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Making sense of Company Tax

Company tax can be a challenge for businesses. To explain the ins and outs, here’s a simple overview.

The  tax year of assessment for taxpayers covers a period of 12 months. For Companies and Close Corporations the year of assessment is the applicable financial year.There are several different types of business entities in South Africa – sole proprietorship, partnership, close corporation and a private company. Each of these has tax responsibilities.

Sole proprietorships

A sole proprietorship is a business owned and operated by an individual and is the simplest form of business entity. The business has no existence separate from the owner who is the proprietor.

The owner must include the income from the business in their own income tax return and is responsible for paying taxes. A sole proprietor  is subject to income tax levied at progressive rates ranging from 18% to 40%.

Partnerships

A partnership is the relationship between two or more people who join together to form a business. It is also not a separate legal person or taxpayer. Each partner shares equal responsibility for the partnership’s profits and losses and its debts and liabilities.

The partnership itself does not pay income taxes, but each partner has to report their share of business profits and losses on their individual tax return. Each partner is taxed on their share of the partnership profits.

Each partner is subject to income tax levied at progressive rates ranging from 18% to 40%.  It is similar to a sole proprietorship except that a group of owners replaces the sole proprietor. The number of persons who may form a partnership agreement is limited to 20.

Closed corporations

A CC is a company, similar to a private company. It is a legal entity with its own legal personality and succession and must register as a taxpayer in its own right. A CC has no share capital and no shareholders.

The owners are the members of the CC and their initial interest in rands (which often reflect their ownership percentages) are called membership contributions. For income tax purposes a CC is regarded to be a company.

CCs are taxed at a rate of 28% on taxable income for the tax year, unless they qualify as SBC (Small Business Corporations), in which case they are taxed at a different, lower scale.

Private companies

A private company is treated as a separate legal entity and must also register as a taxpayer in its own right. The owners of a private company are the shareholders and the company name ends with the suffix “(Pty) Ltd”.

Private and Public Pty Ltds are taxed at a rate of 28% on taxable income for the tax year, unless they qualify as SBC (Small Business Corporations), in which case they are taxed at a different, lower scale.

Small business corporations and micro businesses

Micro businesses pay turnover tax.  Turnover tax is a simplified tax system aimed at micro businesses (with a qualifying turnover of R1 million or less), making it easier for micro businesses to comply with their tax obligations. It replaces Income Tax, VAT, Provisional Tax, Capital Gains Tax and Dividends Tax. A micro business that is registered for turnover tax can, however, choose to remain in the VAT system.

Turnover tax is available to qualifying individuals (sole proprietors), partnerships, close corporations, companies and co-operatives. Specific reasons can disqualify you from the turnover tax system. These can be found in paragraph 3 of the Sixth Schedule to the Income Tax Act.

Turnover tax is worked out by applying a tax rate to the taxable turnover of a micro business. The rates are applicable for any year of assessment ending during the period of 12 months ending on 29 February 2016:

 

Turnover​ (R) Rate of tax (R)
0 – 335 000 0%​
335 001 – 500 000 1% of each R1 above 335 000
500 001 – 750 000 1 650 + 2% of the amount above 500 000
750 001 and above 6 650 + 3% of the amount above 750 000

Table 1: Turnover Tax Rates for any year of assessment ending during the period of 12 months ending on 29 February 2016.

For assistance with your company tax, contact our tax department which offers a broad range of services that cover companies, trusts, close corporations and individuals.

 

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