Unearthed Gold: Transforming Dormant Companies and Defusing Tax Penalty Time Bombs

Unearthed Gold: Transforming Dormant Companies and Defusing Tax Penalty Time Bombs

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In our extensive experience as accountants and business advisors, we frequently encounter individuals who have registered businesses for a variety of reasons. In this article, we will delve into these common motivations:

  1. Formalizing a Side Gig: Many people register businesses as a means to legitimize a side hustle before realizing it may not be sustainable or they lack the time to run the venture effectively.
  2. Meeting Regulatory Requirements: Some individuals are requested by friends to serve as directors for a company primarily to fulfil regulatory obligations, often related to BBBEE (Broad-Based Black Economic Empowerment).
  3. Shifting to Sole Proprietorship: There are instances where individuals initially registered a company but later decided to continue trading as a sole proprietor.
  4. Overseas Relocation: People who registered a company but subsequently relocated abroad for employment often leave their company unattended.

Regardless of the initial reason for registration, it is a recurring trend that many of these businesses eventually become an administrative burden for their founders, partners, or directors. These administrative challenges encompass:

1. Compliance with the CIPC: Ensuring adherence to regulations set by the Companies and Intellectual Property Commission and the Companies Act.

2. Filing of CIPC Annual Returns: Meeting the requirement to submit annual returns to maintain company compliance status.

3. Filing of SARS Tax Returns: This article primarily addresses the critical issue of filing tax returns with the South African Revenue Service (SARS).

The company you registered but might have forgotten about can pose a substantial tax risk. Here’s why:

  1. Tax Obligation: Registered companies have a legal obligation to file annual tax returns with SARS to provide updates on their financial and trading status.
  2. Accumulated Unsubmitted Returns: If you’ve lost track of your registered company, you may have a backlog of unsubmitted tax returns. For instance, if your company was registered five years ago, you could potentially have five years’ worth of outstanding tax returns. This applies to all applicable tax types, including VAT and PAYE.
  3. Ignored Notifications: You might have received notifications and reminders from SARS but overlooked or failed to understand their significance.
  4. Penalties: SARS imposes administrative penalties for non-submission of tax returns, even if the business is not actively trading. These penalties can vary but often start at R250 per month, with a maximum penalty of R16,000 per month. Consequently, for five years of non-submission, you could face a minimum penalty of R15,000. It is important to note that the trigger for these penalties is not trading status, but non-submission of tax returns.

So, what should you do if you find yourself in this situation:

  1. Submit Outstanding Tax Returns: Initiate the process by submitting all outstanding tax returns.
  2. File Returns Regardless of Income: File tax returns for all relevant years, irrespective of whether your business generated income or expenses. As mentioned earlier, penalties are triggered by non-submission, not income levels.
  3. Understand Responsibilities: Avoid registering as a director or tax representative for friends or family without fully comprehending your duties toward the company and tax authorities.
  4. Check Company Compliances: Utilize the Companies and Intellectual Property Commission (CIPC) to obtain a ‘spider report’ for each company you are a director of and verify their tax compliance.
  5. Consider Resignation: If you’ve already registered as a director or tax representative, explore the possibility of resigning from those positions.
  6. Engage with SARS: Communicate with SARS to discuss penalty remittance, repayment plans, or reduced penalties.
  7. Deregister Inactive Companies: If your intent is not to maintain the company’s active status, consider deregistering it with both CIPC and SARS.

Remember, SARS appreciates law-abiding citizens. It’s best to be proactive and honest in addressing any oversight or compliance issues. Approach SARS with transparency and a willingness to rectify the situation by submitting overdue tax returns and seeking resolution for penalties.

We hope this information proves helpful. Feel free to reach out if you require assistance or have further questions.

Unlock Compliance with Ease: Navigate South Africa’s New Beneficial Ownership Laws with Our Expert Help!

Unlock Compliance with Ease: Navigate South Africa’s New Beneficial Ownership Laws with Our Expert Help!

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From 1 April 2023, South African businesses must disclose their beneficial owners to the CIPC in line with the Companies Act. Furthermore, SARS necessitates companies to report shareholders who possess an interest of 5% or more in their tax declarations.

Why the Change?:

This mandate compels companies to maintain and submit beneficial ownership records to the CIPC. Its primary aim is to curb money laundering, financial frauds, and reputation tarnishing activities. Moreover, it aids South Africa’s objective of getting delisted from the Grey-list.

Entities Obliged to Disclose:

Beneficial ownership must be reported by:

  • Private Companies
  • Close Corporations (CC)
  • Non-Profit Companies (NPC)
  • State-Owned Companies (SOC)

Specifically:

  • Trust shareholders equate the beneficiaries as beneficial owners.
  • In a CC, beneficial owners are the members.
  • NPCs with members recognize the members as beneficial owners, whereas NPCs without members consider the directors.
  • For SOCs with a minister as a shareholder, the minister becomes the beneficial owner.

Entities Exempted:

The following aren’t obligated to disclose beneficial ownership:

  • Public Companies
  • Primary Co-Operatives (co-op)
  • Personal Liability Companies

Notably:

  • Public companies are already overseen by entities like the Johannesburg Stock Exchange (JSE) and thus don’t need to submit again.
  • Present amendments exclude primary co-operatives from the mandate.
  • No specific directions have been issued yet for personal liability companies regarding this disclosure.

Who Can Submit?:

Individuals authorized by the company can file the beneficial ownership details.

Deadline Reminder:

Submissions to the CIPC are due by 1 October 2023, which marks 6 months post the inception of the General Laws Amendment Act. If you’re yet to adhere, this provides a month’s time frame to align.

Submission Process:

Filing can be accomplished through the bizportal. Alternatively, using our professional services can streamline the process for you.

Mandatory Documents:

When filing to CIPC, ensure you have the following, which we can generate for you:

  • Mandate to Lodge Beneficial Ownership
  • Register of Beneficial Owners
  • Register of Shareholders (or Members if it’s a CC or an NPC with members)
  • Verified/Certified ID documents of beneficial owners

Once processed and complemented by essential documents, the CIPC will provide a certificate as an acknowledgment of receipt.

Don’t navigate these new regulations alone! Let our experts guide you seamlessly through every step, ensuring full compliance without the stress. Act now for peace of mind tomorrow. Contact us today and stay ahead of the curve

Entrepreneurial Strategies for Overcoming Common Small Business Challenges

Entrepreneurial Strategies for Overcoming Common Small Business Challenges

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Statistics reveal that 50% of small businesses fail within two years of inception. One research conducted by the UWC indicates that between 70% and 80% of small businesses fail within five years. The impact of these failures on the economy and unemployment is substantial. But what factors contribute to the collapse of small businesses?

Unsuitable product offering:

A product or service that fails to meet the needs of the target market can doom a business. It’s essential that small businesses conduct thorough market research to understand customer needs and preferences. The business should develop a unique value proposition that differentiates it from competitors. A failure to continuously innovate and adapt the product offering to market changes can lead to a decline in sales and, ultimately, business failure.

Inadequate customer understanding and engagement:

Understanding your customers is crucial to the success of any business. Without a deep understanding of customer needs, wants, and behaviours, a company may struggle to attract and retain customers. This can be especially problematic for small businesses that rely heavily on a loyal customer base. Effective customer engagement strategies, including personalized service and regular communication, can foster stronger customer relationships. A failure to engage with customers and respond to their feedback can lead to customer dissatisfaction and, eventually, a loss of business.

Inadequate planning:

Many businesses are established as a means of survival. Business owners often register a company without a detailed plan regarding its operation. There are no clearly defined short-term or long-term goals, leading to a lack of understanding of costs, responsibilities, markets, funding needs, and other business requirements. As a result, business owners eventually run out of steam and must return to the drawing board. It is crucial for business owners to create a well-defined plan and maintain a business data room with critical information to aid in discussions with investors or when seeking funding.

Overreliance on a single individual:

In many small businesses, the owner is the primary point of contact for all matters. They handle customers, suppliers, employees, production, administration, shareholder relations, and general problem-solving. This leaves them with insufficient time to focus on essential business aspects, such as growth and strategy. Business owners should identify areas of their business that can be delegated to assistants or other employees to free up time for more important tasks.

The UWC report shows that personal initiative and goal setting are consistently related to business success. A proactive approach to dealing with issues is more likely to succeed than a reactive one.

Failure to differentiate personal and business accounts:

Mixing personal and business finances can lead to confusion and difficulty in tracking expenses and measuring profitability. Business owners should decide on a monthly salary based on their living expenses and the company’s cash flow and tax implications. They should avoid owing the business unless they have a solid repayment plan in place.

Insufficient record-keeping and financial systems:

Many small businesses lack proper financial records, systems, and technology due to cost concerns or fear of the unknown. However, businesses that adopt cloud accounting and other technologies can achieve efficiencies in various areas. Real-time data access can also enhance decision-making quality. Small businesses should embrace technology as an ally, proactively seeking solutions before the lack of it forces them out of business.

Delayed payments by larger businesses:

In countries like Kenya, late payments to suppliers are being considered for criminalization, highlighting the severity of the issue. Cash flow is vital for all businesses, and small businesses must pay their suppliers, who may also be small businesses. Large companies and government departments should process supplier payments more quickly and address officials demanding kickbacks from small businesses.

Passion does not equal expertise:

Passion cannot replace experience. Small business owners should stay ahead by attending managerial, business management, finance, and tax training programs. They should maintain a keen interest in their financials as well as their bank balance.

Ineffective management:

The saying, “People don’t leave jobs, they leave managers,” rings true. When hiring managers, it is essential to find individuals passionate about developing and listening to others. Otherwise, high staff turnover and the associated costs of hiring and training.

Conclusion:

The success of small businesses hinges on several factors including, but not limited to, strategic planning, effective management, proper financial systems, customer understanding, and a suitable product offering. It’s imperative for business owners to approach these areas proactively and adopt strategies that foster growth and sustainability. Ensuring they keep their business and personal accounts separate, leverage technology, and encourage prompt payment practices also greatly contributes to longevity. However, it’s equally important to realize that passion does not equate to expertise, and continuous learning is a key aspect of entrepreneurial success. By understanding and mitigating these common pitfalls, small business owners can significantly increase their chances of success and make a positive impact on the economy.

 

Personal Finance Myths: Separating Fact from Fiction

Personal Finance Myths: Separating Fact from Fiction

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Some personal finance myths continue to persist despite being debunked time and time again. These myths can be harmful as they may prevent individuals from making sound financial decisions, which can lead to long-term financial instability. In this article, we will explore some of these common personal finance myths and debunk them with factual evidence.

Myth #1: Investing is only for the wealthy

Many people believe that investing is only for the wealthy, but this is not true. Anyone can invest regardless of income level. There are several low-cost investment options such as mutual funds, exchange-traded funds (ETFs), fractional shares, and robo-advisors that allow people to invest from as little as R10 or R100. These investment options can help individuals build wealth over time and achieve their long-term financial goals.

Myth #2: Credit cards are bad

Another common personal finance myth is that credit cards are bad and should be avoided at all costs. However, credit cards can be a useful financial tool if used responsibly. They can help build a credit history, earn cashback rewards or points, and provide fraud protection. The key is to use credit cards wisely by paying off the balance in full every month and avoiding unnecessary spending.

Myth #3: Renting is throwing money away

Many people believe that renting is throwing money away and that buying a home is always the better financial decision. However, this is not always the case. Renting can be a smart financial move if it allows individuals to save money for a down payment on a home, or if it is more cost effective than buying a home in their area. Additionally, homeownership comes with additional expenses such as property taxes, maintenance costs, and homeowners insurance, which can add up quickly. Remember, do the numbers before you settle for that decision.

Myth #4: Saving for retirement can wait

Some people believe that saving for retirement can wait until they are older and have more disposable income. However, the earlier individuals start saving for retirement, the more time their money has to grow. Even small contributions to a retirement account can add up over time thanks to compound interest. Waiting to save for retirement can mean missing out on years of potential growth and having to save more later in life to catch up.

Myth #5: Investment = Money kept in a savings account

Some people mistakenly believe that investing means keeping their money in a savings account or a low-interest bank account. However, this is not considered investing because the interest rates on savings accounts are typically very low and may not even keep up with inflation. To be considered investing, the money must be used to purchase assets such as stocks, bonds, real estate, or mutual funds, with the aim of generating a return that exceeds the rate of inflation over time.

Myth #6: High risk always = high returns

Another common personal finance myth is that the higher the risk, the higher the potential returns. While it is true that some investments with higher risk can yield higher returns, it is not always the case. Hight risks can also mean higher losses. And investing in high-risk assets such as individual stocks, options, or speculative investments, may result in significant losses and is not suitable for everyone. When you select high-risk assets, you may need to find ways to manage or mitigate your risk.

Remember, a well-diversified investment portfolio should include a mix of low, medium, and high-risk assets that align with an individual’s financial goals and risk tolerance.

What should you know about Auto Assessment?

What should you know about Auto Assessment?

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What is an auto-assessment?
An auto-assessment is an automatic assessment issued on taxpayers by SARS. This basically means that SARS has collected taxpayer information from their parties (such as medical aid or retirement annuities) and then use this information to file your return and issue an assessment on this return automatically without your involvement.
How will you know if you are auto-assessed? 
You should receive an email or SMS from SARS informing you that you have been selected for auto-assessment. The process started in July 2022. But, this is not the first time SARS has issued an auto-assessment. They also issued these in the 2021 tax year.

What should I do if I receive an auto-assessment? 

SARS says if you agree with the aut0-assessment, you do not have to do anything. However, should you be in disagreement, you have just 40 working days from the date of assessment to file a correction (edited tax return.)

What happens if you miss the 40 days? 

If you do not do anything, SARS assumes you are in agreement with the auto-assessment. The assessment becomes your final assessment at the expiration of the 40 business days.
Can I request an extension? 
If you feel the 40 working days are too little, you can request an extension on eFiling before the 40 days have expired. SARS will require “reasonable” grounds for the request. if you miss the deadline, you will have an additional 21 working days to submit a request for an extension on the same terms. If both 21 and 40 days have passed and you still were not able to submit a correction, you will need to provide “exceptional circumstances” to justify a delayed request for extension.

NOW TO THE BIG QUESTION, SHOULD I ACCEPT THE AUTO-ASSESSMENT? 

We think this is a risky move if (and SARS may not pick up these things on an auto-assessment:)

1. You have qualifying donations you would like to claim

2. You have qualifying out-of-pocket medical aid expenses

3. Your medical aid is being paid for by someone who is not the principal member (normally the person paying for the medical aid would be the one to claim the medical tax credits.)

4. You have capital gains on assets that you sold that fall outside the scope of an auto assessment

5. You are a crypto or share trader

6. You have a side business or rental income (profit or loss)

7. You have and qualify for a home office expense claim (deductions)

8. You would like to claim your business travel kilometres

9. SARS missed one or some of your retirement annuity funds
Contact us:
Was this helpful? Would you like us to do your tax return? Get in touch with us via email (ev****@ev****.com) or by phone – 021 823 9684

What are the tax implications of trading or buying shares?

What are the tax implications of trading or buying shares?

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The tax implication for having shares boil down to two things, whether your gain is income in nature or capital (gain) in nature. Let’s start by defining these two things:

Income: 

Shares held as trading stock are bought mainly for resale at a profit. In other words, any shares held for speculative purposes normally fall under this category. The profits or any gain or loss made on the disposal of such shares (held for-profit/speculative) purposes will be of a revenue nature and will not be subject to capital gains.

Gains of a revenue nature are subject to tax at marginal tax rates that vary between 18% and 45% depending on the circumstances of the taxpayer after taking into account all his/her other income (such as salary, rent, business income e.t.c.) The taxpayer can also deduct expenses directly related to the trading of these shares such as broker fees, transaction fees, subscription to broker news, tools and platforms and any such costs directly related to the trading of these shares.

Capital: 

On the other end of the spectrum, for shares held as a capital asset (that is as a long-term dividend producing investment,) any gains or losses arising from such shares (held for investment/dividend earning) upon disposal will be of a capital nature.

Gains that are of a capital nature are subject to capital gains and at a lower tax rate than gains of a revenue nature. Firstly, you get an exclusion of R40 000 as an individual on your gains. This means that you start paying capital gains tax if your gains exceed R40 000 for a tax year (year of assessment.) This is known as the annual exclusion. For natural persons dying during or after the 2020 tax year of assessment, the exclusion is R300 000.

In addition to the annual exclusion, 40% of the gains are included in taxable income and then taxed as the normal marginal tax rates that apply to your salaries or other income. This 40% is known as the inclusion rate. Assuming that your marginal tax rate is 45% (the highest tax bracket,) the maximum you pay on capital gains is 18% (0.4 x 0.45 = 0.18.)

Yes, you guessed it right, there can be 0% tax on your capital gains when:

  • The sum of capital gain and losses does not exceed the annual exclusion;
  • The sum of capital gain is less than or equal to the sum of capital losses (which means your gains set off against your gains); or
  • Taxable income falls below the level at which normal tax becomes payable, that is if your combined income plus gains fall under the tax-free threshold.

The effective rate (of 18%) we spoke about earlier applies if you fall in the highest tax bracket as an individual taxpayer. The rate is different from that which applies to companies or trusts. Companies and trusts, other than special trusts, pay a higher CGT than natural persons. They do not qualify for the annual exclusion and must include the capital gain at 80% of the gain into their taxable income.  These are the effective tax rates:

  • Companies are at an effective rate of 22.4% which is derived from the 80% inclusion rate and the 28% normal taxes for companies (0.28 x 0.8.)
  • A trust that is not a special trust si at 36% effective tax rate for capital gains (0.45 x 0.8)

What we have done above is the simplest way to look at share-holding. Are things that simple? Not always. The line between gains/losses of a revenue nature or gains of a capital nature can be a bit blurry.

Capital vs revenue: 

When computing your tax liability, the first step is to determine if your gains are capital or revenue in nature. Apart from the three-year rule according to Section 9C (that basically says you must own a share for at least 3 years for your gains to be treated as capital in nature,) the Tax Act itself does not provide objective rules to distinguish between gains of revenue and capital nature. This task has always been left to the courts, which over the years have established some rules for this distinction. So, the onus is on you as the taxpayer to prove that your gains are of a capital or revenue nature.

The most important factor in establishing the nature of your gains is the intention. This is not always an easy task since you can have more than one intention at a time and since intention can change over time. But, the courts have established that the taxpayer evidence as to intention must be tested against the surrounding circumstances of the case. These may include, the frequency of transactions, method of funding and reasons for selling. These may help establish your intention when you bought or sold the shares (Elandsheuwel Farming (Edms) Bpk v SBI.) “If they (the shares) were bought as a long-term investment to produce dividend income, the profit is likely to be of a capital nature. But if the shares were bought for resale at a profit, the profit will be of a revenue nature.”

In SIR v The Trust Bank of Africa Ltd it was established that for a profit to be of a capital nature, “the slightest contemplation of a profitable resale need not be excluded.

Where there were mixed intentions, the dominating intention is the one that establishes intention (COT v Levy.)

Some general guidelines/Principles (source, the SARS guide on tax implications on shares:) 

  • Any profit or loss on disposal of shares will be of a revenue nature if they were purchased for resale as part of a scheme of profit-making (Californian Copper Syndicate (Limited and Reduced) v Harris (Surveyor of Taxes)
  • A profit on the sale of shares is more likely to be of a revenue nature if it was not fortuitous, but designedly sought for and worked for (CIR v Pick ’n Pay Employee Share Purchase Trust )
  • The usual badge of fixed capital investment is that it is acquired for better or for worse, or, relatively speaking, for “keeps”, and will be disposed of only if some unusual, unexpected, or special circumstance, warranting or inducing disposal, supervened (Barnato Holdings Ltd v SIR). 
  • The scale and frequency of share transactions are of major importance, although not conclusive (CIR v Nussbaum).
  • Shares bought for the dominant, main and overriding purpose of securing the highest dividend income possible will be of a capital nature when the profit motive is incidental (CIR v Middelman).
  • Just as an occasional swallow does not make a summer, an occasional sale of shares yielding a profit does not of itself make a seller of shares, a dealer in them (CIR v Middelman).

I do not want to make this a complex matter, so let’s end here. If you need further information or guidance get in touch with me or consult your tax practitioner.

Are you learning anything from this series? Do you want to share any pointers or experiences?

Please leave a comment and remember to share.

What can I do if SARS ghosts/blue-tick me?

What can I do if SARS ghosts/blue-tick me?

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KEY TAKEAWAY POINTS:

  • SARS has 21 business days to complete a verification
  • They may finalise it with or without changes
  • If they take more than 21 business days, you have a right to lodge a complaint
  • If nothing happens, you may take the matter up with the office of the tax ombud
  • Remember to keep a proper track record of the matter and/or any follow-ups you make on the matter
  • In this article, we discuss what verification is, what to do when you are selected for verification and if SARS does not bother to get back to you on time.

INTRODUCTION:

SARS has capacity issues that they are working hard to resolve, But, it seems this 2021 tax season they took more than what they can handle.

We have observed many taxpayers who have been selected for verification but who have not heard back from SARS many days after the verification was initiated. Under normal circumstances, SARS has up to 21 working days to finalise a verification and issue a finalisation letter and/or final or adjusted assessment.

In one case we have looked at, for example, the taxpayer who was selected for verification on 29 July 2021 has not heard back from SARS even at the time of writing this article. We are certain, she is not alone in this.

Let’s look at some important definitions before we can consider what one must do if SARS takes their time on the verifications.

What is verification?

Being selected for an audit and verification are two different processes. With a verification, SARS is doing a face value verification of the information declared by the taxpayer on the declaration or in a return. This involves the comparison of the information on the return against the financial and accounting records and/or other supporting documents. All this is to ensure that the declaration/return is a fair and accurate representation of the taxpayer’s tax position. (Remember, in terms of the Tax Administration Act, the onus is on the taxpayer to provide supporting documentation to prove that the deductions and information on their declaration are reasonable, fair and accurate.)

Who can be selected for verification?

Any taxpayers can be selected for a verification process for the proper administration of tax. The selection can also be done on a risk basis. What should you do if you are selected for verification?

What should you do if I am selected for verification?

SARS will notify the taxpayer if they have selected them for verification. The letter issued will state what the taxpayer must do or provide to SARS. The letter will also notify the taxpayer to check their tax return and to make any corrections if there are any discrepancies on their tax return. The taxpayer will be given 21 business days from the date of the letter in which to provide the supporting documents and schedules. These documents and schedules can be submitted via eFiling or SARS support documents portals.

During the verification, you can expect to get another letter requesting additional information if the relevant material initially supplied was not sufficient to finalize the verification. If you are due for a refund, you may not get this until the verification process is finalised.

What happens if you do not respond to the verification?

It is always important to keep an eye out for SARS correspondences on your email or eFiling. Normally SARS sends you a message and email when they have issued important notices.

If you choose not to respond SARS may:

  • Issue a second letter reminding you to submit relevant information
  • Issue a final request for relevant information
  • If you still do not respond, a SARS official will contact you telephonically and request that you submit the necessary relevant material within 5 business days.
  • Should you still not respond, SARS may raise an assessment based on information readily available or obtain from a third party.

Now let’s consider what your options are if SARS ghosts you.

What if you have complied/responded but SARS takes all the time in the world on the verification?

There is the office of the tax ombud that can help with operational issues. But, it does not get involved before you have exhausted all internal SARS complaints mechanisms. You can only go directly to the office of the tax ombud only if there are compelling reasons to do so.

So, the first step to take is to complain to the SARS complaints office. To do so, you must be sure that the matter is now outside the normal service period, as in the example we have earlier about the taxpayer who was selected for verification on 20 July and has not yet back from SARS ever since.

There are three ways through which one can complain with SARS:

  • Via eFiling. See the step-by-step guide on how to complain eFiling. Please note that you have to be registered on eFiling to be able to do this. You may not download or print the form to send it by any other means. You must also have a valid case number to which your complaint relates.
  • By visiting the branch. If you do, you may need to ensure that you have spoken to all relevant higher people before you leave the branch. Due to covid, you may need to make an online appointment.
  • By calling the SARS Complaints Management office (CMO) on 0860 12 12 16.

Do not call the call normal call centre and say you are following up on an unresolved matter, the call centre agents may just “escalate” your case and normally that achieves very little. If your complaint is not resolved after 21 working days, you may take the matter to the office of the tax ombud.

Here are a few tips on winning the battle against SARS poor service/administrative issues and making sure you have a winnable case when you approach them or the Tax Ombud:

Be specific: 

If you have a complaint, it is better to call the Complaints Management Office (CMO.) If you call the SARS contact centre to get a reference number, specify that it is a complaint with a complaint, specify that it is a complaint and not a follow-up. If you keep calling the call centre and saying you are following up, it may remain just that, a follow-up. You need to specify that you have a complaint so that it is treated as one. Some complaints will need case numbers, make sure you call the contact centre to get one.

Build a compelling case:

The most important thing to do when dealing with SARS is to build a good case, this is whether you are raising a complaint, an appeal or an objection. You will need a system to record your interactions with SARS (at each touchpoint with them). You also need to store documents and supporting documents relevant to the taxpayer’s case. The system of recording your interactions with SARS should allow you to build a timeline of how the case is developed and to ensure that you have all the documents you need for this case.

One such system is to make sure each client file/folder contains relevant subfolders that will help you gather the important and necessary information. The other is to build a dashboard that records the timeline and communications with SARS. This can take any form, for example, Word or Google docs, a task management tool like Asana, Trello or Monday.com.

NB: You do not do this because something has gone wrong, but because things may go wrong and often they do go wrong, but because things may go wrong.

The advantage of doing things this way is that you will save yourself a lot of time when doing the actual complaint, even an appeal or objection. The Tax Ombud form will ask you to summary your case in chronological order. So, if you had been building a case over time, this process will be a breeze. You have all the facts and timeline at your fingertips.

Do you need help with your SARS matters? Contact us here

Basic deductions you can use to save on tax (how to get a tax refund)

Basic deductions you can use to save on tax (how to get a tax refund)

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The tax season is offically coming to an end for non-provisional taxpayers in the next few days. But, even if you are planning for the next tax season, this article is for you as it will consider a few options/deductions that you can use to reduce your tax liability. Let’s consider these:

Medical aid credits:

Taxpayers can claim deductions (or tax credits) for medical aid schemes they contribute to. This can be applied where you contribute as a principal member or where you are not a principal member but pay for and on behalf of someone like a close family member. The credits depend on the number of beneficiaries of the medical aid. The more the beneficiaries the more the credits one can get. For the taxpayer or the first beneficiary, the tax credit is R332 for the 2022 tax year (R319 – 2021), R664 for the taxpayer and one dependant (2022 or 638 for the 2021 tax year0 and R224 for any additional beneficiary (215 for the 2021 tax year.)

Retirement annuity:

If you make contributions towards a pension, provident fund or retirement annuity, you can also claim deductions on taxable income. Taxpayers are allowed to deduct up to, from their taxable income, 27.5% of their remuneration of taxable income, whichever is greater, up to a maximum of R350 000 per tax year if they contributed to a retirement annuity fund, pension or provident fund.

Therefore, it is important that the taxpayer examines and calculate their annual contribution in order to fully take advantage of this tax benefit. However, there is no tax benefit once you withdraw from this fund (we will talk about withdrawals in another publication.)

Donations:

The taxpayer can also claim donations against his/her taxable income. There is a catch though. The deduction is limited to 10% of the taxpayer’s taxable income before claiming donations as a deduction (so, if the taxable income is R300 000, the claim cannot be more than R30 000.) The charitable organisation the taxpayer gives a donation to must also furnish the taxpayer with a Section 18A certificate, not just a receipt.

Home office expenses.

We have previously written about home expenses here. So, if you need a more detailed guide, please refer to that article. However, let’s cover a few things here too. Certain expenses that a taxpayer incur as a result of working from home can be claimed as a deduction against taxable income provided certain conditions are met:

  • The employer must allow the taxpayer to work from home. So, you can’t just work from home because you want to. Your employer must give you express permission to work from home.

  • The taxpayer must spend more than half (50%) of their total working hours working from their home office.
  • The part of the home in respect of which a claim is submitted must be occupied for purposes of a “trade”, as defined in section 1. So, in essence, there should be a specific part of the home that is used exclusively for this purpose. As an example, a specific set aside office must be kept aside for the trade. A taxpayer meeting with a client in the bar area of their home may not qualify for these deductions.
  • Building from the point above, the part that is so occupied must be specifically equipped for purposes of the trade. So, it is important that the space/office must be specially fitted with the relevant instruments, tools and equipment required for the taxpayer to perform their work.
  • The part must be regularly and exclusively used for purposes of the trade. As an example, taxpayers who earn a commission but who spend the majority of their time on the road visiting clients and performing their work at the client’s premises do not qualify for home office expense deduction.

Refer to our previous article on home office expenses for further details and examples of expenses that a taxpayer can get as a deduction for working from home.

Tax-free investments:

These accounts are offered by various financial institutions. The tax benefit is that any income (interest, dividends, REIT payments and capital gains) accrued or received from these funds are exempt from tax. For example, interest income earned is fully exempt from tax as opposed to interest earned elsewhere, which can be exempt only up to certain amounts as per the Act. Though the income is exempt, this must still be included on the taxpayer’s tax return.

Contributions to these funds should not exceed R33 000 annually and a lifetime agreement of R500 000. Any contribution above these amounts triggers a tax on the income earned.

Foreign income:

Ever heard f the 183 days rule? Individuals working overseas for a 183-day term could claim back tax deductions on income earned for the period there were outside the Republic. After 1 March 2020, the exemption is the first R1.25 million of foreign employment income earned by a resident will qualify for an exemption for tax years commencing on or after 1 March 2020.

Travel claim:

If you use your vehicle for work purposes and you are able to prove to SARS that you used your vehicle for work purposes, then you can claim a deduction on it. The catch, keep a travel logbook. Do not “manufacture one!”

Wear and tear:

The world is changing and often employees will use their own tools and equipment to carry out their work. If you are using goods/tools that you bought with your money for work purposes you are entitled to claim depreciation on these tools/assets. These can be computers or laptops. The catch, the cost of the assets must be written off over a time stipulated by SARS and you must be able to prove that the asset/tool was used for work purposes. For example, computers are written off over a period of 3 years. Assets that cost less than R7000 can be written off in full in the year of purchase.

Business expenses:

For the purposes of this article, we will treat a business as an unregistered business such as rental, sole proprietors and freelance businesses run by a taxpayer in their personal capacity. The taxpayer will get deductions for all business running costs as long as they are directly related to the business and as long as they can prove that they are business expenses. The expenses can include but are not limited to:

  • Interest on bond payments (note: not the full bond instalment)

  • Rates and taxes paid on the property
  • Water and electricity
  • Levies
  • Depreciation on furniture in the property
  • Advertising and/or rental agency fees
  • General maintenance and repairs cost like garden services, repairs and painting, cleaning services etc
  • Wear and tear
  • travel costs
  • Business running costs

Capital gains:

Individual taxpayers get an annual exclusion of R40 000 on capital gains. This means that they will start paying for CGT for any gain above R40 000. Also, only 40% of the gain is included in taxable income. If you are holding shares for investment purposes, this may be applicable to you. There can be 0% tax on your capital gains when:

  • The sum of capital gain and losses does not exceed the annual exclusion;

  • The sum of capital gain is less than or equal to the sum of capital losses 9which means your gains set off against your gains); or
  • Taxable income falls below the level at which normal tax becomes payable, that is if your combined income plus gains fall under the tax-free threshold.

For comparative purposes, CGT for individuals is smaller than it is for companies. This is important if you are going to consider holding your investment asset in your personal capacity or in a company. Individual taxpayers, assuming a higher tax bracket, pay a total of 18% on capital gains compared to 22.4% for companies.

Another very important aspect of CGT is the primary residency exclusion. “For the 2018 and 2019 years of assessment, the first R2 million of a capital gain or loss on disposal of a primary residence must be disregarded. This concession, known as the primary residence exclusion, means that most individuals will not be subject to CGT on the sale of their primary homes.”

We will discuss this concept in our future publications. For now, we just wanted to bring to your attention that you may qualify for this exclusion if you sold your primary residence.

There are various other incentives that can be applied by a taxpayer to reduce their tax liability, such as accelerated wear and tear on properties, urban development zones allowances, Section 12J, and certain investments that give the taxpayer some tax benefits. We will discuss these in our future publications to avoid an information overload.

Did you find this article helpful? Do you need help with your taxes? Give us a shout.

How to close a business in South Africa

How to close a business in South Africa

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Who should be reading this article? 

  • Anyone whose business is no longer trading and wishes to wind it down
  • Anyone who wants to liquidate their business
  • Anyone who has lost interest in their registered business and now wishes to discontinue it

KEY TAKE AWAY POINTS:

  1. Pay all outstanding creditors
  2. Collect from all debtors if any
  3. Cancel all contracts (ensuring that all the conditions and terms of doing so are understood and taken care off)
  4. Inform all employees and customers of the intention to close down the business
  5. Sell your business assets (including the cars) and stock (if any) or write off any assets or inventory no longer – S basically liquidate the business
  6. The last step would be to distribute any cash or assets that remain in the business
  7. Deregistering at the CIPC
  8. Deregistering with SARS (all tax numbers)

Why may you consider closing a business off?

There are many reasons for this. But, you may consider closing off your business because of any of the following reasons (not limited to this list:)

  • The business was negatively affected by COVID and there is no possibility of the business doing well again in the future
  • The business has become unprofitable and it no longer makes sense to continue operating
  • Your focus or passion has changed and you would like to focus on something else
  • The project for which the business was designed has ended and will not be resuming again in the future
  • The most profitable clients of the business have left and you do not see the business attracting any new clients
  • Changes in technology that drive your product or business out of the market
  • You no longer have the cash flow or working capital to keep the business going
If you are considering closing down your business, the following steps and considerations are important:

1. Have an exit strategy:

Truly speaking, this should happen before there is a need to close down a business. This is because we will all exit from our business one way or the other. Some of the exit reasons are what we have already highlighted above. But, it could also be due to health reasons, death, new investors, a merger or sale of the business or part of the business. Whatever the reason, every business should have an exit and succession plan in place.

Your goal here is to formulate a plan of how you will close down the business or exit from the business. Without a plan, things usually go wrong and you may be caught unaware along the way.

2. Notify your employees:

After your customers, your employees are an important asset to the business. Besides, they have families to feed and lives to live. Leaving it until late may place an unnecessary mental burden on them and leave them with little time to look for alternative employment. As an alternative, use your relationships to find then alternative employment.

But, the important point here is to keep the employees in the loop, not in the dark, about what is going on. Also, decide on who will handle the communications with the employees. It is also important to decide and communicate their terminal benefits and how these will be paid.

3. Notify your clients

It is important to notify your clients in time so that they have time to look for alternative suppliers. Also, you may need to collect anything that they still owe you. It is important that you decide how you will collect and how they will be notified.

4. Collect your outstanding debts

Plan your business closure around your existing collection policies and avoid giving new credit lines to existing or new clients.

You also want to collect any outstanding debts before you close the business because it may become difficult to get payments once you have already closed off the business. Some businesses’ financial policies do not allow payments to individuals.

Avoid announcing that you want to close off your business before you collect outstanding debts because some clients may just stall on payments hoping it will all go away.

You can offer settlement discounts to encourage customers to settle their accounts. An alternative is selling these accounts to a collecting agency.

5. Notify your creditors and pay outstanding debts

Inform your creditors of your decision to close and ensure you have a plan to handle the outstanding debts.

SARS may be one of those creditors. Ensure that you have filed all your returns and that every return is paid for. If you are unable to pay them, there are processes you can follow to ask for a compromise or a repayment plan (Click here to read more about compromises and repayment plans here.)

There may be specific laws on how you may pay your creditors. Ensure you are familiar with these and follow them in settling your creditors. If you are not sure, enlist the services of a lawyer.

6. Sell your business and operating assets 

If you can, package some of the cash-generating units that are still functional and profitable and sell these to interested parties. If this is not possible, you may want to sell the assets in the business including all the inventory, vehicles and other operating assets you may still have if there is a market available for them.

7. Deregister the business

Once you are satisfied that all processes are complete, it is now time to deregister your business with the CIPC. This is to inform the CIPC that your business is no longer in existence.

After this is done, inform SARS that you have deregistered the business. Also, apply to have all tax types (numbers) deregistered. This is to clear you of future tax compliance burden since your business is no longer in existence.

You may contact us if you need help with:

  • Company registrations
  • Tax and VAT registrations
  • Closing off your business
  • Accounting and Tax
  • Business mentorship and advisor

Timely Financial Reporting/Financial Statements preparation

Timely Financial Reporting/Financial Statements preparation

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Financial statements are intended to meet the needs of decision-makers as well as providing useful information to shareholders.  As a result, the timely preparation of these reports is essential. Financial statements must be available in time to inform decision-making. Therefore, it is important that financial reports/financial statements should be published as soon as possible after the end of the reporting period.

However, we should note here that timely financial reporting should not be reduced to a well-managed “busy financial statement drafting season. Rather, ”it requires careful, yearlong planning and monitoring.  Of course, the need for timeliness has to be balanced against the need for reliability, which in addition to timeliness is also an essential characteristic of financial statements.

Requirement of the Companies Act: 

In terms of the Companies Act, Section 30, Companies are required to produce annual financial statements within 6 months of their financial year-end or within any shorter period as may be appropriate to provide the required notice of an annual general meeting in terms of section 61(7). For example, if one’s year-end of Feb 2018, they should have a set of financial statements by end of August 2018.

Recommendations: 

I would like to make the following recommendations about ways to improve the timeliness and reliability of financial reports. These recommendations are based on my personal experiences and cannot be viewed as an exhaustive list.

Do not leave it until the last time: 

It is never a good idea to start the preparation of your financial statements late on in the year. As mentioned in my introduction, the process requires careful yearlong planning and monitoring. Start with clients whose books are updated and are in order on a monthly basis. For me, these are the client I have monthly management meeting with and at each management meeting, we ensure that the accounts for that month are in order. Once we close off the accounts, we do not come back to these to make any changes. You will find that by the year-end, there is little left to do to produce the financial statements because all books are in order. For me, I find that this process ensures the ongoing completeness and accuracy of financial data.

Team collaborations: 

Reid Hoffman once said, “No matter how brilliant your mind or strategy, if you’re playing a solo game, you’ll always lose out to a team.” I cannot stress enough the importance of working as a team and ensuring that the communications among the team are good and maintained. In my firm, as an example, we have three teams that work closely together to produce financial statements; the tax team, the financial statements drafting team and the financial management team. The financial management team is responsible for day-to-day accounting and the production of the Trial balance. The tax team helps with all complex tax matters. The drafting team takes the Trial balances and produces the financial statements.  What makes the teamwork together well is communication, each member communicating whatever changes or processes that take place at any stage of the process. The biggest advantage of all this is that the reliability of the financial statements is greatly improved. The application of tax and financial reporting laws is also improved.

Systems and processes:

I also find that it helps to have proper systems and processes in place for the production of financial statements. Companies should have a financial system that they use to draft financial statements. These should be able to produce financial statements acceptable for submission with SARS and the CIPC. Also, there should be a well-defined process for the production of financial statements. It could be a well-defined checklist, which has all elements that must be checked before a trial balance is imported into the financial statements software. The presence of such a process will also go a long way in producing a reliable set of financial statements.

Closing and financial statement preparation processing: 

The annual closing process. To avoid delays, aim to have your annual close within a month from the end of the financial period. Communicate these deadlines to all people involved in the process so that everyone is aware of the deadlines and the deliverables that each should meet.

Unforeseen circumstances. The financial report preparation process may identify items that could affect the amounts reported in the financial statements, such as legal disputes, contractual obligations e.t.c. In most cases, a reasonable amount of time may be needed to resolve such items. To avoid delays, it may be better to proceed with the issuance of the financial statements based upon reasonable estimates, rather than to delay their issuance.

Planning: 

There is that old saying that says if you fail to plan, you plan to fail. It is important to carefully when for when the production of financial statements should start, and by whom the financial statements should be prepared. As mentioned earlier, do not leave the drafting to the busy drafting periods. After the year ends, aim to have at least one set of financial statements done per week. Start with those where not too much cleaning is required going to those where late adjustments and more cleaning is done. Also, you may want to aim to submit these financial statements by the time the tax season opens in July. So, plan in a way that will make this possible.

Are you looking for help with your financial statements, reporting or management reporting? Click here to contact us 

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