As an SME owner, if you feel a bit out of your depth when dealing with tax, don’t worry, you aren’t alone. By far, the most common tax related legal mistakes relate to payroll, staff and salaries, and they are prevalent amongst SMEs.
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 who earn money and should be taxed, now pay the tax due.
In previous years it was a regular occurrence for people who earned multiple incomes from multiple employers not to submit a tax return, nor pay the taxes due on their income. However, while more people paying the correct amount of tax means that everyone can pay a little bit less each year, it also means that more emphasis is placed on payroll compliance. 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) has become a cumbersome task, as has dealing with freelance and independent contractors. An expert should be consulted on a regular basis to inspect payroll records to ensure that your business remains compliant.
It’s important to remember that 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. It is 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.
Here are the three most common questions that SME owners ask me.
Q: What are financial year ends, and when is mine?
- Companies (CCs and PTYs) can choose which financial year end they would prefer, and it 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.
Q: 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 to 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 ‘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.
Q: 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.