The South African Small Business Tax Landscape

If you’re self-employed or running a small business in South Africa, you’re probably no stranger to the tension between earning more and paying more tax. South Africa’s tax system is complex, and for small enterprises, the compliance burden can feel disproportionately heavy.

SARS has long recognised that micro and small enterprises — the bedrock of job creation and local economic activity — face a different set of challenges compared to medium or large companies. These businesses often lack in-house accounting teams, operate on thin margins, and can be disproportionately impacted by admin-heavy tax regimes.

To encourage entrepreneurship and compliance, SARS offers two special regimes:

1. Turnover Tax (TOT) – a simplified, low-rate system for very small businesses under R1 million turnover.
2. Small Business Corporation (SBC) Tax – a preferential rate system for growing companies under R20 million turnover.

While both can save you money compared to standard company or personal tax rates, choosing the wrong one can mean overpaying SARS for years.

Part 1: Turnover Tax – The Micro Business Solution

Turnover Tax was introduced in 2009 to simplify compliance for micro businesses. The idea was to create a flat, predictable tax based on gross income, without the need to calculate and justify every expense.

The logic is simple:

• No complex accounting records needed for tax purposes
• Lower admin costs (you don’t need a full-time accountant just to stay compliant)
• Lower effective rates for low-margin traders

Who Qualifies for Turnover Tax? (2025 Rules)

SARS sets out a strict set of criteria — fail any of these, and you’re out.

You qualify if:

• Your total annual turnover is R1 million or less (turnover = all sales and income before expenses).
• Your business structure is sole proprietor, partnership, close corporation, private company, or co-operative.
• Every shareholder or partner is a natural person (no companies, CCs, or trusts as owners).
• You are based in South Africa.
• Your income is mainly from trading, not investments or professional services.
• Your assets, excluding land, are worth R1 million or less at cost.

You do not qualify if:

• You are in the financial services industry (banks, insurers, etc.).
• More than 20% of your income is from professional services (unless you have multiple unrelated service lines that dilute this percentage).
• More than 20% of your income comes from investment income (interest, dividends, etc.).
• You have corporate or trust shareholders.

Turnover Tax Rates for 2024/2025

Example 1: Small-scale trader
Turnover: R400,000
Tax = 1% × (400,000 – 335,000) = R650

Example 2: Mid-range service provider
Turnover: R900,000
Tax = R6,650 total — less than 1% of turnover.

Why Turnover Tax Exists

SARS introduced TOT to bring more informal businesses into the tax net. Many small traders and sole proprietors avoided registering because compliance was daunting. By creating a simple, low-cost, low-admin tax, SARS hoped to:

• Improve compliance rates
• Reduce accounting costs for micro businesses
• Encourage registration and legitimacy
• Avoid chasing small amounts of unpaid tax through complex audits

Advantages of Turnover Tax

1. Extremely Low Effective Tax Rate
If your profit margin is thin (say, 10–20%), TOT can be much cheaper than paying standard personal or company tax on profit.

2. Minimal Record-Keeping for Tax Purposes
You still need basic financial records, but SARS doesn’t require a full profit and loss statement for TOT returns.

3. All-in-One Simplicity
TOT replaces Income Tax, Provisional Tax, Capital Gains Tax on business assets, and Dividends Tax.

4. Predictable Cash Flow
Because it’s based on turnover, you can forecast tax easily without tracking fluctuating profits.

Limitations and Risks of Turnover Tax

1. You Pay Even if You Make a Loss
Since tax is on turnover, not profit, high-expense businesses can end up paying tax despite making a loss.

2. No Deductions Allowed
You can’t claim for rent, salaries, materials, or other expenses — the rate is meant to be low enough to cover this.

3. Strict Qualification Rules
One wrong step (e.g., earning too much from professional services) and you’re out for the year.

4. Growth Ceiling
If you expect to pass the R1 million mark soon, switching to SBC or standard tax mid-growth can be disruptive.

Who Should Use Turnover Tax?

Turnover Tax works best for:

• Retailers and traders with low profit margins
• Small-scale service providers under the 20% professional service income threshold
• Seasonal businesses with simple operations
• Side hustles that are growing but not yet complex enough to justify full accounting processes

Common Turnover Tax Mistakes

• Registering too late – you must opt in before 1 March of the tax year.
• Not tracking the 20% professional services rule – many small service providers get caught out.
• Forgetting about VAT implications – most TOT businesses aren’t VAT vendors, which can be a disadvantage if your clients are VAT-registered companies expecting input credits.
• Assuming it’s always cheaper – in some cases, SBC rates beat TOT once profit margins rise.

TOT vs VAT – A Quick Note

While TOT and VAT are separate, you generally cannot be registered for both — unless voluntarily registered for VAT and SARS grants permission. Most micro businesses skip VAT under TOT, which can simplify admin but also means you can’t claim back input VAT on purchases.

Real-World Example: The Corner Café

A café in Cape Town turns over R850,000 a year.

• Expenses: R700,000 (rent, salaries, stock) → Profit = R150,000
• Under standard company tax (27%), tax on profit would be R40,500.
• Under SBC rules, the first R95,750 is tax-free, then 7% on the rest → R3,780 tax.
• Under TOT, the café pays R6,650 — more than SBC, but avoids the admin and complexity of expense tracking.

In this case, SBC is marginally cheaper, but the owner chooses TOT for simplicity and predictability.

Part 2 – Small Business Corporation (SBC) Tax: The Growth-Friendly Option

What is SBC Tax?

The Small Business Corporation (SBC) tax regime is SARS’s way of rewarding small, incorporated businesses that meet certain criteria. Instead of paying the standard company tax rate of 27% on all taxable income, SBCs benefit from a graduated tax scale that starts at 0% for the first slice of taxable profit.

Where Turnover Tax (TOT) focuses on the smallest, simplest businesses, SBC is designed for companies that are:

• Beyond the micro stage
• Likely to grow
• Prepared to handle proper accounting records
• Earning enough profit that taxing only the profit (not turnover) makes more sense

Who Qualifies for SBC? (2025 Rules)

To qualify, you must meet all the following:

You qualify if:

• Your business is a private company (Pty Ltd), close corporation (CC), or co-operative
• All shareholders or members are natural persons (no companies, CCs, or trusts as owners)
• Your gross income is R20 million or less in the tax year
• No more than 20% of your income comes from investment income (interest, dividends, rentals)
• No more than 20% of your income comes from personal services unless you employ at least three full-time (non-shareholder) employees engaged in your core business

You do not qualify if:

• Any shareholder is not a natural person
• You exceed the R20 million gross income threshold
• You’re primarily an investment or rental business
• You’re a personal service company with fewer than three non-shareholder employees

SBC Tax Rates – 2024/2025

Worked SBC Examples

Example 1: Small profit company

• Turnover: R900,000
• Expenses: R700,000 → Profit = R200,000
• First R95,750 = 0% tax
• Remaining R104,250 × 7% = R7,297.50 tax

Example 2: Growing company

• Turnover: R3 million
• Expenses: R2 million → Profit = R1 million
• First R95,750 = 0%
• Next R269,250 × 7% = R18,847.50
• Next R185,000 × 21% = R38,850
• Remaining R450,000 × 27% = R121,500
• Total tax = R179,197.50 (effective rate ~17.9%)

Advantages of SBC

1. Pay Tax Only on Profits
Unlike TOT, you’re not taxed on every rand you bring in — only what’s left after expenses.

2. Higher Threshold
You can earn up to R20 million turnover and still enjoy SBC rates.

3. Full Deductions Allowed
Expenses like rent, salaries, advertising, stock, and professional fees can be claimed to reduce taxable income.

4. Compatible with VAT
You can register for VAT if it makes sense for your industry.

5. Encourages Growth
Because the tax isn’t tied to turnover, scaling revenue without scaling expenses can lower your effective tax rate.

Limitations and Risks of SBC

1. Higher Admin Burden
You must keep full accounting records, produce annual financial statements, and comply with all Companies Act requirements.

2. Capital Gains Tax and Dividends Tax Apply
Selling assets may trigger CGT, and distributing profits to shareholders incurs 20% Dividends Tax.

3. Payroll Requirements for Personal Service Companies
If you offer professional services and want to qualify, you must employ at least three full-time staff.

4. Potential for Higher Tax if Margins are Thin
If your expenses are high and profit is low, the flat percentages in TOT can beat SBC.

Who Should Use SBC?

SBC works best for:

• Businesses with higher profit margins (>25%)
• Growing companies aiming to scale beyond R1 million turnover
• Businesses needing VAT registration
• Professional service firms with sufficient staff to qualify
• Startups with investor or partner funding

Common SBC Mistakes

• Assuming you qualify without checking shareholding rules – one corporate shareholder disqualifies you.
• Not tracking the 20% personal service/investment income limit – breaching this can kick you out of SBC.
• Failing to employ the required staff in professional services – losing SBC status can result in a big tax jump.
• Confusing SBC rates with Small Business Tax Relief – these are different measures entirely.

Real-World Example: The Design Agency

A Cape Town design agency:

• Turnover: R2.5 million
• Expenses: R1.5 million → Profit = R1 million
• Staff: 5 full-time employees
• Qualifies as an SBC (meets employment rule)
• SBC Tax: ~R179,000
• Standard company tax: R270,000
• Saving: ~R91,000

Here, SBC status enables both significant tax savings and full deductibility of legitimate business costs.

SBC vs Standard Company Tax

If you don’t qualify for SBC, you pay 27% company tax on all taxable profits. This flat rate can be significantly higher than SBC’s graduated scale, especially for profits under R550,000.

Part 3 – Turnover Tax vs Small Business Corporation: Side-by-Side, Break-Even Points, and Transition Strategies

Direct Comparison Table

Break-Even Scenarios

The real decision between TOT and SBC comes down to profit margin.

Let’s look at 3 scenarios, assuming turnover of R900,000:

Scenario 1 – Low Margin (15% profit)

• Profit = R135,000
• TOT Tax = R6,650
• SBC Tax = First R95,750 @ 0%, remaining R39,250 @ 7% = R2,747.50
• Winner: SBC slightly cheaper, but TOT’s simplicity may outweigh R3,902.50 difference.

Scenario 2 – Medium Margin (30% profit)

• Profit = R270,000
• TOT Tax = R6,650
• SBC Tax = First R95,750 @ 0%, remaining R174,250 @ 7% = R12,197.50
• Winner: TOT significantly cheaper.

Scenario 3 – High Margin (60% profit)

• Profit = R540,000
• TOT Tax = R6,650
• SBC Tax =
  • First R95,750 @ 0%
  • Next R269,250 @ 7% = R18,847.50
  • Next R175,000 @ 21% = R36,750
  • Total = R55,597.50
• Winner: TOT by a large margin — but note SBC allows VAT recovery and full deductions, which may matter strategically.

Interpreting the Break-Even Point

Based on current rates, the break-even profit margin (where SBC tax equals TOT tax) is roughly ~20–25% for a R900,000 turnover business.

Below that margin → TOT usually wins.
Above that margin → SBC may win if deductions, VAT, or scaling are important.

Transition Strategies

1. TOT to SBC

You may start in TOT and switch to SBC if:

• You outgrow the R1 million turnover limit
• Your profit margin improves
• You need VAT registration for client credibility or cost recovery

Steps:

• Plan the change at financial year-end
• Ensure you meet SBC shareholding and service rules
• Prepare for higher admin costs (full accounting)

2. SBC to TOT

Rare, but possible if:

• Turnover drops below R1 million
• Your margins shrink
• You simplify operations

Steps:

• Apply before 1 March via SARS eFiling
• Deregister from VAT if necessary
• Adjust systems to handle TOT simplicity

Risk of Switching Too Often

Frequent regime changes can:

• Raise SARS scrutiny
• Complicate financial records
• Cause forecasting errors

Best practice: pick the regime that suits your 2–3 year growth path, not just the current year.

Strategic Considerations Beyond the Math

1. VAT Position
   • TOT businesses can’t usually claim input VAT, which can hurt if your suppliers are VAT vendors.
   • SBC companies can recover VAT on expenses — useful for high-CAPEX or inventory-heavy sectors.
2. Investor Readiness
   • Investors often prefer incorporated SBC structures with full accounts for due diligence.
3. Exit Planning
   • SBC structures can be more tax-efficient for asset sales under certain CGT reliefs, despite the extra admin.
4. Cash Flow Predictability
   • TOT tax is fixed to revenue, so downturn years with low margins can still be painful.
   • SBC tax falls with profit, offering more relief in bad years.

FAQ: Turnover Tax vs SBC in South Africa

1. What is the main difference between Turnover Tax and SBC tax?

Turnover Tax is calculated on gross turnover (total sales before expenses), while SBC tax is calculated on taxable profit (income minus allowable expenses). TOT is simpler but offers no deductions; SBC allows deductions but requires more admin.

2. Which tax regime saves more money?

It depends on your profit margin.

• Low margins (<20–25%) → TOT often results in a lower bill.

• Higher margins (>25%) → SBC may be better, especially if you can claim significant deductions or recover VAT.

3. Who qualifies for Turnover Tax in 2025?

Businesses with:

• Turnover ≤ R1 million

• All owners as natural persons

• Assets ≤ R1 million (excluding land)

• ≤20% of income from professional services or investments

• Not in the financial sector

4. Who qualifies for SBC tax in 2025?

Companies, CCs, or co-operatives with:

• All shareholders as natural persons

• Gross income ≤ R20 million

• ≤20% from investment or personal services (unless employing 3+ full-time staff in core business)

5. Can I register for both Turnover Tax and SBC?

No. SARS rules allow you to use only one special regime at a time.

6. Do I have to register for Turnover Tax every year?

Yes — you must opt in before 1 March of each tax year. SBC status applies automatically if you qualify.

7. Can I claim expenses under Turnover Tax?

No. The low rate is meant to replace deductions. You can still keep records for your own business tracking, but SARS doesn’t use them to calculate TOT.

8. Can SBC companies claim expenses?

Yes. SBC companies can claim any expense that is wholly and exclusively for business purposes, subject to SARS rules.

9. How do VAT rules differ?

• TOT: Generally not VAT-registered unless voluntarily and approved by SARS.

• SBC: Can (and often should) register for VAT if turnover > R1 million or input VAT recovery benefits the business.

10. How does dividends tax apply?

• TOT: No dividends tax.

• SBC: 20% Dividends Tax applies when profits are distributed to shareholders.

11. How does Capital Gains Tax apply?

• TOT: Not charged on business asset sales.

• SBC: CGT applies, but SBCs may get certain reliefs or exclusions depending on the asset and holding period.

12. What happens if my turnover exceeds R1 million on Turnover Tax?

You’ll be disqualified from TOT for the next tax year and will need to use SBC or standard tax.

13. What happens if my turnover exceeds R20 million on SBC?

You lose SBC status and pay standard company tax (27%) on profits.

14. Can professional service businesses use Turnover Tax?

Only if ≤20% of their income comes from professional services. Most such businesses exceed this limit and must use SBC or standard tax.

15. Can professional service businesses use SBC?

Yes — but only if they employ 3+ full-time, non-shareholder employees engaged in the core service.

16. Is it easy to switch from TOT to SBC?

Yes, but best done at the end of a tax year. You must deregister from TOT and meet SBC rules.

17. Is it easy to switch from SBC to TOT?

Possible if turnover drops below R1 million and you meet all TOT rules. Apply before 1 March.

18. What’s the biggest risk of Turnover Tax?

Paying tax in a loss-making year, since it’s based on turnover, not profit.

19. What’s the biggest risk of SBC?

Failing to keep proper records, which can lead to disallowed deductions and higher taxable income.

20. Which regime is better for a startup?

If you expect low profits and simple operations, TOT may be better initially. If you plan to grow quickly, SBC offers more scalability.

21. Which regime is better for seasonal businesses?

TOT offers predictable tax in high and low months, but SBC may save more if expenses fluctuate significantly.

22. Does SBC status help with investors or tenders?

Yes — SBC companies are incorporated entities with audited or reviewed accounts, which many investors and procurement departments prefer.

23. Does Turnover Tax affect my ability to get finance?

Possibly — because TOT businesses may not produce full financial statements, some lenders may see them as higher risk.

24. Can I use TOT if I trade in multiple industries?

Yes, as long as you meet all the criteria across your combined activities.

25. How do I decide definitively?

Do a side-by-side simulation with your actual turnover, expenses, and VAT position — or have an accountant run the numbers for both regimes.

Final Takeaway

The right choice depends not just on the tax rate, but on your margins, growth plans, admin tolerance, and industry requirements.
Small businesses with thin margins often win big with TOT. Higher-margin, growth-focused businesses benefit more from SBC’s deductions and VAT compatibility.