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.
What Should I Know About Dealing With Tax When It Comes To My Business?
If you want your business to comply with tax legislation and avoid a visit from SARS, consider implementing the information in this comprehensive guide on tax for your small business.
Content in This Guide
- Should Your Registered Business Submit A Tax Return?
- Different Types Of Businesses
- Different Forms Of Business Tax
- Small Business & Tax
- Tax For Part-Time & Contract Workers
What is business tax?
Business tax refers to a tax levied by the South African Revenue Services (SARS) on the profits made by companies. Small Businesses are required to follow the same tax processes as medium or large businesses, but, small businesses often experience the tax process as stressful.
The complex and strict nature of tax returns is often intimidating and quite a burden to small business.
The information in this guide is aimed at alleviating tax-related stress for you and your small business.
Should Your Registered Business Submit A Tax Return?
The Small Business Corporation (SBC) tax rates for the financial years ending on any date between 1 April 2016 and 31 March 2017 are as follows:
- 0 – 75 000 – 0% of taxable income
- 75 001 – 365 000 – 7% of taxable income above 75 000
- 365 001 – 550 000 – 20 300 + 21% of taxable income above 365 000
- 550 001 and above – 59 150 + 28% of taxable income above 550 000.
If your business is not yet generating an income, you must still register your business as a tax payer and submit a zero return.
Related: Entrepreneurs And Tax: 101
Different Types Of Business Entities
There are various types of business entities all of which will have a unique way of dealing with tax; here are the main types:
1. Sole Proprietor
A sole proprietorship, also known as a sole trader, is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business. The sole proprietor accepts all risks and rewards of the business, occasionally having to supplement the business’s profits with personal funds.
However, the SARS recommend that you register your business as a tax payer. Businesses with a turnover of under R100 000 usually do not pay tax, but it should still be registered with SARS.
A partnership is the business relationship that exists between two or more people who have come together to carry out a trade, business or a profession. A partnership is also not considered a separate legal person or taxpayer, which means each partner, is taxed on their portion of the profits.
3. Close Corporation (CC)
A CC is similar to a private company and is a legal entity, which means it is a taxpayer in its own right. The minimum number of people in a CC is one and the maximum is 10. From a tax perspective, SARS treats a CC like a company.
4. Private Company
SARS treats a private company as a separate legal entity and it must be registered as a taxpayer in its own right. It has separate rights and duties from its owners. The owners of this type of business are shareholders and they don’t necessarily have to manage the company, in order to own it.
A ‘co-operative’ is defined as any association of persons registered under Section 27 of the Co-operatives Act 91 of 1981 or Section 7 of the Co-operatives Act 14 of 2005.
Related: Tax Basics For Business Owners
Different Forms of Business Tax
Small Business Tax
Small Business Tax is typically the best route for a smaller company, as it’s frequently taxed on the basis of a progressive rate system.
This means that tax is calculated at a rate of 0% on the first R 75 000 of taxable income, 7% on taxable income in excess of R 75 000, 20 300 + 21% of taxable income above 365 000 and a rate of 59 150 + 28% of taxable income above 550 000.
Corporate Income Tax
Corporate Income Tax is a tax implemented on businesses resident, incorporated under the law and managed in the Republic of South Africa. The rate for Corporate Income Tax is 28%.
Micro businesses with a turnover of less than R1 million per annum qualify for Turnover Tax, which reduces and simplifies its tax compliance and administrative procedures.
To do a quick test to see if you qualify for turnover tax, click here.
For more information on turnover tax, click here.
Dividends Tax is a tax charged at 15% on shareholders when dividends are paid to them. For more information on Dividends Tax, please visit here.
Small Business & Tax
How to Register For Income Tax
Once you, as a taxpayer, launch your business you should register with your local SARS office in order to receive an income tax reference number.
Income tax requires registration with the Companies and Intellectual Property Commission (CIPC). Once you’ve registered for income tax you can then register for Value-Added Tax (VAT) or Pay-As-You-Earn (PAYE), without going through a lengthy registration process. Registering for income taxes allows you to access eFiling.
Corporate Income Tax was recently refreshed, offering you a new Income Tax Return for Companies (ITR14), which aims to improve efficiency and compliance. To find out more about the new enhanced ITR14 and what you must do, click here.
Employers are required to deduct employees’ tax (Pay-As-You-Earn) from the earnings of employees and pay it over to SARS on a monthly basis. A business that pays salaries, wages and other remuneration to any of its employees above the tax thresholds (R54 200 for individuals under the age of 65 and R84 200 for individuals aged 65 or older) must register with SARS for employees’ tax purposes. This is done by completing an EMP 101 form and submitting it to SARS.
Once registered, the employer will receive a monthly return (EMP 201) that must be completed and submitted together with the deducted employees’ tax within seven days of the month following the month for which the tax was deducted. Further information about the deduction of PAYE can be found in the Guide for employers in respect of employee’s tax on the SARS website.
SITE (Standard Income Tax on Employees) is merely a method that means employees who earn less than a certain amount, pay income tax as a full and final liability on the information to the specific employer. SITE applies to individuals:
- Whose net remuneration does not exceed R120 000 annually
- Whom do not receive a travel allowance
- Whom do not receive any other income
Sole Proprietor & Tax
What Expenses Can A Sole Proprietor Claim Against Income?
A sole proprietor can claim all typical business expenses. The sole proprietorship itself is not separately taxed on its income. Instead, the sole proprietor reports business income and expenses on his or her own tax return.
What Are Considered As Business Expenses?
Business expenses, also referred to as operating expenses, are the ordinary and necessary expenses incurred in the operation of the business. Don’t forget expenditure must be ‘in the production of income’.
Typical overheads could include:
- Accounting and bookkeeping costs.
- Internet: Costs to run and maintain the system.
- Insurance costs.
- Licences: Those that apply to the business.
- Legal fees: Costs incurred when obtaining legal advice.
- Maintenance and repairs.
- Motor vehicle costs: Maintenance, repairs and licences (costs should be allocated separately from personal running expenses).
- Postage including stamps and mailing expenses.
- Printing and stationery: Letterheads, business cards.
- Delivery and freight.
- Depreciation: For business assets that lose value while in use by a business.
- Entertainment: Expenses – normally food and beverages paid for by the business to entertaining people important to the business, such as customers and suppliers.
- Electricity and water: Costs associated with the business’s premises and the equipment use.
- Rent/Rates and taxes: For leasing your business’s premises.
- Rent: For any leased equipment, signage used by the business.
- Research and Development.
- Security: Costs for security services such as alarm monitoring, armed response, armed guards.
- Subcontractors: Other parties that have provided services for your business related to the product, services and sales.
- Telephone and Fax/Communication: Fixed line and cellular phone costs.
Working From Home
You can claim all your business expenses but there are specific requirements for claiming a deduction for occupying a portion of your home for the purposes of trade. This means that a portion of your home must be specifically equipped to accommodate and support your specific trade and must be used regularly and exclusively to run the business. Your duties must also be mainly performed in that portion of your home.
What Are ‘Home Office Expenses’?
Typical home office expenses include:
- Rent on the premises
- Interest on the mortgage bond
- The cost of repairs to the premises
- Electricity, water, rates and taxes
- Cleaning costs
When you claim a deduction for these expenses, they need to be in proportion to the floor area of your home office against the total floor area of your home. Keep an accurate record of all expenses, as SARS may want to check the information.
Related: Ways To Save More Tax
Tax For Part-Time & Contract Workers
Tax For Part-Time Workers
As long as the company who contracts you issues an IRP5 at the end of each financial year, you do not need a pay slip. But, you must invoice them each month and obviously keep a record of each invoice payment that you receive.
The invoice acts as your ‘payslip’. As you work only for one client, even though you work on a contractual basis, you are not considered an independent contractor as you do not have multiple clients.
Usually, employers are not liable to pay employees’ tax to the South African Revenue Services (SARS) in respect of payments made to independent contractors. But, due to the breadth of the SARS definition of an independent contractor, employers may find that they are liable for employees’ tax payable in respect of independent contractors, and for the interest and penalties associated with the failure to pay over employees’ tax, so it is easier for the employer to pay tax on the contractor’s behalf.
If employees’ tax is deducted, then it is mandatory for the contractor to be issued with an IRP5 certificate at the end of the tax year. But, what is extremely important is that the gross income paid to the independent contractor must be disclosed under code 3616 (independent contractors), and not 3601 (income – taxable).
If A Sole Proprietor Is Employed On A Contract Basis For Three Months, Do I Have To Pay PAYE And UIF On Their Behalf?
Most employers are clear about their responsibility to deduct PAYE from their permanent staff, but the waters tend to get a little muddy when it comes to contractors and casual or part-time staff:
How To Tax An Independent Contractor Or Sole Proprietor
An independent contractor should have a contract of service in place stating that he/she is an independent contractor committed to delivering a specific end-product or service. This means that they are then exempt from PAYE deductions. However, if the contractor is paid on a regular basis (weekly or monthly for example), or works in a regulated environment in terms of fixed hours and supervision, he/she is then excluded and PAYE needs to be deducted from their income.
If you have independent contractors working for you under subcontractor agreements, they can be made responsible for their own tax payments, thus relieving you of the hassle of having to send in monthly PAYE for people who work for you on a contract basis. But, make sure that you have proper contract agreements in place before you wash your hands off the responsibility of contractors’ PAYE.
SARS can still query why you haven’t paid PAYE for these contractors, if it becomes evident that they haven’t been paying tax themselves; it pays to have all the paperwork in place.
It’s also a good idea to ask short-term contractors to include their tax registration number on their invoice as an additional measure to ensure that they are indeed registered for, and pay, tax.
From a casual or part-time employee point of view, bear in mind that you have to deduct 25% tax from casual workers if you pay them more than R65 a day.
As an employer of staff, SARS requires that you register for your employees’ tax. Effectively, this makes you, the employer, an agent of Government, deducting from the earnings of your employees and paying this tax over to SARS each month.
This functions as credit that is set off against the final tax liability of your employees, which is determined once a year. Employee tax includes SITE (Standard Income Tax for Employees) and PAYE.
You have to register as an employer for employee tax if you pay salaries that exceed the tax thresholds. In other words, your employees become liable for tax if their annual salary is R40 000 for individuals under 65 years and R65 000 for individuals 65 years and older, and need to be taxed accordingly.
Members And Directors Are Employees
Bear in mind that as a member and/or director of a company, you are classified as an employee. This means that your company needs to register for PAYE even if you are the only employee.
Failure to deduct and withhold PAYE on remuneration due to directors of companies will result in the imposition of penalties, currently imposed at a rate of 10%, as well as interest.
How To Register For Employee Tax
So, how do you go about registering for employee tax? Firstly, you need to complete an EMP101 form and submit it to SARS. This form is available at your local SARS office or online at www.sars.gov.za. In it, you need to include information relating to your name and the name(s) of your partners if you operate in sole proprietorship or partnership, or the name of your company. You will also need to submit your street and postal address, business telephone numbers and the number of people that you employ.
Registration as an employer is free. The Receiver will let you know when it has received the forms and may ask for additional information before registering you as an employer.
SARS will let you know which Revenue office you are registered with and provide you with the latest EMP 10 – Guidelines for Employers book, which contains the relevant tax tables for you to work out how much tax you need to deduct from each employee’s salary every month.
Once you are registered, SARS will send you a monthly return (an EMP201) and it now becomes your responsibility to complete and submit this form, every month, together with the amount of tax you deducted from employees’ salaries. You need to do this within seven days after the end of the relevant month.
SARS will send you a receipt, which you need to keep on file. Once a year, you will be required to add up all the PAYE tax paid and fill in an IRP501 form and submit this to SARS. At the end of February each year, you will need to give each employee an IRP5 form which shows how much tax they have paid in that year.
Unemployment Insurance Fund (UIF)
You will also need to register for UIF, whether or not you employ staff. It applies to all employers and workers (except those working less than 24 hours a month), learners, public servants, foreigners working on contract, workers who get a monthly State pension and workers who only earn commission.
The fund makes short-term provision for individuals who become unemployed, or are unable to work because of illness, maternity or adoption leave. It also provides financial relief to the dependants of deceased contributors.
Register For UIF
As an employer, it is your responsibility to register with UIF and make the monthly payments. These include a 1% payment from you (based on your employees’ individual salaries).
Each individual employee needs to make a further 1% payment, but it is your duty to deduct this amount from their salary and pay it to UIF, together with your contribution, on a monthly basis to SARS if you are registered for PAYE; or directly to the UIF if you are not.
Register your business by completing a UF8 form, and each new employee needs to be registered using a UI-19 form. You can obtain these forms from the Department of Labour.
SARS has provided guidelines in order to assist employers and independent contractors. These are available on the SARS website here: www.sars.gov.za under ‘Interpretation Notes/Income Tax’. If in doubt, it is almost certainly best to take advice from a tax consultant.
Related: Do You Know Your Taxpayer Rights?
When To Register To Pay VAT
Value-Added Tax (VAT) is an indirect tax, based on consumption of goods and services in the economy. Registered businesses pay VAT and charge VAT on all goods and services.
A self-assessment of your business will determine how you choose to charge, collect and pay VAT. This allows your business to determine its liability or refund of tax. It adopts a credit input method which allows businesses (vendors) to deduct the VAT incurred on business expenses (input tax) from the VAT collected on the supplies made by the business (output tax). In other words, the burden of the VAT is on the final consumer while maintaining neutrality in the business chain.
For smaller companies trying to attract business from big companies it’s advisable to register for VAT, as larger companies prefer to work with registered VAT users. The only way to obtain a VAT number is to register with SARS.
When Is VAT Compulsory?
You will be liable to register for VAT if you earn an income, through your business, from selling goods, or fees earned from services supplied, is more than R1 million in any consecutive period of 12 months, or will exceed that amount in terms of a contractual obligation in writing.
Non-resident suppliers of certain electronic services are also liable to register for VAT, if the fees earned from these electronic services exceeds R50 000.
If you do not receive a large number of VAT invoices and turnover is below the required amount, then it would be advisable not to register for VAT.
Did You Know?
Businesses registered for VAT on a voluntary basis are referred to as vendors. As a vendor with a VAT number and if your business turnover is below the threshold, you must still submit a return, even if the VAT amount on the return is zero.
How To Register For VAT
It is very easy to register for a VAT online. Here are the steps to follow:
- Go to http://www.efiling.gov.za/
- Click on the red button on the top right hand corner that says, “Register”.
- Three options will appear in the middle of the page: For Individuals, For Tax Practitioners or For Organisations. Click on “For Organisations”.
The next screen will provide step-by-step instructions that will ask you to:
- Read the terms and conditions and accept it; before you are guided through the registration process.
- SARS will ask you about who you are (personal information).
- The website will request information about your business.
- You will have the opportunity to register for e-filing for specific tax returns. SARS accepts activation requests for VAT. Please make sure that you have the relevant tax reference numbers handy.
Once you have read and understood the terms and conditions and selected the box which accepts terms and conditions you will go to the next screen, which will request you to provide:
- Login (your login name will create a unique SARS e-Filing login name):
- Confirm the password
- Provide a password hint
- Security question – (such as what is your mother’s name)
- The answer to the security question
- Identification type – South African ID or passport
- Your ID number.
Related: Filing Your Annual Tax Return
Is Insurance Tax Deductible?
“The only insurance contributions that are tax deductible for the employee are RA’s (Retirement Annuity) or pension fund contributions. Dread disease cover, life insurance, disability and provident funds contributions are not tax deductible for the employee,” explains Lerato Slater, a consultant at SARS.
With regard to RA’s, the amount paid by a company is considered a fringe benefit. The contribution shown on the tax certificate issued by the RA provider to the employee is deductible within the limits set by SARS.
The employer’s contribution to the fund is tax deductible to a maximum of 20% of the total salary roll. The employee cannot claim any rebate from SARS on provident fund contributions. For details with regard to the tax deductions you can refer to the Income Tax Act, 1962 (Act 58 of 1962).
Are Marketing Expenses Tax Deductible?
“Marketing expenses pertaining to direct production of income are tax deductible as long as you have proof that the expense is connected to income. If you are paying commission to a third party this would also be tax deductible as it is considered an expense,” explains DJS Tax Specialists, director, David Smith.
In order for you to successfully claim an expense as a deduction for income tax purposes, there must have been a clear intention for this expense to have resulted in you earning taxable income from this expense.
Claiming of expenses is regulated by Section 11(a) of the Income Tax Act. The so-called “general deduction formula” is used to determine taxable income derived by any person who is trading.
A trade according to the Act includes every profession, trade, business, employment, calling, occupation or venture, including the letting of any property and the use of, or the grant of permission to use, any patent as defined in the Patents Act.
Use A Tax Specialist
You can also acquire the services of a tax specialist who can formulate an appropriate tax strategy that is aligned with your overall business strategy and the tax challenges facing your business.
SARS tax consultants (either at their offices or via the phone) can help you calculate your tax and answer any questions that you may have regarding your business. Large accounting companies or smaller firms can assist depending on your requirements, but will charge for their professional services. Contact the South African Institute of Chartered Accountants for more details.
Be sure to choose someone sufficiently qualified, and who won’t leave you in trouble with the taxman. Do not assume that because a practitioner is registered with SARS, they have enough experience to advise you. Call references to gauge service delivery or ask trusted associates for recommendations.
Do all businesses need to register for tax? If I have five employees earning ±R2 500, how do I handle my salaries and do I have to submit SITE and PAYE for myself and employees?
According to the SARS Tax Guide for Small Businesses as soon as you commence your business you are required to register with your local SARS office and obtain an income tax reference number. You should register within 60 days of commencing the business by completing an IT 77 form (available on the SARS website www.sars.gov.za).
The remuneration of directors of private companies is subject to employees’ tax. A formula is used to determine a deemed monthly remuneration upon which the company must deduct employees’ tax in the instance of the director’s remuneration only being determined late in the year of assessment or in the following year.
You’re (Probably) Paying More Tax Than You Should
Tax laws aren’t as complicated as you think. In fact, it’s easier than ever to find legitimate ways of saving on tax, provided you’re looking for them.
Tax is often confusing to business owners because of the complex nature of the law itself. Some of the apparent complexities have arisen due to many tax anti-avoidance measures being incorporated into the Income Tax Act over the years.
Quite frankly, these anti-avoidance measures have actually simplified the interpretation of the law, rather than obscuring it, and by so doing have plugged up loopholes, creating a fair and equitable basis on which tax revenue is collected, and a solid base on which to determine legitimate tax savings.
1. Get your structure right
The way that a company is set up has significant implications for the amount of tax payable. Your business can save up to a maximum of R74 550 in tax annually if structured properly. The key is to structure the company so that it can take full advantage of the tax saving benefits of a ‘Small Business Corporation’.
Here is a brief outline:
- An annual turnover not exceeding R20 million.
- Not more than 20% of revenue derived from investment income or ‘personal services’.
- Shareholders or members are all natural persons.
- Members or shareholders do not own shares (other than listed shares) or members interest in any other company.
2. Don’t leave money on the table
Out-of-pocket expenses landed as the number one overlooked deduction that accountants have observed, followed by motor expenses. So save those receipts for coffee shop, lunch, parking and cell phone pay-as-you-go airtime and depreciate that iPhone and iPad — it all adds up.
3. Travel allowance versus company car
Which is more tax efficient? Whether you receive a travel allowance or your company owns the motor vehicle you use for both private and business purposes, both are taxed.
To obtain a tax deduction on either a travel allowance or on the fringe benefit portion of the use of a company motor vehicle will require you to keep a log book.
The amount of a travel allowance can be calculated to optimise tax savings, whereas you would pay more tax on the use of a company vehicle. However, tax savings should not be the only consideration as you could have more cash in your pocket if you compare the tax savings to the cost of purchasing a vehicle and its related running costs.
4. Is it better to take a dividend or a bonus?
A dividend’s effective tax rate is 38,8% as you need to also factor in company tax of 28%. Therefore, a business owner will save tax by paying himself a bonus up to R4,3 million as opposed to paying a dividend. However, if your business qualifies as a ‘small business corporation’, you will receive even greater tax savings if you distribute a dividend up to R550 000, as opposed to paying a bonus.
A word of caution though, significant penalties can be imposed by SARS if directors pay low monthly salaries and boost their earnings by way of an annual bonus to reduce their monthly PAYE payments.
Related: Entrepreneurs And Tax: 101
5. Untaken employee leave
Your employee contracts should, at the minimum, comply with the Basic Conditions of Employment Act. As annual leave can be taken up to six months after the annual leave cycle, ensure that your business claims a deduction for outstanding leave pay at the end of the financial year.
6. Charge your company interest on your loan account
Charge your company interest on monies invested by you on loan account as it will effectively save company tax of 28% on the interest amount. However, the interest will be taxed in your individual hands, but the first R23 800 is tax free! This is worth doing if your personal income tax’s effective rate is less than 28%, which is an annual taxable income of R725 000 or less.
Related: Ways To Save More Tax
Meeting with your accountant to go over your specific tax situation will allow them to best advise you on what to do to keep your tax bill, and the stress over it, as low as legally possible.
5 Tax Questions Every Business Owner Should Ask In 2016
Here are the five tax questions every small business owner should be asking their tax consultant this year.
It’s tough out there. Entrepreneurs need to do more with less and keep an eye on changes in the tax legislation, as these could affect their payroll calculations and the tax they need to pay on behalf of their employees.
Finance Minister Pravin Gordhan’s recent budget speech admirably brought a sound outline for the country’s framework for the next year with some changes in tax legislation.
Some of these legislative changes (as included in the amendment Acts and reiterated in the budget speech), such as employee contributions to retirement funds, will most probably have an impact on the company’s payroll systems.
Related: Do You Know Your Taxpayer Rights?
1. What is happening with the Employment Tax Incentive (ETI)?
The 2016 Budget indicates that the ETI will be reviewed in the third quarter of 2016 with a view to extending its life for another year.
It is still debatable whether ETI has been effective in addressing the crisis of youth unemployment.
If the legislation is to be renewed, it needs substantial changes to make it more effective and to encourage wider participation by businesses. Areas of difficulty in the current legislation include:
- Putting the responsibility for minimum wage compliance into the ETI Act has compromised its simplicity and effectiveness.
- The three-step formula used to calculate the monthly incentive, results in complicated and poorly understood ‘grossing-up’ calculations that the payroll must perform if a ‘partial month’ is worked.
- If employers claim the monthly incentive in a month in which they are inadvertently not tax compliant, penalties and interest can be the result. This risk is too high in the opinion of some employers.
Generally, some employers are of the opinion that the administrative costs and risks outweigh the financial benefit of the incentive. I am hopeful that pragmatic changes to the ETI Act can address these challenges and improve its effectiveness as a way to boost youth employment rates.
2. Will there be any changes to employee contributions towards retirement funds?
Yes. From March 2016, any employee contributions towards a retirement fund (pension, provident and retirement annuity) are tax deductible, subject to a limit which must be applied by the employer. Previously, contributions towards a provident fund were not tax deductible.
The employee may contribute more than these limits, but he/she will only receive the tax benefit up to the statutory limit. Any contributions made by the employee in excess of the limits will reduce the taxable value of any lump sum paid in future.
3. Am I obliged to register with SARS for skills development?
Yes. All employers registered with SARS for employees’ tax purposes in terms of the Fourth Schedule of the Income Tax Act, must register with SARS for skills development, irrespective of whether they are excluded from paying the levy by one of the following conditions:
- any public service employer in the national or provincial sphere of government,
- any national or provincial public entity, if 80% or more of its funding comes from government,
- any religious or charitable institution,
- any municipality in possession of a certificate of exemption, and
- any employer where the total annual remuneration for the next 12 months is not expected to exceed R500 000.
4. Has there been any change to the income replacement policies since 2015?
No. Since March 2015 premiums towards an income replacement policy were no longer tax deductible and this remains the same. It has not been affected by the changes to retirement fund contributions and how it should be treated on the payroll.
5. Are medical aid contributions still no longer tax deductible on the payroll for employees who are 65 years or older?
Yes. Since March 2014, medical aid was no longer tax deductible for employees who are 65 or older.
If an employee contributes towards a medical aid, the employee will be entitled to a tax credit amount.
However, effective from March 2016, these individuals will also be allowed an additional medical tax credit on the payroll. This value is calculated by allowing 33.3% of the value of the medical aid contributions which exceeded 3 times the normal medical tax credits.
Related: Tax Basics For Business Owners
I believe that the global economy is powered by SMEs. Economic stability, growth and employment are reliant on the success of SMEs. Entrepreneurs are the drivers of potential prosperity. This will only be possible if tax legislation and the country’s fiscal policy supports this section of the economy.
To learn more about PAYE legislation changes for the 2016/17 tax year simply download the Sage Payroll Tax Guide 2016/17.
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