Legal Advice

Working with SARS

Throughout its lifetime, every business will work with SARS.

First, ensure that your business is registered with SARS. When you register your business with CIPC, your business will automatically be registered as a taxpayer with SARS. In other instances, registration with SARS can be done online or via post. Upon registering with SARS, your business will obtain a tax reference number which is important for filing tax returns and making payments to SARS. 

Once you are registered, you must submit annual tax returns via e-filing. File your business’ tax returns before the annual due date published by SARS. Failure to do so may result in financial penalties and interest charges.

Various taxes will likely be relevant to your business, including:
  • Corporate Income Tax or Turnover Tax;
  • Value Added Tax;
  • Capital Gains Tax;
  • Dividends Tax;
  • Donations Tax; and
  • With respect to your employees, PAYE, UIF and the Skills Development Levy.

Businesses are obligated to make various tax payments monthly, quarterly, or annually. Tax payments are calculated based on your business’ income and expenses. SARS provides thresholds for different tax payments which may also depend on the sector in which your business operates. It is your business’ duty to stay up to date and comply with changes to tax laws and thresholds.

Even when you submit your tax returns as usual, SARS may require further information from your business from time to time. Note that your business is compelled to respond to SARS’s enquiries accurately, honestly, and timeously.

In addition, your business is obligated to keep accurate financial records. Financial records can be used to prepare tax returns and to demonstrate compliance with the law. These records should also be made available to SARS upon request. Retain invoices, proof of payment, bank statements, and any other relevant documents recording your income and expenses. Other documents to keep include accounting records and financial statements. You can digitalise this to make your record-keeping easier and more secure.
Consequences of non-compliance with tax legislation include:
  • Fines;
  • Confiscation of property;
  • Business failure; and
  • Imprisonment.

There is no reason not to be compliant. However, businesses that are non-compliant with their tax obligations can apply to SARS via the voluntary disclosure program (VDP) to obtain relief. This relief is available for taxpayers that have a pending audit or investigation that has not been completed.

SARS also has a detailed dispute process. You have the rights to object to assessments, decisions, administrative non-compliance penalties, or interest imposed by SARS. If you are not satisfied with the outcome of your objection, you are entitled to appeal the decision. Objections and appeals must be submitted at your nearest SARS Branch or by email to contactus@sars.gov.za. In your appeal documents, you may agree with SARS to refer the appeal for resolution by Alternative Dispute Resolution. Disputes may also come before the Tax Board or a Tax Court.

For more information, SARS' website is accessible at https://www.sars.gov.za/ and includes a wealth of advice and knowledge on the various taxes that will apply to your business.

Working with Accountants

Working with accountants can assist your business to ensure compliance with the legal taxation framework. Accountants can promote transparency and business integrity,  
Businesses can employ in-house accountants. These accountants can provide accounting expertise on a daily basis. This is important for regular checks and balances. For example, an in-house accountant can prepare financial statements for the business review month-to-month or every quarter.
Businesses can also outsource accountants. For example, a business can outsource accountants from an accounting firm. This can be helpful in saving the business costs and time on training, recruitment, and employee turnover. Outsourcing accountants can also assist businesses to acquire professional and expert services without any bias. 
Appoint an accountant, registered tax practitioner, or an auditor registered with SAICA or SAIPA, to assist you with your business’ tax requirements. To protect your business, ensure that your accountant is registered with, and accountable to, a body like SAICA or SAIPA and that you have a services agreements with clear and measurable Key Performance Indicators (KPIs).
Always remember that what your accountant does remains your responsibility, even if they are outsourced, so verify all work done. You will be pursued by SARS if, for example, you accountant fails to submit tax returns on your business’ behalf or PAYE for your employees. 
Nevertheless, accountants are at the centre of bookkeeping as they are responsible for preparing financial statements, such as income statements, balance sheets, and cash flow statements. They also provide services such as costing, managing finances, providing financial advice, doing financial calculations, assessing business performance, analysing business ratios, and budgeting. 
It is therefore advisable that businesses work with an accountant to acquire accurate financial records. An accountant does not only to save time, money, and stress but also helps to make sound financial decisions. 

The Difference Between Personal Income Tax and Business Income Tax for Sole Proprietors and Companies

Understanding the difference between personal income tax and business income tax is essential for business. Knowing these differences helps a business owner make better decisions on the business structure, manage tax responsibilities efficiently and navigate the tax system effectively.

Personal Income Tax for Sole Proprietors
Personal income tax is charged on an individual’s taxable income, which is essentially gross income minus exemptions and allowable deductions. 
A company is a separate legal entity from its owners, but a sole proprietorship is not a separate legal entity – there is no separation between the business owner and the owner. Therefore, the applicable threshold for personal income tax will apply to the sole proprietor. The business owner must include the income from the business in their personal income tax return and is responsible for paying taxes on that income.

Company tax rate vs Sole Proprietor tax rate 
In a company, Corporate Income Tax (CIT) applies to companies that are liable under the Income Tax Act for the payment of tax on all income received by or accrued to them within a financial year. Profits are taxed at a flat rate of 27%, irrespective of value or turnover – unless the company qualifies as a Small Business Corporation or Micro Business registered for Turnover Tax. 

The tax rate for a sole proprietor is based on personal income tax which applies to individuals. Individuals are taxed on a sliding scale (tiered approach) on the business profits at the applicable personal income tax rate, meaning higher earnings are taxed at higher rates, ranging between 18% to 45%. For the 2025 tax year, individuals under 65 must pay income tax if they earn more than R95,750. For those aged 65 to 74, the tax threshold is R148,217.

As an individual's income rises and they enter higher tax brackets, the tax difference between operating as a company versus a sole proprietorship decreases. In such instances, registering the sole proprietorship as a company could be more beneficial.

Tax on Dividends and Remuneration
Company shareholders may receive dividends from the company’s profits as a form of income, which is taxed separately from the company’s income at a tax rate of 20%. In other words, company profits are taxed twice – once at the company level and again as dividends. 
Sole proprietors on the other hand, don't receive dividends as their business profits are taxed as personal income.

Reporting / Filing Tax Returns 
Since a company’s liability, income, expenses and taxes are separate from the shareholders, the company will also have its own tax number and will have to submit annual income tax returns. A company’s business income and expenses are declared in the Company’s annual tax return. The company is required to file two provisional returns (IRP6) during the tax year and an annual tax return (ITR14) after the tax year ends.
A sole proprietor must register for income tax in their personal capacity, not the business. As the owner of a sole proprietorship is personally responsible for all business taxes, the personal and business income and expenses are declared on the owner’s personal tax return. The owner is required to submit two provisional returns (IRP6) during the tax year and the annual tax return (ITR12) after the tax year.

Understanding the distinct tax implications for sole proprietorships and companies is crucial for South African business owners. Factors such as tax rates, dividend taxation, reporting requirements, and the distinction between personal and business income must be carefully considered when choosing a business structure to optimise tax efficiency and to ensure compliance.

Correctly Calculating and Submitting PAYE for Employees Under the Income Tax Act

As an entrepreneur, understanding how to correctly calculate and submit Pay-As-You-Earn (PAYE) tax for your employees is vital for compliance with the Income Tax Act.

Pay As You Earn (PAYE) is a tax deduction withheld from an employee's income, which is then paid over to the SARS on a monthly basis.  This payment must be made within seven days after the end of the month in which the deduction was made.

The Minister of Finance announces new tax rates in the annual budget, specifying their effective date(s). These rates are valid for 12 months, unless otherwise instructed by SARS. Employers must use the official tax deduction tables or the legal tax rates as specified by SARS. To calculate PAYE, follow these steps: 
  1. Determine Taxable Income: Subtract any allowable deductions from the employee’s salary to get the taxable income.
  2. Use the Tax Tables: find the employee’s income bracket in the published annual tax tables that outline the different income brackets and their corresponding tax rates.
  3. Apply the Tax Formula: apply the formula for the relevant income bracket.
  4. Calculate Monthly PAYE: Divide the annual tax amount calculated in step 3 by 12 to get the monthly PAYE deduction.

SARS provides online calculators, and most payroll software automatically calculate PAYE based on the latest tax tables. These tools are highly recommended to ensure accuracy and reduce the risk of errors in manual calculations. Using payroll software or consulting with a tax professional can help ensure compliance.

Declarations must be submitted to SARS by way of EMP201s (Monthly Employer Declarations) and EMP501s (Employer Interim Reconciliation Declarations).

If an employer submits the EMP501 late, SARS will charge non-compliance penalties. The penalty will be 1% of the year's PAYE liability. This penalty will increase by 1% each month. It can reach a maximum of 10% of the year's PAYE liability.
If an employer wilfully or negligently fails to submit the EMP201 or EMP501, they commit an offence. The employer may be fined or imprisoned for up to two years.

Accurate calculations and timely submissions are crucial to ensure legal compliance, maintain good standing, and protect the interests of both employers and employees.

How the Choice of Business Entity Affects Tax Obligations and Liability

It is essential for entrepreneurs to carefully consider the tax implications of their (new) businesses. Choosing the right business structure from the onset is crucial, as different structures have varying tax obligations and opportunities. Understanding available tax deductions and allowances is also essential for effective tax planning and minimising future tax liabilities as the business grows.

Types of businesses and their tax considerations
The type of business structure selected will affect the overall tax the business is liable to pay:
  • Sole proprietor: a sole proprietorship is owned and run by a single individual and is not a separate legal entity – there is no separation between the business owner and the owner. Business income is reported on the owner's personal income tax return, and the owner is personally responsible for paying the resulting taxes.  Business income is taxed at individual rates, which range from 18% to 45% on a sliding scale. For the 2025 tax year, individuals under 65 must pay tax if earning over R95,750, while those aged 65–75 have a threshold of R148,217.
  • Partnership: A partnership exists when two or more individuals agree to conduct a business, trade, or profession together. Like a sole proprietorship, a partnership is not a separate legal entity for tax purposes. Profits are distributed among the partners and taxed as part of their individual income, based on their agreed-upon share of the partnership's earnings. 
  • Company: Companies are separate legal entities and must register as taxpayers with SARS. The standard tax on income is called the Corporate Income Tax (CIT) and is a flat rate of 27% on the profits, irrespective of the value of turnover (unless the company qualifies as a Small Business Corporation or Micro Business registered for Turnover Tax). When profits are distributed to the owners (shareholders) as dividends, these dividends are then taxed at an additional 20%.
  • Close corporation (CC): Similar to a company, a CC is a separate legal entity that must register as a taxpayer in its own right. For income tax purposes, CCs are treated like companies, with its income taxed at a flat rate of 27% (CIT).
  • Trust: Trusts are taxed at a flat rate of 45% on their income. A Special Trust is subject to taxation based on the progressive tax rates applicable to individual taxpayers. A trust approved as a public benefit organisation is tax-exempt, unless it earns trading income which would be taxed at a rate of 27% thereon. When trust assets generate income and that is distributed to beneficiaries, that income is taxed according to each beneficiary's individual income tax rate.

Considering Turnover Tax when choosing a business structure
Turnover tax simplifies tax compliance for micro businesses with a turnover of R1 million or less annual (as opposed to a percentage of profit as with business income tax), making it easier to meet their tax obligations. This system replaces several taxes, including Corporate Income Tax, VAT, Provisional Tax, Capital Gains Tax, and Dividends Tax. This is beneficial as it decreases the tax liability. It works off the taxable turnover of a business, therefore applying to any business structure, as long as the turnover falls within the threshold.

Qualifying micro businesses should consider registering for turnover tax, as it simplifies tax compliance and reduces administrative obligations. If you qualify as a micro business for turnover tax, you will be exempt from paying tax if your turnover is less than R335 000 per year. Small business tax benefits offer lower tax rates and faster asset depreciation, which in turn reduces profits and ultimately reducing taxes.

It is quite evident that choosing the right business structure can have significant tax implications. Understanding these implications, the differences and potential benefits, together with current and projected financial positions can assist in decision-making. However, consulting with a qualified tax professional is highly recommended to ensure optimal tax efficiency and compliance.

The Tax Implications of Switching from a Sole Proprietorship to a Company

As a South African entrepreneur, switching from a sole proprietorship to a private company (Pty) Ltd can have significant tax implications.

Understanding these changes will help you make an informed decision and structure your business effectively.

1.  Why Consider Switching?
A sole proprietorship is taxed under personal income tax rates, which can be as high as 45%. In contrast, a company is taxed at a flat corporate rate of 27%, with dividends tax at 20%. This means that if your business is generating substantial profit, incorporating a company could lead to lower overall tax liability. Additionally, a company provides limited liability protection, separating personal assets from business debts.

2.  Key Tax Implications
  • Corporate Income Tax: A company pays 27% corporate income tax, which may be lower than personal tax rates for higher-earning sole proprietors.
  • Dividends Tax: If you take profits as dividends, a 20% tax applies, which is still often lower than paying personal income tax on all business earnings.
  • PAYE and Salaries: If you pay yourself a salary from the company, Pay-As-You-Earn (PAYE) tax and UIF must be deducted, but this allows you to structure your earnings tax-efficiently.
  • VAT Registration: If turnover exceeds R1 million, VAT registration is required for both sole proprietors and companies, but a company may find VAT compliance more structured.

3.  How to Make the Switch
  • Register the Company: Use the CIPC online portal to register a Pty Ltd.
  • Transfer Business Assets: Ensure that contracts, assets, and intellectual property are assigned to the new company.
  • Register for Tax: Apply for a new tax number with SARS and register for VAT and PAYE if required.
  • Open a Business Bank Account: Separate finances for better tax management.

Switching can lead to tax savings and business growth, but it is advisable to consult a tax professional for tailored advice.

Legal Implications and Penalties for Late Tax Submissions or Failure to File Returns with SARS

Every business has a legal obligation to file and submit tax returns to SARS. Failure to do so will result in legal implications and penalties being imposed on the business. 

Types of penalties that can be imposed
Administrative Penalties
An administrative penalty is a penalty levied under section 210 of the Tax Administration Act (TAA). The TAA outlines the various forms of non-compliance that are subject to fixed administrative penalties. The Administrative non-compliance penalty for the failure to submit a tax return results in a monthly penalty based on the taxpayer's taxable income. This penalty is applied for every month the return remains outstanding up to 35 months maximum.

Criminal Offences
It is a criminal offence to not submit a tax return or to submit a return without making the necessary payment in terms of Section 234(2)(d) read with subsection (k) of the Tax Administration Act (TAA). This may lead to fines or imprisonment.

Interest on Late Payments
Section 89(2) imposes interest at the prescribed rate on any taxes not paid during the period for payment specified in a notice of assessment or within the period prescribed by the Act. 

SARS Debt Collection Measures
If taxes are not paid, there are a number of debt collection options SARS can enforce:
  • Collect the debt from someone who holds money on your behalf (third party appointments) i.e. employer, bank or customer.
  • Issue a judgement and have your name blacklisted.
  • Attach and sell your assets.
  • Obtain a preservation order in respect of your assets to prevent the disposal of your assets.
  • If you hold assets offshore, an order can be obtained compelling the assets to be repatriated to South Africa and in the interim your right to trade or to travel can be restricted.
  • Liquidate or sequestrate your estate 

Conclusion
Taxpayers must ensure compliance with SARS to avoid severe penalties, interest charges, and enforcement actions. Timely tax submissions and payments are essential to maintaining financial and legal stability.