The turnover tax system: Barriers to small businesses

TAXATION10Author: Leonard Willemse (Mazars)

According to the Explanatory Memorandum on the Revenue Laws Amendment Bill, 2008 (EM) small businesses in South Africa are instrumental in the growth of the South African economy as it is a source of job creation and a counter to poverty. Research, however, indicates that small businesses face many obstacles, such as relatively high tax compliance costs relative to their turnover. This is due to the generally high fixed costs associated with systems necessary to comply with the requirements of the tax system. The reality is that many small businesses are outside the income tax net either because they generate small profits or because they are overwhelmed by the tax system itself.

It was therefore proposed in the 2008 Budget Review that a turnover tax system be implemented for micro businesses with a turnover up to R1m per annum. This instrument effectively replaces income tax, capital gains tax (CGT), dividends tax, and value added tax (VAT) for qualifying micro businesses. Payroll taxes such as PAYE and UIF contributions are excluded as they are taxes generally borne by employees and collected by employers on behalf of the State. Turnover tax payable by micro businesses is regulated by section 48 and the Sixth Schedule of the Income Tax Act No. 58 of 1962.

According to the Comprehensive Guide to Turnover Tax issued by the South African Revenue Service (SARS) the benefits of Turnover Tax for a qualifying micro business includes reduced levels of record-keeping, simplified compliance requirements, reduction in costs of accountancy services, possibly a lighter tax burden as the system has its own tax scales and Turnover Tax effectively replaces CGT, Secondary Tax on companies (STC) and VAT.

Persons specifically disqualified from the turnover tax system

Paragraph 3 of the Sixth Schedule lists the persons who do not qualify as a micro business and who are therefore not allowed to make use of the Turnover Tax system. One of the exclusions is where a ‘person renders a professional service during the year of assessment.’

‘Professional service’ is defined in paragraph 1 of the Sixth Schedule as a service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftmanship, education, engineering, entertainment, health, information, technology, journalism, law, management, performing arts, real estate, research, secretarial services, sport, surveying, translation, valuation or veterinary science.

The list is quite extensive, but can also be seen as vague. According to the EM the Sixth Schedule will not apply where the micro business renders a ‘professional service’ as defined. It goes on to say that the exclusion of ‘professional service’ from the definition of a micro business is an anti-avoidance measure to protect the employment income tax base and that such professional services are generally rendered by more sophisticated, high income earning taxpayers, with profit margins that are significantly higher than those assumed in the design of the turnover tax.

The definition of professional service thus poses a potential interpretation problem. It begs the question how professional must one’s service be in order for it to be classified as ‘professional’ for purposes of the Sixth Schedule? And, how sophisticated must a taxpayer be, before his services will be considered professional? Only a list of certain activities are given in the Sixth Schedule which are seen as professional for example sport, health, entertainment etc. However, none of these activities are clearly defined in the Income Tax Act. The question thus arises how wide (or narrow) should those activities be interpreted? In other words what is the scope of the given definition?

The following two authoritative english dictionaries define the word ‘professional’ as follows:

The Oxford Paperback Dictionary (Fourth Edition) professional

adjective  1. of or belonging to a profession or its members.

2. having or showing the skill of a professional

3. doing a certain kind of work to make a living.

noun        1. a person working or performing payment.

2. someone highly skilled.

Collins English Dictionary (Fifth Edition) professional

adjective  1. of, relating to, suitable for, or engaged in as a profession.

2. engaging in an activity for gain or as a means of livelihood.

3. extremely competent in a job, etc.

4. undertaken or performed for gain or by people who are paid.

noun        1. a person who belongs to or engages in one of the professions.

2. a person who engages for his livelihood in some activity.

3. a person who engages in an activity with great competence.

It is clear there are different degrees to which a person could be deemed professional ie. membership to a profession, some acquired skill and even the mere participation in an activity itself. If one should analyse the definition of professional as given by these dictionaries (see left) the following questions arise. Does this mean that a person should have some kind of specific qualification? And if so, should the qualification be obtained from a specific institution? Will this qualification result in the person being ‘highly skilled’? Must the person rendering the service be a member of an accredited institution? What then will be deemed a proper qualification and or level of accreditation which will satisfy the criteria set by the Sixth Schedule? Furthermore, what requirements must an institution meet in order for it to be deemed ‘accredited’ or ‘professional’? Is there the proverbial ‘litmus paper test’ which will determine whether a service is professional or not? In ITC 12860 it was held that the carrying on of a ‘professional’ activity required a particular qualification and, in many cases, a licence, certificate, or membership of a professional body before the person concerned can participate in that activity. At present there are no clear and unambiguous answers to these questions.


As ‘professional service’ is currently defined, it seems as though any service rendered in any one of the activities listed can be deemed professional, ignoring levels of qualification, accreditation and even definitions of the activities themselves. If one follows the definition of professional service in the Sixth Schedule, the mere fact that a service has been rendered in the field of one or more of the listed activities, makes that service professional. The scope of the definition seems, without a doubt, to be too wide and too vague. Clear and unambiguous parameters regarding the definition of ‘professional service’ need to be set by the Legislature to dispose of any uncertainties regarding its scope and meaning. The Portfolio Committee on Finance has by its own admission conceded in their Response Document to the Revenue Laws Amendment Bill, 2008 that the scope of the definition of ‘professional service’ in the Sixth Schedule of the Income Tax Act will be reviewed going forward. This clearly indicates that the ‘professional services’ issue is a grey, if not a problematic one.

So, for the time being, if you as ataxpayer are rendering a service,you must ask yourself whether your services is considered professional enough to exclude you from the Turnover Tax system and being able to benefit from it. Hopefully the Legislature will deal with these uncertainties in due course.

This article first appeared on