “total receipts from carrying on business activities”?
Section 12E of the Income Tax Act defines investment income as follows:
‘…any income in the form of dividends, …, rental derived in respect of immovable property,…’
It is clear that Mr Joe Public’s rental income earned and dividends received will qualify as investment income, but the question remains if investment income will qualify as “…receipts from carrying on business activities…”?
The meaning of the words ‘business activities’ as used in the definition of qualifying turnover (as well as various other paragraphs of the Sixth Schedule) is neither defined in the Income Tax Act, nor in the Sixth Schedule to the Income Tax Act. Section 48 of the Income Tax Act links the Sixth Schedule with the Income Tax Act (Stiglingh, 2009:950) and indicates that the words or expressions as defined in section 1 of the Income Tax Act will have the same meaning in the Sixth Schedule, unless defined otherwise in the Sixth Schedule. This is still of no value due to the fact that no meaning is added to what the words ‘business activities’ actually imply.
It is not certain whether the meaning of the word “trade” as defined in section 1 of the Income Tax Act has the same meaning as or includes or means something totally different from the words ‘business activities’ as referred to in the Sixth Schedule.
The word “trade” is defined in section 1 of the Income Tax Act and includes:
‘..every…,trade, business,…including the letting of any property…’
It is clear that the rental income earned by Mr. Joe Public will qualify as a trade. On the other hand, the dividends received on the shareholding constitute activities that might produce income and is seen as the passive earning of income that does not constitute a trade (Van Schalkwyk, 2009:93). This principle was also confirmed in ITC 1275(1978). This means that not all investment income will necessarily form part of and be seen as a ‘trade’.
The fact that the words “…total receipts from carrying on business activities…” are used in the Sixth Schedule, rather than the words “…total receipts from carrying on a trade…” creates the perception that the word “trade” does have a different meaning than the expression ‘business activities’.
Paragraph 3(b) of the Sixth Schedule to the Income Tax Act reads as follows:
‘A person does not qualify as a micro business for a year of assessment where-
1. more than 10 per cent of that person’s total receipts during that year of assessment consists of investment income as defined in section 12E.’
From the wording of paragraph 3(b), the understanding is that to test whether a person’s investment income exceeds more than ten per cent of the “total receipts” the expression “total receipts” constitutes a figure inclusive of that person’s investment income. The fact that the words “total receipts” are used in paragraph 3(b) instead of the words “total receipts from carrying on business activities” as used in the definition of ‘qualifying turnover’ in paragraph 1, creates the perception that there is a difference between these two expressions. It seems that the words ‘total receipts’ constitute a figure inclusive of investment income while the words ‘total receipts from business activities’ do not include any investment income. If this is true, it means that the expression ‘business activities’ does not include any investment income.
As a result, if Mr Joe Public wants to determine whether his qualifying turnover for a year of assessment does not exceed R1 million, he should not take any investment income into account as this will not constitute ‘total receipts from carrying on business activities’. This means that if a person has a maximum qualifying turnover of R1 million he can also have additional investment income of up to R100 000 (10% of R1 million) and still qualify as a micro business.
Taxpayers should not make the mistake of including their investment income in determining their qualifying turnover, as this may result in exceeding the R1 million threshold and will erroneously disqualify them to be registered as a micro business. Don’t be tricked by the words “total receipts from business activities” as this can easily result in you missing out on the beneficial treats of turnover tax.
ITC 1275(1978) 40 SATC 197
South Africa. 1962. Income Tax Act No.58 of 1962. Pretoria: Government Printer.
Stiglingh, M., Koekemoer, A., van Schalkwyk, L., Wilcocks, J.S., de Swardt, R.D., Jordaan, K. 2009. SILKE: South African Income Tax 2009. Durban: LexisNexis.
Herman Viviers CA(SA), MCom, is a tax lecturer in the Department of Accounting at the University of Stellenbosch.