Small businesses in South Africa are often managing multiple priorities such as business efficiency, innovation and growth. Amidst these daily challenges, many overlook the value of claiming the full range of tax benefits available to them.
The Tax Base at a Glance
At the forefront of this movement is the South African Revenue Service (SARS), which collects the bulk of its revenue from three main sources – Personal Income Tax (PIT) at 37.4%, Value Added Tax (VAT) at 25.7%, and Company Income Tax (CIT) at 18.2%.
The SARS’s tax ecosystem is large and multifaceted. In 2023/24, there were 959,000 registered VAT vendors, but only 488,118 were active, amounting to just 50.9% of the total. Out of 3.6 million registered CIT taxpayers, only 1.16 million are actively contributing – 643,948 are registered for PAYE, 389,302 are registered Trusts, and a mere 172,611 are registered for Small Business Corporation (SBC) tax.
Although over 1 million businesses were assessed for CIT in 2023/24, a staggering 66.5% of all CIT revenue came from just 549 companies. Only 14.8% of assessed companies registered for SBC tax, indicating that many small businesses either report zero or negligible taxable income.
Significant Revenue Growth Signals Positive Change
SARS’s total tax revenue has shown impressive growth, from R1,355.8 billion in 2019/20 to R1,740.9 billion in 2023/24, marking an annual increase of 3.6%. This growth is a testament to two key factors. Firstly, SARS has invested heavily in advanced technology to simplify and streamline tax filing processes.
Secondly, there is an increasing number of small businesses that are growing their education around tax, often guided by the crucial advice of their accountants. “SARS is a well-run organisation that is currently using and planning to increase the use of technology, especially AI, to improve its already efficient processes. VAT and Payroll eFiling are examples of great innovations that have made the process smoother for taxpayers and increased compliance.
Tax Incentives Tailored for Small Businesses
While SARS is investing in making tax filing processes even more efficient through advanced technology, there are still very few small businesses reaping the rewards of available tax incentives. For example, there was a 15.5% increase in the limit for the first SBC tax bracket, from R79,000 to R91,250 for the 2023 tax year. This change allows small businesses to earn more income before facing higher tax rates.
More Small Businesses Registering for VAT
When examining VAT compliance, 53.0% of active VAT vendors have a turnover of R1 million or less, yet they only account for 5.6% of Domestic VAT payments. This highlights both the challenge and the potential of SMEs within the realm of VAT. With better financial practices and a focus on tax compliance, these businesses stand to not only improve their contribution to the economy but unlock greater business success for themselves.
Understanding your tax types and tax compliance obligations is critical to any SME, regardless of whether they use a tax professional. SARS assists with taxpayer education and understanding the basics of tax. In addition to the SARS YouTube channel, they’ve held 215 taxpayer workshops to support taxpayers to better understand their tax obligations.
Challenges Faced by Small Businesses
Another concerning statistic from the 2022 tax year reveals that only 20.7% of companies declared a positive taxable income, with 54.6% reporting zero taxable income. However, small businesses actually did a lot better with 57.5% declaring a positive taxable income even with only 4,261 small businesses having a taxable income in excess of R1m.
“What the stats say is that small businesses are more likely to be profitable but at a much smaller scale and they contribute very little to tax revenue. Cash flow is therefore critical given these small margins,” says Faber.
Building Trust Through Improved Compliance
Public confidence in SARS has seen an increase from 71.8% in 2021/22 to 77.5% in 2023/24. This rising trust, combined with easier filing thanks to digitisation, paves the way for stronger relationships between SARS and businesses. For small businesses, this not only means smoother compliance processes and less stress but enhanced transparency and accountability, which are all critical factors for long-term financial success.
SARS is taking positive steps to continue building public trust by delivering on its plans and communicating progress along the way. But there is still room for improvement in the tax system. There are things SMEs can do to compliment SARS’ efforts and benefit their own businesses and the economy.
Business owners, accountants, and tax advisors must work alongside each other to develop forward-thinking tax strategies that consider current frameworks as well as prospects. In a world where every rand and cent counts, it’s less about questioning if you can afford to claim these tax benefits but rather, whether can you afford not to.
Small businesses are the backbone of South Africa’s economy and by harnessing every tax advantage available they can free up critical resources for growth and innovation. However, this relies on small businesses seeing tax compliance as less of an administrative obligation and more of a strategic asset.
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