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Entrepreneurs And Tax: 101

Don’t let tax be a subject to cause pain and headaches each month.

Le Roux van der Walt

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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?

Related: 5 Tax Questions Every Business Owner Should Ask In 2016

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.

Related: Tax Basics For Business Owners

The tax process

tax-basic-ideas

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.

Related: Don’t Forget to Claim Qualifying Tax Deductions

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.

Related: Do You Know Your Taxpayer Rights?

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.

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.

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Tax

7 Direct And Indirect Taxes You Should Consider Before Registering Your Business

Tax planning is critical for us all more so for the success of your newly registered entity.

Kenlin Stride

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If your business has been registered, guess what in the eyes of the law your business is now a legal entity, congratulations. What does this mean? Well this means your business is a distinct legal entity separate from you in the eyes of the law, this means your business can now enter into contracts to purchase assets, utilise debt instruments and hire staff amongst other things. This unfortunately also means your business is subject to tax compliance. Let me try and give you a snapshot of what taxes to be aware of as a business owner however not all will automatically be applicable to your business.

1. Income Tax

Income tax is one of the state’s main sources of revenue and is levied on taxable income determined in terms of the Income Tax Act. All businesses must be registered for Income Tax. It is illegal not to be registered for Income Tax if you have a business.

2. Provisional Tax

The payment of provisional tax is to assist taxpayers in meeting their tax liabilities by way of installments out of their taxable income. Income tax is only paid once the full 12 months of trading is complete. It would be impractical to expect taxpayers to pay one large lump sum of income tax to SARS. Companies automatically fall into the provisional tax system.

Related: Tax Basics For Business Owners

3. Small Business Corporations Tax

SBC Tax was introduced as a tax relief measure for small business. SBC Tax will not be calculated on the flat 28% of taxable income. Dependent on your annual taxable income, you will be liable at the percentages in the table.

4. Pay As You Earn

Employees’ tax refers to the tax required to be deducted by an employer from an employee’s remuneration (salary) paid. The process of deducting or withholding tax from remuneration as it is earned by an employee is commonly referred to as PAYE.

5. Value Added Tax

This is an indirect tax levied on the ‘sale’ and ‘purchase’ of goods and services. This tax is not compulsory unless your turnover has exceeded R 1 000 000 mark however you choose to register voluntarily if it makes sense for your business strategy.

Related: How to Reduce Your Taxable Income

6. Unemployment Insurance Fund

UIF contributions are compulsory for all employees working more than 24 hours a month. The contributions are paid to the Department of Labour (DOL), or can be included in the SARS payment of PAYE on the EMP201

7. Workman’s Compensation

An employer must register with the Commissioner within seven days after the day on which he employs his first employee, (this includes the Director or Owner of the company)

You might be thinking tax compliance, what’s the big deal? I’ve been doing that most of my adult life, well personal tax is very different to business tax. As the director of your newly registered business it is assumed that you have done the research as to what laws to comply with as a business owner. In reality however the thrill of having a business overshadows the mundane compliance elements that go hand in hand when running a business. Let’s face it as much as your business is now a legal entity your business won’t do the research and comply with the necessary taxes on its own that responsibility lies with the director and when I say director I mean you.

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Tax

Tax Refunds – What You Need To Know

You are able to object/dispute any SARS decision not to release the refund on efiling or through your tax practitioner.

Maselaelo Mphela

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Most taxpayers are not aware of the requirements for a tax refund to be facilitated and SARS very often will delay paying out the refund. In this article, we will look at the requirements taxpayers need to be aware of and the Tax Ombud’s report on the investigation into alleged delayed payment of refunds as a systemic and emerging issue in terms of section 16 (1) (b) of The Tax Administration Act No. 28 of 2011 (TAA).

What you need to know as a taxpayer:

  • The tax refund must be claimed within 5 years from date of submission of the return.
  • SARS has the right to withhold the refund as per section 190 (2) of TAA: “SARS need not authorise a refund as referred to in subsection (1) until such time that a verification, inspection or audit of the refund in accordance with Chapter 5 has been finalised.”
  • Authorisation of payment of refund done once SARS is satisfied with the acceptable security provided by the taxpayer in terms of section 190 (3) of TAA: “SARS must authorise the payment of a refund before the finalisation of the verification, inspection or audit if security in a form acceptable to a senior SARS official is provided by the taxpayer.”
  • As a taxpayer, you need to ensure that you verify your banking details with SARS and that there are no outstanding returns in order for your refund not to be delayed.
  • Any decision not to refund by SARS is subject to an objection and appeal by the taxpayer in terms of section 190 (6) of TAA.
  • Refunds less than R100 are not refunded but carried forward to the next tax period.
  • To view the status of your refund you can use the Refund Dashboard on efiling under the ‘Returns History’ tab for the tax period in question or contact the SARS call centre.
  • Interest starts accruing from 21 business days from the date on which the refund became due, i.e. verification/audit outcome finalised.

Related: Tax Basics For Business Owners

Tax Ombud’s Report

The Tax Ombud’s report identified various mechanisms used by SARS to defer or delay the payment of refunds due:

  • SARS failing to link submitted supporting documents at a SARS branch to the main file.
  • The use of special stoppers on taxpayers’ accounts and the delay in lifting the stoppers, e.g. being required to verify banking details in person at a SARS branch. Even after the verification is done, there is still a lengthy delay in paying the refund.
  • Using the filing of new returns as an excuse to block refunds. The system blocks already verified refunds the moment a subsequent return is submitted by the taxpayer.
  • Withholding of refunds for one period while an audit/verification is in progress on another period. This is contrary to section 190 of the TAA.
  • The use of historic returns suddenly reflecting as outstanding but these have never been shown as outstanding on the Tax Clearance Certificate or the Statement of Account.
  • The raising of assessments and passing of journals to absorb credits on taxpayers’ accounts, i.e. overpayments. In doing so, SARS creates fictious tax liabilities instead of making a decision on the refund.
  • Requesting further information during the audit to delay finalisation, thus delaying the time frame from when the interest accrues.
  • No turnaround time for assessments successfully disputed.
  • Obstacles regarding diesel refunds.
  • Raising of assessments prematurely before the 21 days to submit the supporting documents
  • Refunds for periods that have been verified automatically set-off against bad debts on other periods not withstanding a request for suspension or where there is the suspension of payment. SARS may not instate any collection steps from date of submission of request for suspension of payment until 10 days after decision to not grant the request has been communicated to the taxpayer in terms of section 164 (6).

You are able to object/dispute any SARS decision not to release the refund on efiling or through your tax practitioner.

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Company Posts

Reimagine The Use Of Technology

The phenomenon of ‘big data’ is rapidly catching up with the world of tax.

PwC

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As tax professionals we live in a new reality, fueled by the blinding pace of change. The digital revolution is here. Reimagine the future of the tax function through the lens of analytics.

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