Tito Mboweni delivered a stark warning with his first Budget Speech: the economy is not doing well, the public purse is exhausted and someone has to pay the bill. On the surface the budget that was presented seemed like it could have been worse – no adjustments to any tax brackets was probably not what the those fearing the worse expected, but it was certainly not good news either.
The major tax changes that were announced late last month that affect small businesses run as Sole Proprietorships are:
- A freeze of personal income tax brackets, and
- A slight decrease in the tax rate for small businesses
How the personal income tax brackets freeze may affect you
If you are a sole proprietor the income tax brackets are important to watch. A sole proprietorship is a business that is owned and managed by a (living, breathing) person and is viewed as inseparable from its owner and manager. In comparison a company is a separate legal entity that exists separately from its owners (i.e. the shareholders). Companies get registered with the Companies and Intellectual Property Commission, whereas you do not have to register a Sole Proprietorship.
This distinction has ramifications for how taxes are paid: the earnings from a sole proprietorship are treated as normal income in the owner’s individual income tax calculations, whereas a company is taxed at a flat rate of 28% under most circumstances.
This means that a successful sole proprietor, whose profits increase, can find that they pay more and more tax over time. The kicker is that this year the income tax brackets have been frozen. This means if you sell the same number of widgets as you did last year, but the price you sell them at has increased by inflation, you may find that you jump a tax bracket without really trying. If you do really well and sales increase you may even jump more than one bracket in a single year.
| Taxable Income | Tax Rate |
|---|---|
| R0 – R195 850 | 18% of taxable income |
| R195 851 – R305 850 | R35 253 + 26% of taxable income above R195 850 |
| R305 851 – R423 300 | R63 853 + 31% of taxable income above R305 850 |
| R423 301 – R555 600 | R100 263 + 36% of taxable income above R423 300 |
| R555 601 – R708 310 | R147 891 + 39% of taxable income above R555 600 |
| R708 311 – R1 500 000 | R207 448 + 41% of taxable income above R708 310 |
| R1 500 001 and above | R532 041 + 45% of taxable income above R1 500 000 |
A knock-on effect is that some of your customers may be dealing with the same problem: if their salaries increase by inflation or more they may find themselves in a higher tax bracket with less disposable income. For businesses that rely on people having disposable income, especially ones selling luxury products or services, this knock-on effect can have an impact on sales.
Tito did have some good news for small businesses, but not much.
How taxes may affect your company
For small businesses registered as companies there are two tax regimes that may apply: either the income tax rate for small business corporations (SBC) or the turnover tax system. The regime your business falls under will depend on the circumstances of your business and it is advisable that you talk to a tax adviser to find the one that works best for you.
The good news is that if you earn below R79 001 in the SBC regime you pay no tax. Last year that threshold was R78 151. The difference is far below any inflationary increase (4% year-on-year in February), but may raise some small cheer for businesses in that gap. All other tax brackets above that remain the same. Like for the personal income tax tables, inflation will push more than a few businesses into higher tax brackets.
Income Tax for Small Business Corporations
| Taxable Income | Tax Rate |
|---|---|
| R0 – R79 000 | 0% of taxable income |
| R79 001 - R365 000 | 7% of taxable income above R79 000 |
| R365 001 – R550 000 | R20 020 + 21% of taxable income above R365 000 |
| R550 001 and above | R58 930 + 28% of the amount above R550 000 |
Turnover Tax for Micro Businesses
| Taxable Income | Tax Rate |
|---|---|
| R0 – R335 000 | 0% of taxable turnover |
| R335 001 – R500 000 | 1% of taxable turnover above R335 000 |
| R500 001 – R750 000 | R1 650 + 2% of taxable turnover above R500 000 |
| R750 001 and above | R6 650 + 3% of taxable turnover above R750 000 |
So where is the silver lining?
There is expected growth outlined in the national budget and small businesses have a role to play in generating that growth. Tax is a consequence of growth, which is a more positive way to look at things. In summary: After last year’s VAT increase – it could have been worse, but it’s not better.
