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How to Make Money Before you Start your Business

Ensure you have the optimal business and tax structure before you launch.

Craig van der Westhuizen

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I presented a short talk to a group of entrepreneurs a little while back. My opening question to them involved finding out what vehicle they used to operate their business. The overwhelming majority – in fact every one of them – used a company or close corporation to trade with. In addition, none of them used any of the alternative tax options such as Small Business Corporations Tax or Turnover Tax. I asked the question as to WHY these options were employed and the consensus was that “it was the best thing to do” … but is it really?

Choosing your trading vehicle and tax framework is an important matter. No two businesses and business owners are in the same position – and therefore consideration needs to be given to personal circumstances in order to make an informed decision. I also believe that this decision needs to be taken as early as possible in your entrepreneurial journey because sometimes the decisions taken in the beginning are difficult to be reversed later without additional administration and costs.

Doing business

To simplify matters, I am going to look at some of the high-level strengths and weaknesses of doing business in your personal name as a sole proprietor or partnership versus that of a company. (I will ignore Trusts etc for these purposes – but they do have their place).

Ownership: Sole prop / Partnership

  • Protection from Creditors – No
  • High administrative burden – No
  • Tax advantages – Yes

Ownership: Company/CC

  • Protection from Creditors – Yes (Limited)
  • High administrative burden – Yes
  • Tax advantages – Yes

Tax Framework

Individual

  • Individual – Yes
  • Companies – No
  • SBC – No
  • Turnover Tax – Yes

CC/Company

  • Individual – No
  • Companies – Yes
  • SBC – Yes
  • Turnover Tax – Yes

In short, Companies offer some protection from creditors (but if  you have signed personal surety that protection could be nullified?) Both forms of ownership can also have tax benefits over the other – it just depends on your circumstances.

The crux of the matter here is matching your selected tax framework to your business. In broad terms, the following tax frameworks could be applicable:

  • Personal income tax : The sliding tax scales issued by SARS which taxes net income received by individuals
  • Company tax : Taxable income is taxed at 28%
  • Small Business Corporation Tax : Taxable Income is taxed on a sliding scale from 0% to 28%
  • Turnover tax : Tax is levied on the turnover of the enterprise on a sliding scale. It ignores any costs or expenses incurred

To illustrate the point of choosing a suitable framework please download the example of the implication of different structures and taxes here. The assumption is that the business generates R1m in turnover and a profit of R600k before paying any owner salaries. Owners are then paid a salary of R250k and the remaining profit is distributed via dividends.

As one can see, the effective tax rate that is paid varies from 14% to 28% depending on the structure that is used. Now, this could easily be optimised by taking the time out at the BEGINNING of the enterprises existence as opposed to the end. Had this business elected to use turnover tax upon inception – irrespective of the vehicle (i.e. company vs sole prop) it would have saved at least R25,000.

Existing businesses

There are other considerations to take into account – and certain constraints which may prohibit registration for certain types of tax frameworks and businesses – but my advice is to consult a good tax accountant PRIOR to setting up your business (and then regularly thereafter to review the position) to ensure that you are using an optimal structure for your particular circumstances.

If you already have an existing business, fear not for the proverbial horse has not necessarily bolted. You may elect to register for a different tax framework at the beginning of the next fiscal year provided you meet the requirements of that tax framework.

Feel free to contact us to make an appointment to discuss the most effective structure for your business on info@beadvised.co.za or via our website www.beadvised.co.za

Craig van der Westhuizen qualified as a chartered accountant in 2000. He then spent just short of five years with Imperial in the commercial vehicles sector before leaving the corporate world in 2006 to start his own business. He is currently the MD of Bull’s Eye Advisory Services, a team of entrepreneurs and associates that focus on delivering a range of professional services primarily to the SME market. Bull’s Eye also runs an ‘Entrepreneur Village’ that encourages entrepreneurs to join their premises, which fosters networking and results in more business for everybody. Visit www.beadvised.co.za for more information and to test Bull’s Eye’s free personal budgeting and document storage tool.

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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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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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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.

Entrepreneur

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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.

Related: Budget 2018/9: 3 Key Tax Areas To Look Out For In The Speech

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?

Related: What Should I Know About Dealing With Tax When It Comes To My Business?

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.

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