Connect with us

Tax

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

Published

on

BudgetSpeechImpactSME

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.

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

Published

on

direct-and-indirect-taxes

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.

Continue Reading

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

Published

on

tax-refunds

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.

Continue Reading

Company Posts

Reimagine The Use Of Technology

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

PwC

Published

on

By

tax-video-image

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.

Continue Reading
Advertisement

SPOTLIGHT

Advertisement

Recent Posts

Follow Us

Entrepreneur-Newsletters
*
We respect your privacy. 
* indicates required.
Advertisement

Trending