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.
Related: Tax Basics For Business Owners
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.
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 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
- you have proof of the payment to SARS; proof of payment is provided at the end of the transaction with a unique reference number),
- 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),
- 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
- 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.
Reimagine The Use Of Technology
The phenomenon of ‘big data’ is rapidly catching up with the world of tax.
Invest And Save 100% Of Your Tax Payable To SARS With The 12J Fund
Section 12J funds were created in response to the South African Government offering tax incentives for private investors to support funds that support SME growth in South Africa. Three experts unpack the benefits of investing in 12J funds — particularly for high net worth individuals.
What is a 12J Fund?
Clive Butkow: In 2009, the South African Government implemented a tax incentive for investors in enterprises through a Venture Capital Company (VCC) regime known as Section 12J.
These funds were set up to help early stage companies raise venture capital to stimulate economic growth and job creation. Section 12J was based on the Venture Capital Trusts (VCT) in the UK, which enable high net worth Individuals to save tax and rather invest in a VCT, which will then invest in start-ups. Individuals, trusts and companies can all invest in a Section 12J company and receive the respective tax deduction.
Neill Hobbs: The South African Revenue Services (SARS) has written Section 12J into the Tax Act, which offers taxpayers a 100% reduction in their taxable income in the year of investment for the amount they invest by way of a subscription for shares in a Section 12J VCC. The VCC then invests into small and medium-sized enterprises (SMEs) with the added intention of creating jobs and securing employment. The VCC must be approved by both SARS and the Financial Services Board.
Why is it tax deductible?
Gidon Novick: The legislation provides for a tax deduction providing the fund complies with the requirements of the Act. The intent of the incentive is to stimulate certain critical areas of the South African economy (such as tourism and hospitality) through SME growth in the sector.
Neill: Section 12J advocates investment into SMEs and junior mining exploration to act as a catalyst for a positive shift in the economy. We know that SMEs are a significant source of employment in the economy and provide a plethora of job opportunities and income security for households. This ultimately creates a positive iterative loop in the economy.
How do the tax deductions work?
Clive: The total amount invested can be deducted from the tax- payers’ taxable income. This results in a taxpayer (who is paying tax at the marginal rate of 45%), saving 45% of their investment by reducing their taxable income. For example, a taxpayer who has a taxable income of R1 million and would normally pay R450 000 to SARS will rather pay the R1 million to the Section 12J company and pay zero tax.
The caveat is that the taxpayer needs to hold their shares for five years in the relevant Section 12J fund, or SARS will recoup their tax saving. The tax is deductible to incentivise taxpayers to rather invest in a Section 12J company and promote the growth of the South African economy than pay tax on their taxable income.
This seems like a double benefit to investors? Is that correct and why?
Clive: There’s definitely a double benefit, as the taxpayer receives a once off deduction from SARS in the year they invest in the Section 12J company, as well as an added benefit based on the performance of the Section 12J company. Some companies are set up to invest their capital in higher risk ventures with others in lower risk ventures. The returns to investors range from 15% to 38% based on the nature of the fund and their investment strategy.
Gidon: The benefit to investors would be in the form of their tax deduction but importantly also their investment returns. Investors need to fully understand the nature of the investments the fund is making, the risks involved and their ability to cash out after the five-year minimum term, in other words, the liquidity of the investment.
Neill: Individual investors will get an immediate tax saving, up to 45% of the amount invested, in addition to any dividends and long-term capital growth. A Section 12J VCC provides self-interest value to the taxpayer in the tax saving and growth in investment, but in a broader sense, marries business value with societal value through the boost in the SME space.
What questions should investors who are interested in investing in a 12J fund be asking?
Clive: The most important question is of the experience and reputation within the management team. Money follows management in the venture capital asset class. The management team needs to have experience in the investment strategy of their Section 12J fund. At Kalon Venture Partners we only invest in disruptive digital technologies where the CEO and the board have significant experience in buying, building and selling technology companies. The CEO was the ex-COO of Accenture South Africa and prior to that led Accenture’s technology business. Another important consideration is how the Section 12J company creates liquidity for their investors as it’s important for the investor to understand how and when the Section 12J company will pay dividends of the profits and surpluses on the sale of assets. Lastly, investors must understand the governance and investment disciplines, systems and processes when making investments.
Gidon: What is the risk/return profile of the underlying investments? Who are the fund managers and what is their track record? What are the assets that underpin the investments? How will this fund make an impact on the South African economy and job creation? How will I get my money out after five years?
Neill: Confirm SARS and FSB approval. What is the VCC’s investment strategy? The VCC’s industry focus? What is the fund’s launch date? Track record? Capital raised? Targeted return? Number of investments made in qualifying companies? Annual financial statements published? Basis for valuing the underlying investment and the VCC’s dividend policy and history? Fee structure? Minimum investment?
What are the pros and cons of a 12J fund versus more traditional investment portfolios?
Neill: The benefit for a deduction in respect of a retirement annuity contribution is limited to
R350 000 in a year, whereas the contribution and benefit of an investment into a Section 12J VCC is not capped and can be 100% of taxable income.
Many SMEs require capital and management support. With the support from the VCC team, stakeholder integration and interaction takes place on the factory floor, rather than just in the boardroom. The investor management team walks the walk with the SME.
A VCC investment should be viewed as a long-term investment. The proceeds on the sale of the VCC shares will be subject to full tax recoupment if the shares in the VCC are sold within five years from the date of investment.
If the shares are held for a period exceeding five years, the sales proceeds from the sale of the shares will only be subject to capital gains tax, albeit from a zero base.
Clive: A major pro for investors is the upfront tax advantage where there is no limit to the investment that you can make, unlike an RA, which is limited to a percentage of taxable income and capped. A second pro is the fact that investors can now diversify their portfolio with 12J investments and not only invest in the traditional capital markets.
What is the amount you can invest into a 12J fund?
Neill: CIPC requires that if a VCC does not have a prospectus, then the minimum amount that can be invested is R1 million. The intention with this is to make sure that any general person from the public, who might not understand the investment they are investing into, does not invest more than is appropriate for them.
Clive: Our recommendation at Kalon Venture Partners is that an investor should not invest more than 7,5% to 10% of their net wealth into a Section 12J due to the higher risk profile of a venture capital investment.
Is there a ‘right’ time to invest in a 12J fund with regards to tax exemptions?
Clive: There is no right time to invest, however with the current rand strength we see this as a vital time to diversify one’s portfolio. The most effective time to raise capital is at the tax year end on 28 February. An alternate time of the year that capital is raised is during the provisional tax season in August or September each year.
Gidon: An investor should only consider a 12J if they have the taxable income and don’t need access to the funds they have invested for at least five years. Investments must be made before the tax year-end (ie 28 February) to qualify for the deduction in that year.
Neill: Section 12J is particularly attractive to high income earners. It’s also attractive to those taxpayers who have made a capital gain, which will be subject to capital gains tax. For example, an individual who realises a capital gain of R5 million in the 2018 tax year, will only have to invest the inclusion amount of 40% (R2 million) into a VCC to avoid capital gains tax completely in the 2018 tax year.
A VCC investment is the only recognised manner in which a corporate employee, who is subject to PAYE on their salary, can receive a refund of PAYE deducted by the employer. Although there is no provision for a directive for the reduction of the PAYE amount, an employee who earns R2 million per annum, and makes a R2 million VCC investment, could receive a full refund of PAYE on the submission of their annual tax return.
The sunset clause is currently 30 June 2021. This means that funds invested before that date must remain in for the five-year period, but any funds invested into a 12J fund after that date will not enjoy the current tax benefits. This date could be re-assessed and extended.
Silver Linings For Smaller Businesses In Budget 2018
As expected, the Finance Minister and Treasury have proposed some tough measures to address South Africa’s tax collection shortfall, growing budget deficit, and new spending priorities in the 2018 Budget Speech. Sage software can ensure your business remains compliant through these upcoming changes.
Higher VAT, fuel levies and import duties on luxury goods will crimp consumer spending, which could be bad news for SMEs, but we are pleased that the Finance Minister has raised his GDP growth projections and proposed interventions to help grow South African SMEs.
Government is taking steps to restore fiscal credibility, rein in spending, and hold off another credit ratings downgrade, such as:
Growth, reviewed competition policy and improved market access
The hopes and concerns of entrepreneurs and SMEs were extensively covered, including how low market access and high barriers to entry are constraining the growth of the country’s SMEs.
While government will take action against anti-competitive behaviour that harms these businesses, big businesses should also play a constructive role in nurturing the growth of SMEs through mentoring and partnership.
An increase in SME funding
The Departments of Small Businesses and Science & Technology and the National Treasury developing a R2,1 billion fund to benefit SMEs during the early start-up phase is good news, but it’s important that the funding is spent efficiently and productively.
We’d like to hear more details about how government will choose to allocate this money.
A shift in public procurement participation
Government using public procurement to support Black Economic Empowerment, industrialisation and development of SMEs see its billions of rand in procurement spend used to empower SME owners — we look forward to more details about how government will increase participation of small and micro businesses in procurement opportunities.
It’s also critical that government follows through on its promise to pay small businesses within 30 days of invoicing. Cash flow is a major challenge for small businesses and few of them can afford to wait three to six months for payment on a big project.
The rise in the VAT rate
The VAT hike will take some money out of people’s pockets, but will probably have less impact on business confidence than higher corporate taxes, and less impact on consumer spending than further personal tax increases.
SMEs will need to ensure their systems are ready to cater for the new VAT rate, but this should not be too much of a challenge for those with automated accounting systems. By international standards, VAT in South Africa is still relatively low — we can just hope that this increase is not followed by another in the next year or two. n
Managing the VAT Transition
The VAT Act stipulates that the time of supply will be either when an invoice is issued or when payment is received — whichever happens first. For example, if you invoice for a sale on 31 March but are only paid on 30 April, the VAT rate of 14% will apply. If you receive payment on or after 1 April but have not yet invoiced for the sale, then VAT should be charged at 15%.
Cloud-based, automated accounting solutions, like Sage One, were VAT-ready on 1 April.
Businesses using these solutions don’t have to worry about staying on top of the different VAT rates because the system will automatically generate the correct VAT invoice, quote and debit or credit note.
The VAT Act states that displayed pricing and adverts must include VAT (unless the product is zero-rated). You have until 31 May to complete this work. Until then, you can display a notice at the till point, stating that prices do not include VAT at the new rate and will be adjusted at the tills. But why delay and risk confusing your customers?
The next VAT201 return you submit to SARS will be more complicated because you will need to calculate input and output tax at different rates, not to mention the apportionment rate that will need to be calculated for contracts and services taking place before and after 1 April. If you’re using manual processes, you might need to consult an accountant to make sure you’re not over or under reporting VAT on your reconciliations.
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