Name: Pertunia Senamela Taba
Student: 15187543
Module: LSB2605
Question 1
Prudence is an electrician who runs a business serving her local community. She invested
her personal savings of R200,000 into equipment and a vehicle so that she can offer her
services wherever needed. Within the first month, Prudence earns a total revenue of
R50,000. She decides to employ an apprentice, Samuel, who she pays R10,000 per
month and promises to teach him the skills of the trade in exchange for his fulltime labour.
Answer the following questions.
1.1) What kind of business structure would you advise for Prudence? Explain your
answer. (6)
I would advise Prudence to set up a Sole proprietorship for her business. A sole proprietorship is the
simplest form of business structure where a single individual owns and operates the business.
This type of business is not required to file annual returns with the CIPC, and it involves fewer other
legal compliance requirements, except for having to register with the South African Revenue Services
(SARS) for tax purposes. Unlike other legal structures or business entities, sole proprietorship is not a
legal entity. The business has no existence separate from the owner. The owner and the business are
seen as one and the same. Consequently, the owner assumes all the risks related to the business. This
means that the owner faces unlimited liability, and he/she is accordingly liable for all the debts of the
business. In other words, the owner may be sued in his/her personal capacity for the debts of the
business, and his/her personal property may be attached by way of a court order. As far as matters of
taxation are concerned, the owner of a sole proprietorship is taxed in his/her personal capacity; the
owner is therefore personally responsible for the payment of the various taxes.
1.2) Is it possible to register her business for turnover tax? Would you advise Prudence
to do so? Explain fully. (15)
Yes, it is possible for Prudence to register her business for turnover tax. Turnover tax is a simplified tax
system available for small businesses with an annual turnover of R1 million or less. It is designed to
ease the tax burden and simplify the tax compliance process for qualifying businesses. Prudence's total
, revenue in the first month is R50,000. If this trend continues, her projected annual turnover will be
R600,000. Since it is below the R1 million threshold, she meets the eligibility criteria for turnover tax.
It will tax her small businesses on turnover and not on “taxable income” (which requires one to start
with the gross income, then deduct any exempt income to get to income, and then deduct any
allowances, then add any taxable gains, and finally get the taxable income). The turnover tax rates are
generally lower compared to the standard income tax rates for businesses. The rates vary depending
on the business sector and range from 1% to 7% of turnover. Prudence should carefully assess her
specific business activities and determine the applicable tax rate. Prudence should consider her long-
term business goals and growth projections. If she anticipates her business expanding and exceeding
the R1 million turnover threshold soon, it may be more beneficial for her to register for standard income
tax from the beginning. This would provide more flexibility in terms of deductions and future tax planning.
1.3) What would be Prudence’s business tax liability if she were taxed according to the
rates for company tax? (5)
companies are taxed at a flat rate of 28%, regardless of how much the company earn so since the total
revenue of Prudence is R50,000 in the first month, we are now assuming that Prudence had allowable
deductions of R10,000, which includes expenses such as materials, apprentice wages, vehicle
maintenance, and other operating costs. Therefore, her taxable income would be:
Taxable Income = Total Revenue - Allowable Deductions
= R50,000 - R10,000
Taxable Income = R40,000
multiplying her taxable income by the applicable corporate tax rate:
Business Tax Liability = Taxable Income * Corporate Tax Rate
= R40,000 * 28%
Business Tax Liability = R11,200
Therefore, if Prudence's business were taxed according to the rates for company tax at a rate of 28%,
her tax liability would be R11,200 based on the given information. It's important to note that tax rates
Student: 15187543
Module: LSB2605
Question 1
Prudence is an electrician who runs a business serving her local community. She invested
her personal savings of R200,000 into equipment and a vehicle so that she can offer her
services wherever needed. Within the first month, Prudence earns a total revenue of
R50,000. She decides to employ an apprentice, Samuel, who she pays R10,000 per
month and promises to teach him the skills of the trade in exchange for his fulltime labour.
Answer the following questions.
1.1) What kind of business structure would you advise for Prudence? Explain your
answer. (6)
I would advise Prudence to set up a Sole proprietorship for her business. A sole proprietorship is the
simplest form of business structure where a single individual owns and operates the business.
This type of business is not required to file annual returns with the CIPC, and it involves fewer other
legal compliance requirements, except for having to register with the South African Revenue Services
(SARS) for tax purposes. Unlike other legal structures or business entities, sole proprietorship is not a
legal entity. The business has no existence separate from the owner. The owner and the business are
seen as one and the same. Consequently, the owner assumes all the risks related to the business. This
means that the owner faces unlimited liability, and he/she is accordingly liable for all the debts of the
business. In other words, the owner may be sued in his/her personal capacity for the debts of the
business, and his/her personal property may be attached by way of a court order. As far as matters of
taxation are concerned, the owner of a sole proprietorship is taxed in his/her personal capacity; the
owner is therefore personally responsible for the payment of the various taxes.
1.2) Is it possible to register her business for turnover tax? Would you advise Prudence
to do so? Explain fully. (15)
Yes, it is possible for Prudence to register her business for turnover tax. Turnover tax is a simplified tax
system available for small businesses with an annual turnover of R1 million or less. It is designed to
ease the tax burden and simplify the tax compliance process for qualifying businesses. Prudence's total
, revenue in the first month is R50,000. If this trend continues, her projected annual turnover will be
R600,000. Since it is below the R1 million threshold, she meets the eligibility criteria for turnover tax.
It will tax her small businesses on turnover and not on “taxable income” (which requires one to start
with the gross income, then deduct any exempt income to get to income, and then deduct any
allowances, then add any taxable gains, and finally get the taxable income). The turnover tax rates are
generally lower compared to the standard income tax rates for businesses. The rates vary depending
on the business sector and range from 1% to 7% of turnover. Prudence should carefully assess her
specific business activities and determine the applicable tax rate. Prudence should consider her long-
term business goals and growth projections. If she anticipates her business expanding and exceeding
the R1 million turnover threshold soon, it may be more beneficial for her to register for standard income
tax from the beginning. This would provide more flexibility in terms of deductions and future tax planning.
1.3) What would be Prudence’s business tax liability if she were taxed according to the
rates for company tax? (5)
companies are taxed at a flat rate of 28%, regardless of how much the company earn so since the total
revenue of Prudence is R50,000 in the first month, we are now assuming that Prudence had allowable
deductions of R10,000, which includes expenses such as materials, apprentice wages, vehicle
maintenance, and other operating costs. Therefore, her taxable income would be:
Taxable Income = Total Revenue - Allowable Deductions
= R50,000 - R10,000
Taxable Income = R40,000
multiplying her taxable income by the applicable corporate tax rate:
Business Tax Liability = Taxable Income * Corporate Tax Rate
= R40,000 * 28%
Business Tax Liability = R11,200
Therefore, if Prudence's business were taxed according to the rates for company tax at a rate of 28%,
her tax liability would be R11,200 based on the given information. It's important to note that tax rates
