Entrepreneurs and Tax: 101

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As an entrepreneur who does not have a financial background, step one is to hire an accountant. The best accountants are the ones that have been referred by word of mouth.  Ask a friend or colleague whether they are happy with their accountant and whether they would recommend him/her/that practice.

Second, judge by the way the initial meeting and subsequent interactions unfold.  If an accountant is serious about new clients, he/she will ensure that a clear and full understanding of the needs and history of the new client is obtained, and that all the relevant business and personal details of the client is obtained at the onset.  If he/she is serious about getting the ‘full picture’, he/she will be serious in giving a thoroughly planned and organised service.  Slap-dash is a no-no.  Will you let your new doctor prescribe medicine, without asking about your medical history?

Third, make sure that your new accountant has other businesses similar to yours.  If you breed with horses, and your new accountant only works with restaurants, rather try and find someone that has at least some knowledge of the industry that you work/trade in.

Finding the most suited tax expert

Business owners often ‘over invest’ in expertise, by appointing expensive auditors or accountants, neglect to utilise their specialist knowledge’, whilst a straight forward bookkeeper could be more than adequate.  In other words (depending on the income tax and company act and your business type) an auditor or accountant may not be necessary.  My advice would be to schedule an appointment with a specialist in the field of tax and auditing, such as myself, and get clarity on what kind of accountant, bookkeeper or auditor you need for your specific business type.  A business’s need should be the measuring tool when deciding on the level of expertise or the most suited type of tax expert for any business. Your accountant, tax consultant  or auditor should be in a position to provide you with essential and relevant information that you need to run your business efficiently, and in compliance with the various tax laws.

How to manage your tax throughout the year

This depends on the volume of paperwork.  If you run a trading business, with cash ups, staff, suppliers and stock issues, best to have an accountant that processes your books on a monthly basis.  Never fall behind – it is extremely difficult to catch up with tax and accounts and often has additional fees, penalties and taxes as a result!

For individuals that file an annual tax return, the advice I most often give is to simply keep the documents that form part of your day to day purchases and transactions during any given tax year.  Empty your wallet or unfiled post in a box and sort through all when it is tax time.  The most common problem when it comes to tax returns is lost / missing invoices, slips and documents.   Other important tax documentation such as medical aid or retirement annuity contribution certificates are automatically issued by those institutions only once the tax year has lapsed, so no need to worry about them during the year.  Ensure that they have your current and relevant information so that the certificates reach you.

The tax process

Once you have kept all your slips and invoices in a safe place, those can be handed to your tax consultant when the tax season commences.  A good consultant will provide a reasonably thorough list of documents that are required to put him/her in a position to compile your tax return.   By inspecting the type of income that you earned during the preceding tax year, he/she will immediately be able to say whether the slips and invoices that you had diligently kept are needed or not.

Once the return has been compiled, it should be presented to the taxpayer for approval (remember, the taxpayer always takes full legal responsibility for everything that is contained in the tax return, even if it is compiled by a consultant – so ASK what everything means and whether there are any risky claims or declarations contained in the return).

Once submitted, depending on the complexity of the tax return, an assessment is usually issued with 7 – 14 days, which should reflect the information submitted in the tax return.  The consultant should check the assessment and inform the taxpayer of the outcome and whether there are any mistakes or unexpected other items on the assessment that possibly requires investigation.

Once the consultant and taxpayer are happy with the details of the assessment, payment must be made to SARS by the due date stipulated on the assessment, or alternatively, a refund will be paid out the taxpayer by a specified date.  This will usually conclude the tax year, unless there are other issues that require that the assessment be rectified or amended.

Getting audited

It has been our experience that audits happen for various reasons.  Either an audit was requested during the prior tax year – then an audit will probably be requested every year; or a tax return contains an unusually large or small claim for a deduction; or the calculated refund owing to the taxpayer is more than R15 000; or it is simply randomly chosen by the SARS computerised assessment system.

More regular auditing does not necessarily mean there is anything to worry about – it is probably a mechanism that SARS needed to implement since a large portion of the figures and information that are contained on tax returns land there automatically.  If you have proof of any expenses claimed, and they were in the production of income, and you have declared all your income, then you will have nothing to worry about.

E-filing

E-filing is an online system that makes it possible for taxpayers and businesses to submit their monthly, 6-monthly and annual returns to SARS. Probably the most helpful part of E-filing for businesses is that as an E-filer, you can authorise payment for outstanding taxes, which is automatically deducted from your business bank account.

This means that

1. you have proof of the payment to SARS; proof of payment is provided at the end of the transaction with a unique reference number),
2. you do not have to incur extra charges or spend time by taking a cheque to SARS, or posting it (and run the risk that it may not arrive),
3. the payment that has been made can directly be linked to that specific tax that needs to be paid (income tax; monthly PAYE or VAT) – this is especially useful since payments by cheque and electronic transfer in the past was often misallocated to wrong periods or taxes, which meant that penalties and interest for non-payment that were incorrectly levied, had to be objected to and rectified, which was a very time consuming process – and
4. you have access to historical returns, information and payments by the click of a button, as long as you have access to the internet – no more looking for files that are in storage when a query arises.

What are the key areas where SMEs most often make ‘tax related  legal mistakes?

By far, the most common tax related legal mistakes, relate to payroll, staff and salaries.  [Tax rates have reduced year on year for the last couple of years due to the fact that more and more income earners have been drawn into the tax net.  This simply means that systems have been put in place and improved to ensure that people that earn money, that should be taxed, now pay the tax due.

In previous years it was a regular occurrence where people earned multiple incomes, from multiple employers, and did not submit a tax return, nor pay the taxes due on their income.  More people paying the correct amount of tax, means that everyone can pay a little bit less each year.]

However, this means that more emphasis is placed on payroll compliance and the paperwork and documentation in this regard has become more and more complicated and the level of compliance has increased.  Recording salaries, wages and taxable employee benefits (even, for example, paying the staff member’s transport!) have become a cumbersome task, as well as dealing with freelance and independent contractors, and an expert should be consulted on a regular basis to inspect payroll records to ensure that your business remains compliant in this regard.

Important: payment of wages or salaries may not be made to anyone without obtaining their income tax reference number, identity number (and copy of ID, just to be safe), contact details, such as telephone and address, and their banking details.  Best to draw up a template that is completed whenever payment to a new staff member or casual is made for wages or salaries, instead of trying to obtain these details after the fact.

The Income Tax Act is often amended, and unless regular checks are done by a professional, to ensure that your business remains compliant with the laws that govern employment, it can cost you dearly in penalties and the double payment of taxes that were not deducted from staff and paid over to SARS when required.

What are the most common tax-related FAQs from SMEs?

• What are financial year ends, and when is mine?
  • Companies (CC’s and PTY’s) can choose which financial year end they would prefer, and can be any month of the year.  This is done when they are registered with the CIPC (previously CIPRO) and can be changed if need be.
  • Individuals’ financial year end in South Africa is always February, for everyone.
  • May a specific expense be deducted for income tax purposes?
    • The basic principle here is that any expense paid for, that is “in the production of income”, is deductible against income earned, for income tax purposes.  A basic example is: “in order sell my goods, I have to place an advertisement in the newspaper” – the advertising costs may be deducted from the income earned from sales, as a tax deductible expense.  This concept basically leaves that ‘allowed’ expenses wide open, and if an expense can be adequately justified as a necessary expense in order to earn income that resulted from that expense, then it may be deducted for income tax purposes.
    • When do I need to register my business for VAT?
      • Only once your business sales/turnover (not salary) in any 12 month period is expected to exceed R1 million does it become compulsory to register for VAT.
      • Alternatively, if your business needs a VAT registration number for tender or other contractual business purposes, then a voluntary VAT registration number may be obtained.  One of the basic requirements here would be proof that more than R50 000 in turnover / income has already passed through your business account.

About the Author

Le Roux van der Walt is an accountant who swopped the overstressed, underpaid life of working at a firm of Chartered Accountants in the Cape Town city centre, where clients are simply another file on his desk, for the more fulfilling life of working for himself and servicing smaller clients in person. Lighthouse Consulting gets its name from the view from Le Roux’s office where he started off in Mouille Point, and signifies the guiding light Lighthouse Consulting aims to be for their clients. Email leroux@lighthouseconsulting.co.za for more information.