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How The Income Tax Act Can Help The Entrepreneur

Small business corporations and the Income Tax Act.

Grant Robson

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Section 12E of the Income Tax Act was created specifically to encourage new business ventures and to create jobs and this encouragement comes in the form of reduced taxation for qualifying small businesses.

It is critical for the entrepreneur and small business owner to understand how to structure his/her business in order to qualify for this reduced tax benefit.

Please note that this section is not intended to benefit any professional person who renders his/her personal services through a company or close corporation.

What is an SBC?

Personal services entities who maintain at least three full time employees for core operations would qualify as an SBC. It is important to note what is defined as a ‘personal service’.

The first category includes professional or semi-professional activities that require a particular qualification and in many cases a license, certificate or membership of a professional body in order to practise. Examples here would include accounting, architecture, education, engineering, law, health and real estate.

The second category comprises broadcasting, commercial arts, entertainment and sports.

Related: Stop Making These Tax Mistakes

Qualifying criteria for SBC

Currently, a Small Business Corporation (SBC) is defined in the Act as a close corporation, co-operative or private company, where the gross income does not exceed R20 million per annum and which complies with all of the following requirements:

  • All the shareholder/members must, at all times during the year of assessment, be natural persons (i.e. individuals and not other companies)
  • Shareholders/Members may not hold any shares/member’s interest in the equity of any other Company/Close Corporation. A share/interest in a listed company, collective investment scheme, friendly society and less than five percent holdings in certain other corporations would be exempted from this clause.
  • Not more than 20% of the gross income and capital gains consists of investment income and income from the provision of professional/personal services. Investment Income would include interest, rental income, royalties, dividends and trading in fixed property and marketable securities.

What is the benefit?

The best way to explain this is by way of example.

The effective tax of a resident company (excluding a personal service provider) that is assumed to pay out all profits as dividends is calculated as follows:

income_tax_1

The rates of tax levied on an SBC for years ending between 1 April 2013 and 31 March 2014 are as follows:

income_tax_2

If we assume that your business makes taxable income of R600 000 for the 2014 tax year the following tax would apply:

income_tax_3

This results in a tax saving of R232 800 less R84 757 = R148 043. This is a massive saving for a new business that would typically be battling with cash flow issues.

Over and above these normal income tax savings, SBCs also qualify for accelerated wear and tear allowances as well as Capital Gains Tax relief.

It is strongly advised that small business owners and entrepreneurs consult a tax professional, experienced accountant, lawyer or Chartered Accountant that is familiar with the Income Tax Act to help advise them on company structure in order to take advantage of the tax benefits that are available to them.

This may not be as daunting as it sounds as there are companies on the market that offer this kind of service on a part time or project basis.

Grant Robson is the executive chairman of The Finance Team a financial executive outsourcing company. He holds a BCom, BCompt (Hons) and is a CA(SA). Grant’s commercial experience includes roles in financial services (African Bank) and the medical industry (Medco), along with international mining experience (Petra Diamonds Plc). He has also served as the CFO of MvelaMasefield (Pty) Ltd, the energy trading subsidiary of the Mvelaphanda Group, with both local and international operations. During his tenure, Grant was responsible for the company’s operations in East Africa, specifically Tanzania and Zanzibar. Following his role at Mvela Masefield, he was appointed financial director of Whiz Property Group (Pty) Ltd, a Johannesburg based, multi-million rand, commercial property development business. Grant’s strengths are client acquisition, service delivery and client retention. For more Information go to www.thefinanceteam.co.za.

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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