Dormant company SARS Tax Penalties: Why Shutting Down Your Dormant Company Can Save You From Costly Penalties
Dormant company SARS Tax Penalties: Why Shutting Down Your Dormant Company Can Save You From Costly Penalties In our extensive experience as accountants and business advisors, we frequently encounter individuals who have registered businesses for various reasons. In this article, we will delve into these common motivations and explain why shutting down your dormant company can save you from costly penalties. Common Motivations for Business Registration: Formalizing a Side Gig: Many people register businesses to legitimize a side hustle before realizing it may not be sustainable or they lack the time to run the venture effectively. 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). Shifting to Sole Proprietorship: There are instances where individuals initially registered a company but later decided to continue trading as sole proprietors. 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, many of these businesses eventually become an administrative burden for their founders, partners, or directors. These administrative challenges encompass: Compliance with CIPC: Ensuring adherence to regulations set by the Companies and Intellectual Property Commission and the Companies Act. Filing CIPC Annual Returns: Meeting the requirement to submit annual returns to maintain company compliance status. Filing SARS Tax Returns: Addressing the critical issue of filing tax returns with the South African Revenue Service (SARS). The Risks of a Dormant Company The company you registered but might have forgotten about can pose a substantial tax risk. Here’s why: Tax Obligation: Registered companies have a legal obligation to file annual tax returns with SARS to provide updates on their financial and trading status. 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. Ignored Notifications: You might have received notifications and reminders from SARS but overlooked or failed to understand their significance. 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. Steps to Mitigate Penalties So, what should you do if you find yourself in this situation: Submit Outstanding Tax Returns: Initiate the process by submitting all outstanding tax returns. 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. 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. Check Company Compliance: 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. Consider Resignation: If you’ve already registered as a director or tax representative, explore the possibility of resigning from those positions. Engage with SARS: Communicate with SARS to discuss penalty remittance, repayment plans, or reduced penalties. Deregister Inactive Companies: If your intent is not to maintain the company’s active status, consider deregistering it with CIPC and SARS. Conclusion: 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. Feel free to reach out if you require assistance or have further questions. Leave a message Subscribe now:
Unlock Compliance with Ease: Navigate South Africa’s New Beneficial Ownership Laws with Our Expert Help!
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 acknowledgement 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 Leave a message Subscribe now:
What should you know about Auto Assessment?
What should you know about Auto Assessment? 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: Leave a message/ get a quote Subscribe now:
Effective Steps to Successfully Close a Business in South Africa (Guide)
Effective Steps to Successfully Close a Business in South Africa: CIPC and SARS Deregistration Guide (2026) Quick Answer: How Do You Close a Business in South Africa? To close a registered company in South Africa, you must first determine whether it qualifies for voluntary deregistration or requires a formal liquidation process. For a company that has stopped trading and has settled its assets and liabilities, the closure process generally involves: Reviewing the company’s financial position. Collecting outstanding customer payments. Settling creditors and other liabilities. Addressing employee and contractual obligations. Disposing of business assets and stock appropriately. Finalising accounting records and outstanding tax returns. Applying for CIPC deregistration where eligible. Cancelling the relevant SARS tax registrations and other employer registrations. Retaining the required business records. Important: Simply stopping trading does not automatically close a company or end its tax obligations. The correct process depends on whether the company is solvent, has outstanding debts or still owns assets. 1. What Is the Difference Between Deregistration and Liquidation? Before closing a business, it is essential to understand the distinction. Deregistration Liquidation Generally appropriate for a company that has ceased trading and meets CIPC eligibility requirements Formal winding-up process for a company with assets or liabilities requiring administration Removes the company from the CIPC register Involves the legal administration and winding-up of the company’s affairs Usually simpler where all affairs have been finalised Usually involves additional legal procedures and a liquidator Does not provide a lawful shortcut for avoiding creditors Provides a formal process for dealing with creditors and distributing assets Subject to CIPC requirements and objection procedures May apply to solvent or insolvent companies under different legal procedures CIPC also provides for certain deregistration situations involving insufficient assets to justify liquidation. These cases require careful consideration, particularly where liabilities remain. A company can therefore be solvent and still require a formal winding-up process. 2. Why Would Someone Decide to Close a Business? Business owners may decide to close their companies for several reasons. These include: Continued financial losses. Insufficient cash flow or working capital. Retirement or a change in career. Completion of a specific project. Changes in market conditions. Loss of major customers. Technological changes affecting the business. A decision to focus on other investments or businesses. Shareholder or ownership changes. A business that was registered but never commenced trading. Not every struggling business needs to close. Depending on the circumstances, restructuring, selling the business or negotiating with creditors may be possible alternatives. 3. Start With a Business Closure Plan A structured closure plan helps business owners identify outstanding responsibilities before beginning the deregistration process. Start by preparing a current financial position. Review: Bank balances. Trade receivables. Trade payables. Outstanding loans. Inventory. Vehicles and equipment. Tax liabilities. Employee obligations. Existing contracts. Shareholder loans. Other assets and liabilities. This information helps determine whether the business can settle its debts and whether deregistration or liquidation is appropriate. Example: Assessing a Company’s Financial Position Suppose a company has the following position: Description Amount Cash available R40,000 Customer balances recoverable R80,000 Estimated net proceeds from assets R100,000 Total estimated available resources R220,000 Trade creditors R90,000 SARS liabilities R30,000 Other liabilities R40,000 Total liabilities R160,000 Estimated surplus before closure expenses, additional taxes and other adjustments: R60,000 This suggests that the company may have sufficient resources to settle its recorded liabilities. However, it does not establish that the company is legally solvent or that deregistration can begin immediately. The company must still consider contingent liabilities, asset realisability, tax consequences and the appropriate closure procedure. 4. Notify Employees and Comply With Labour Legislation If your business employs staff, closure may involve retrenchments or other lawful termination arrangements. Employers must consider the Labour Relations Act, including the applicable consultation requirements for dismissals based on operational requirements. Depending on the circumstances, obligations may include: Consultation with affected employees. Consideration of alternatives to dismissal. Appropriate notice. Statutory severance pay where applicable. Outstanding remuneration. Accrued leave payments. UIF documentation. Relevant employment certificates and records. Example: Severance Pay Under the general statutory minimum for qualifying operational-requirements dismissals, severance pay is at least one week’s remuneration for each completed year of continuous service, subject to applicable legal provisions. Suppose an employee earns R5,000 per week and has completed four years of continuous service. Illustrative minimum severance: R5,000 × 4 = R20,000 Other termination payments may also be payable. Important: The calculation of remuneration, eligibility for severance and any applicable exceptions must be assessed under the relevant employment legislation. Business closure does not automatically remove an employer’s labour-law responsibilities. 5. Inform Customers and Review Existing Contracts Customers should receive appropriate notice where the business can no longer provide products or services. Review outstanding contractual obligations, including: Customer agreements. Supplier agreements. Property leases. Equipment rentals. Software subscriptions. Insurance policies. Service agreements. Finance contracts. Some agreements may contain notice periods, cancellation charges or other termination provisions. Do not assume that closing the company automatically cancels its contractual obligations. 6. Collect Outstanding Debtors Before closing the business, review all outstanding customer accounts. Prepare a debtors age analysis showing: Amounts outstanding. Due dates. Overdue balances. Disputed invoices. Potentially irrecoverable debts. Where appropriate, follow up with customers and consider lawful collection arrangements. Why Is This Important? Outstanding debtors are company assets. If a company still has recoverable receivables, it may not yet satisfy the requirements for straightforward voluntary deregistration. Uncollected balances should therefore be properly addressed before the company is closed. 7. Settle Creditors and Outstanding Liabilities A business must properly address its liabilities before pursuing a closure process. These may include: Suppliers. Banks and finance providers. Employees. Landlords. SARS. Shareholder loans. Other creditors. Where the company cannot pay its debts, directors should seek professional advice on the appropriate legal process. Do not distribute remaining cash to shareholders while ignoring outstanding creditors. What If the Business Owes SARS? Depending on the circumstances, SARS may permit a qualifying taxpayer to apply for a payment arrangement or compromise of tax debt. These are formal processes subject to statutory requirements and SARS approval. They
Can I deduct home office expenses?
Can I deduct home office expenses? These days the work culture has changed. Since lockdown was introduced. Some companies had to close shop and some employees were required to work from home. Also and in general, the world is changing and so is the way people work and interact. Many people, like myself, prefer working from home. Working from home has become a normal thing. The GIG economy will also make working from home just another normal thing. Luckily, SARS allows home office deductions if certain conditions are met. However, it is important to note that SARS often than not flag returns with home office expenses for audit. So it is important that one correctly and accurately claims these deductions. It is worth understanding the rules around home office expenses as they are allowed under certain circumstances. Not everyone may end up deducting home office expenses. Having said this, it is important to point out that the situation is different for self-employed people or what we would term sole proprietors or freelancers who work from home. These taxpayers can automatically deduct their home office expenses. These taxpayers (self-employed, sole proprietors, freelancers) do not need to work through the tight conditions required for one to be able to deduct home office expenses. They simply have to include their home office expenses with the local business, trade and professional income on their tax return. What is required to be able to deduct home office expenses? 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 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 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. What expenses can be deducted? First, one needs to check the taxpayers’ remuneration structure to see if they are: A commission earner, that is, takes more than 50% of their total remuneration from the commission or some other variable form which is based on their performance. A normal salaried employee with variable payments/commission making up less than 50% of their total remuneration. The commission earners can deduct the following: Rent Interest on bond Repairs to premises Rates and taxes Cleaning Internet Wear and tear and All other expenses relating to their house as well as other commission related business expenses (such as telephone, stationery, repairs to printers, maid answering phone in your absence etc) The salaries employee with variable payments/commission making up less than 50% of their total remuneration can deduct: Rent of the premises Interest on the bond Cost of repairs to the premises and other expenses in connection with the premises Rates and taxes Cleaning Internet, Wear and tear and all other expenses relating to their house only. How to calculate the home office deduction: One would need to work out/measure the total square meterage of the office in relation to the total square meterage of the house. This is then converted into a percentage. The percentage is then used to apportion the expenses that can be used for home office deductions. Example: Mrs taxpayer is a software engineer who works for Corona Company Pty Ltd. Her remuneration consists of a salary only (no commission.) Her Company allows her to work from home three days per week. Mrs taxpayer has a separate office at home, fitted out with a computer and printer, which she uses exclusively for her software engineering job. Her office is 30 square meters, and the floor space of her entire home (including the office) is 300 square meters. During the tax year, she incurs the following expenses: – R120, 000 interest on a bond – R36, 000 rates and electricity – R36, 000 paid to the cleaner – R5, 000 roof repairs – R12, 000 cell phone expenses Based on the above information, Mrs taxpayer qualifies for home office deduction. Based on the space occupied by her home in relation to the entire house, the apportionment ratio is 10% (30/300). Therefore her home office deduction is 10% x (120 000 + 36 000 + 36 000 +5 000) = R19 700. Her cell phone costs will not be deductible since she is not a commission earner. Will I qualify for a home office deduction for the 2021 tax season? The 2021 tax season started 1 March 2020 and ends 28 Feb 2021. To be able to claim home office expenses you would need to have met the conditions specified earlier. You will also need to have ended up working from home for more than six months of the tax year. That is, you would have worked from home until at least the end of September 2020. Need help claiming your home office expenses or finding someone who can deal with SARS on your behalf? Leave a message Subscribe now: