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Guiding you Through Audit Terminology

Before you panic about where your taxes are being spent, understand the terminology.





“Every few months there’s a stir in the media when the Auditor General releases yet another government entity’s audit report,” says Kevin Phillips, MD of idu Software. The reports are variously damning, with the provinces and municipalities often being the worst culprits when it comes to things like ‘fruitless and wasteful expenditure’.

But what do these scary-sounding terms actually mean? What is really happening to our tax money in these cases – and how much of a big deal is it? Phillips shares his views on the subject.

The purpose of audits

To answer those questions, let’s first recap the purpose of an audit. The auditor’s job, whether in the private or the public sector, is to make sure that an organisation’s financial statements are a fair reflection of what actually went on during a financial year. It’s about accuracy, transparency and completeness of information.

If corrupt individuals are organised enough, they can fool the audit process for a while – but it won’t be easy. Corruption doesn’t flourish where financial information is transparent and widely available, so that many people understand the broader financial picture. On the other hand, if there’s only one person in the organisation who knows what’s going on, the risk of fraud and corruption is massively higher.

So, a regular audit serves both to uncover problems and as a useful precaution: When people know they have to satisfy an auditor at the end of the year, they are more likely to follow good practice.

Good practice

With that in mind, it’s easier to understand what all those audit terms really mean. A clean audit report is what everyone wants: A confirmation that there are no material errors or omissions in the organisation’s financial statements.

That little word ‘material’ is important, however. It doesn’t mean there are no errors or omissions at all – it just means they aren’t significant enough to be a serious concern. The ‘threshold of materiality’ is the point at which errors or omissions become large enough to influence economic decisions in the organisation.

Exactly where this threshold lies will depend on the size of the organisation’s budget: A R1 million discrepancy could be a sign of major trouble in a small municipality, or a mere rounding error in a large government department. This materiality issue goes some way to explaining why there is sometimes confusion about whether an organisation’s statements really are clean or not.

The next step down from a clean audit is a ‘qualified audit’ – the accounts contain some ‘material misstatements’, or there isn’t enough evidence to decide whether some amounts are accurate enough.

The words ‘qualified’ and ‘unqualified’ also sometimes lead to confusion, because the way they are used in audit reports is different to the way we use them in everyday speech. We want our doctors and our accountants to be qualified, ie. we want them to have all the right training and certifications and to meet certain standards. But we don’t want audit reports to be qualified; because that means the auditor has some reservations about the figures. Hence a clean or unqualified audit is better than a qualified one.

Finding problems

A further step down the list is the adverse audit: The auditor finds the organisation’s financials have substantial misstatements. In other words, the amount of information that is wrong or left out is significant.

Even that is not as bad, however, as a disclaimed audit: This happens when the auditors throw up their hands and say “these statements are such a mess I can’t tell what’s going on!” or the accounts are fundamentally incorrect or false. This is a red flag precisely because of the point we made about transparency above: If nobody knows what’s going on, what could be hiding in the mess?

Within each category of audit opinion, there are three kinds of problem spending that the auditor might flag. The first is unauthorised spending: That is, spending that goes over budget or wasn’t used for the purpose intended.

Irregular expenditure is something different: Spending that was incurred “without complying with applicable laws and regulations,” according to the Auditor General’s definitions. Unauthorised spending can be down to admin errors or accidents – irregular spending might raise more concerns because it suggests that procedures aren’t being followed and there is potentially more chaos to follow.

Finally, ‘fruitless and wasteful expenditure’ is the facepalm category: Pointless spending that could have been avoided “if reasonable care had been exercised.” Penalties and interest for late payments fall into this category.

Next time you read a sensational news story about an Auditor-General’s report on a particular department or municipality, take some time to consider the details. Is the report misunderstanding, or making a mountain out of a molehill – or are things even worse?

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Entrepreneur Today

3 Stealthy Tax Hikes Payroll Managers And Employees Need To Take Note Of

By Rob Cooper, tax expert at Sage, and chairman of the Payroll Authors Group of South Africa





“Dammed if you do and dammed if you don’t.” 

The adage summarises the difficult decisions government and the Finance Minister faced when balancing the country’s books, rescuing state-owned enterprises, and reviving the growth of our economy. Given the economic pressure that most taxpayers are facing, government ideally needed to achieve all of that without direct increases to personal income tax in the most recent Budget Speech.

Personal income tax has comprised at least a third of South Africa’s total tax revenue in recent tax years, despite growing unemployment. The 2019 Budget, presented in February, forecasts that personal income tax will account for nearly 39% of tax collected during the upcoming (2019/20) tax year. Given that we are in an election year and that the tax base is fragile, it’s not surprising that the Finance Minister and the National Treasury avoided direct increases to the statutory tax tables used to calculate PAYE for employees in the budget.

Nonetheless, government has made inflation work in its favour to impose some tax increases by stealth. Here are three ways government is raising more revenue without direct tax increases:

1. Bracket creep

The statutory tax tables used by payrolls and employers have not been changed for 2019/20, nor have the brackets been adjusted for inflation. This effectively amounts to an indirect tax increase that will yield a revenue saving of approximately R12.8 billion for government’s coffers.

It is not unusual for government to use ‘bracket creep’ to effectively raise more revenue. But unlike previous tax years, even low- and middle-income earners are not getting much relief. Rebates and the tax threshold are being increased by small amounts to allow some relief, but many people this year will feel the pain as inflationary salary increases push them into a higher tax bracket.

2. Medical aid credit not adjusted for inflation 

As proposed in the 2018 Budget, the Finance Minister did not apply an inflationary increase to the Medical Tax Credit, which allowed him to raise an extra R1 billion in revenue for the year. Surprisingly, these funds will be allocated to general tax revenue rather than ring-fenced for healthcare. In previous tax years, revenue generated from below-inflation increases on medical scheme credits was used to fund National Health Insurance (NHI) pilot projects.

There is still no clarity on how the NHI is going to be funded except for a general statement that the funding model is a problem for the National Treasury to solve, and that the principles of cross-subsidisation will apply. One wonders if any real progress will be made soon, given the fiscal constraints government faces.

3. Business travel deduction left untouched

The Budget leaves the per-kilometre cost rates used to determine tax deductions for business travel untouched. By not increasing travel rates to account for inflation, government effectively increases income tax collection at the cost of the taxpayer. This will be a blow for people who need to claim from their employers for business travel in their personal vehicles. This change has slipped through largely unnoticed and the budget does not provide numbers for the expected increase in tax revenue.

Closing words

Amid political turmoil and uncertainty, the Finance Minister presented a balanced budget for 2019/20 that offers hope for the future along with some tough love. With government taking steps to accelerate economic growth and improve revenue collection, we should hopefully see a steady improvement in government finances, which will translate into less pressure on the taxpayer in future years.

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Entrepreneur Today

SMEs: Staying On The Right Side Of The Taxman

Remaining SARS compliant can be a constant challenge for small- to medium-enterprises (SMEs), especially when they are trying to focus on growing their businesses and streamlining their operations.





EasyBiz Managing Director, Gary Epstein, says submitting taxes can be a seamless process that does not have to take up more time than is necessary. “If business owners understand what is required of them and they put a few processes into place to deal with their tax submissions properly, their lives will be so much easier.”

What are the top three considerations for SMEs when submitting tax returns?

“Firstly,” says Epstein, “SARS returns must be accurate and submitted in terms of the relevant Act. Secondly, returns should be submitted and paid on time to avoid unnecessary penalties and interest, and thirdly, business owners must follow up on queries issued by SARS. “Do not ignore these queries, act on them as soon as possible”.

What are the major SARS submission deadlines for SMEs?

Epstein points out that small business owners need to adhere to various tax deadlines, each with their own particular dates for submission. “It is important that business owners diarise the dates (and set advance reminders for themselves) and/or enlist the services of an accountant or financial adviser to help them keep abreast of requirements.”

Value-added tax (VAT)

VAT payments need to be submitted in the VAT period allocated to the business, according to various categories and ending on the last day of a calendar month. This may mean making payments once a month, once every two months, once every six months or annually, depending on the category.

Provisional taxes

Provisional tax should be submitted at the end of August (first provisional) and at the end of February (second provisional) – for February year-end companies.

Employee taxes

In addition to submitting an annual reconciliation (EMP501) for the period 1 March to end of February for Pay-As-You-Earn (PAYE), Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF), employee tax, in the form of an EMP201 return, needs to be submitted by the seventh of every month.

When can SMEs get extensions and is it worth it?

Epstein says SMEs can apply for various extensions, but these are subject to the Income Tax Act and Tax Administration Act.

“It is best for SMEs to consult their tax professionals to get advice regarding extensions for their businesses.”

What is SARS not flexible about?

SARS is not flexible when it comes to late returns and late payments.

“I cannot stress enough how important it is for SME owners to ensure their tax returns are submitted on time. In this way, they will avoid the inconvenience and expense of additional fines and interest,” notes Epstein.

What skills do SMEs need in their organisations to be able to submit to SARS efficiently?

Business owners often don’t have the time or expertise to deal with tax submissions throughout the year. If the business cannot afford to employ a full-time accountant or financial services expert, it would do well to outsource its tax requirements to a registered tax practitioner.

“I would recommend that even if they are not submitting the tax returns themselves, business owners should have a broad understanding of the tax regulations and what is expected of them. There is a lot of helpful information on the various Acts and tax requirements on SARS’ website,” says Epstein.

How does the right software help SMEs remain SARS compliant?

SME’s (and their accountants’) jobs can be made easier by using reliable accounting software to calculate accurate VAT reports. These reports are only as accurate as the data entered into them, which means care needs to be taken when inputting data into the accounting programme. Epstein says a good accounting software package must be reliable, easy to use and functional.

“SMEs need to check that the software has thorough reporting capabilities and can interface with other software solutions. Of course, it is also important to find out whether the software is locally supported by the vendor or not.”

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Entrepreneur Today

4 Dangers Of Business Under-insurance

A common short-term insurance peril that many SMEs face when submitting a claim following an insured event is the risk of being underinsured.





Malesela Maupa, Head of Products and Insurer Relationships at FNB Insurance Brokers says, many small business owners mistakenly believe that by merely having a short-term insurance policy in place they are adequately protected against unforeseen events.

“This is technically correct provided that the business is covered for the full replacement value of the items insured. However, in circumstances where the sum insured does not cover the full replacement value or material loss of the item insured, the business is underinsured,” explains Maupa, as he unpacks the dangers of business underinsurance:

1. Financial loss

The most common risk is financial loss on the part of the business. If the business is underinsured or the indemnity period understated, the short-term insurance policy will only pay out the sum insured for the stated indemnity period as stated in the schedule, with the business owner having to provide for the shortfall. This often leads to cash flow challenges, impacting profit margins or rendering it difficult for the business to recover following the financial loss.

2. Reputational damage

Should an underinsured business not have sufficient funds to replace a key business activity or critical component following a loss, this may impact its ability to fulfil its contractual obligations, leading to a loss of business or market share, and irreparable reputational damage in the worst-case scenario.

3. Legal action

A small business also faces the risk of customers or clients taking legal action against it, should it fail to deliver on goods and services following a loss or be unable to honour its financial commitments that they committed to prior to the loss.

4. Survival of the business

A catastrophic event such as fire, which could result in the loss of stock or company equipment and documentation, could threaten the survival of a small business that is not yet fully established, if the business assets are not adequately insured.

Working with an experienced short-term insurance broker or insurer is essential when taking up short-term insurance to ensure that business contents are covered for their full replacement value.

Furthermore, depending on the nature of the business or item insured, the policy should be reviewed on a regular basis to avoid underinsurance as the value of items often change overtime due to fluctuations in economic activity. Where it’s necessary, evaluation certificates need to be kept up to date.

“Lastly, SMEs should ensure that the sum insured does not exceed the replacement value, which would lead to over insurance. Should a business submit a claim following a loss, the insurer would only pay out the replacement value, regardless of the higher sum insured,” concludes Maupa.

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