Tax- Outsourced Finance

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This topic has been a contentious one for many businesses in South Africa.

There is no prohibition on minimising your tax payable in South African tax law, however, there’s a fine line between tax avoidance and tax evasion – with severe consequences for those who dare cross it. Understanding the difference between tax avoidance and evasion is key; avoidance is the act of using legal methods to minimize tax liability, while evasion is any illegal method undertaken to minimise tax liability through fraudulent techniques such as deliberate understatement of taxable income or inflating expenses. Ensuring legality when reducing tax requires the correct planning and monitoring, which is where tax planning comes into play.

Tax planning is the process of analysing one’s financial situation in the most efficient manner, to avail various exemptions and deductions legally. The businesses that consider the tax consequences of each transaction or investment made are those that make the most savings in tax as they realise that it’s the continual process that yields benefits. The use of professional practitioners in a business’s tax planning could be essential to gaining these savings as each year new regulations and amendments are made to ensure these tax loopholes can be combatted, ensuring maximum tax contributions.

 

Tax liability chargeable

Depending on the registration status of your business, the tax liability chargeable will vary. Turnover tax is chargeable if your SMME yields a turnover of less than R1 million per annum. Turnover tax replaces VAT (if you have chosen not to elect your business for the VAT system), provisional tax, income tax, capital gains tax, secondary tax on companies (STC) and dividends tax. Thus, qualifying your businesses to pay a single tax instead of various other taxes.  For turnover tax rates, link: https://www.sars.gov.za/Tax-Rates/Pages/Turnover-Tax.aspx

For registered Small Business Corporation (SBC), incentivised tax rates will apply. Companies in South Africa (including Close Corporations) are generally required to pay a flat rate of 28% income tax. However, SBC’s are subject to reduced rates on income up to R550 000. To qualify for these more favourable tax rates (Check SARS web for more info), a business must mark on their annual company tax return that they are an SBC.

Understanding what your businesses tax liability is will aid in tax planning –  allowing the maximum savings in tax for your business.

 

Tax evasion penalties  

In terms of penalties, small business owners must be aware of the understatement penalty regime. A tax understatement is defined as any prejudice to the South African Revenue Service (SARS) or the fiscus as a result of: a default in rendering a return, an omission from a return, an incorrect statement in a return or if no return is required, the failure to pay the correct amount of tax. The highest understatement penalty applicable is dependent on the amount understated – with the highest percentage payable being 150% of the understated amount for a first offence. With other penalties payable including:

  • If a substantial understatement, 10% of the understatement will be fined.
  • If reasonable care is not taken in completing the return 25% of the amount will be fined
  • If there are no reasonable grounds for tax position taken, 50% of the amount will be fined
  • Impermissible avoidance arrangement will be penalised with a fine of up to 50% of the payable amount
  • If gross negligence is proven 100% of the payable amount will be fined
  • If intentional avoidance is proven 150% of the payable amount will be fined
  • If there is a repeated offence 200% of the amount payable could be fined

Tax planning makes good business sense, by finding legal ways to reduce tax payable, your business could save the needed capital to ensure growth. However, in trying to take these tax reductions to the extreme, ensure your business is always on the right side of the law.

Tax avoidance. Tax evasion. One is legal and one isn’t – be sure to know the difference, or your company could pay the ultimate price.


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Doing business in South Africa is often described as being exciting yet challenging. The average entrepreneur is kept awake by an array of concerns, the most prominent of these being able to turn a profit and remain successful. With this being said, financial success means little to nothing if your company is found to be in violation of laws and regulations that govern businesses, thereby facing the possibility of being penalised or, even worse, dissolved.

Local and international business regulations are put in place to govern business operations and to ensure that commercial business entities act in a reasonable and responsible manner. Unfortunately, a lot of businesses tend to treat compliance as a secondary function, with little consideration of the consequences of non-compliance. Small, Medium and Micro Enterprise (SMME) owners are often guilty of this, thinking that they may slip below the radar due to their size.

Here are consequences of non-compliance with Tax Law regulations and the Company Act.

 

Penalties and fines from the regulators

The most obvious consequence of non-compliance is financial punishment from the relevant authorities. There are two different types of administrative non-compliance penalties that can be levied by The South African Revenue Service (SARS), namely; fixed amount penalties and percentage based penalties, both of which relate to the failure to comply with administrative requirements of the Tax Act. Payment of these penalties and fines could have a catastrophic impact on your business’ bottom line. It may be worth the hassle to ensure that your company is compliant with the laws and regulations, than facing the risks of being penalised.

 

Business can be shut down with the owner/director held liable

The biggest risk of non-compliance with tax regulations and the companies act is the deregistration and closure of your business. In addition to this, possible action could be instituted against the directors of the company for failing to fulfill their fiduciary duties. The legal effect of the deregistration process is that the juristic personality of the company can be withdrawn and the company ceases to exist. According to the Companies Act, all companies are required to file their respective CIPC returns on an annual basis. Failure to do this within the prescribed time period may lead to the CIPC deregistering the company and removing it from its active records. This could result in a range of issues for the company, such as the forfeiture of registered assets of the company.

 

Piercing the corporate veil

Under South African law, a company has a separate legal (juristic) personality from its members (the shareholders) and its officers. The company’s directors and officers are mandated to act in the best interests of the company. When the veil of incorporation is pierced or lifted due to either fraudulent activities or non-compliance, the court is in a position to strip away the protective covering of the limited liability presented by the company structure.

Non-compliance with Tax laws and the Company Act for a Public Company or a Close Corporation can lead to the lifting of the corporate veil, allowing for the shareholders to be held personally liable.

 

Ability to get funding

Business funding institutions such as banks, incubation hubs and development programmes, do not compromise when it comes to compliance to the Tax laws and the Companies Act. Neglecting your duties to keep your business compliant may lead to your losing out on much needed investment or funding. Non-compliance with either the Tax Laws or the Companies Act may cast doubt into the legitimacy of your business, as well as your legitimacy as an entrepreneur. Compliance is also usually taken as the reference point against which ethics, values, policies and codes of conduct can be measured. Given the choice of funding either a compliant entity or a non-compliant entity, most funders will happily opt to fund the compliant business.

 

Ability to sell the business

Another reason to ensure that your SMME is always compliant with the regulations is the ability to sell your company when the opportunity presents itself. Any company conducting a due-diligence on your company will require proof of compliance with Tax Laws and the Companies Act.

To keep your company in good standing with the relevant authorities and to avoid any penalties, entrepreneurs are advised to invest time in ensuring that their companies comply with both the Tax Laws and the Companies Act.

With our in-depth knowledge of the regulations and laws that apply to SMMEs, Outsourced Finance is a well suited Accountancy firm to assist your company with its compliance requirements.

 

 

 


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Small businesses are an important engine for economic growth and job creation, but until the government reconsiders stifling taxes and regulations, it is vital for them to have sufficient tax and compliance support. Receiving the right compliance support and having simplified administration will allow business owners to better focus on growing their businesses rather than becoming inundated with time-consuming tasks and confused by complex tax regulations.

The budget speech and changes to tax, announced by SARS, highlight five key areas for small businesses to note about the new tax year:

1.      Employment Tax Incentive extended for 10 years

In 2014, the government introduced the Employment Tax Incentive(ETI) to encourage the employment of young people and workers with less experience. The ETI allowed the employer to reduce the employees’ tax payable to SARS for PAYE, SDL and UIF, which are deducted from employees’ wages and salaries. This was able to provide a real cash flow benefit to employers and a greater opportunity to hire resources to drive growth.

The ETI was initially meant to be implemented for three years but has now been extended until 29 February 2029, due to its success at supporting jobs for the youth. The programme currently supports about 1.1 million young people according to the Minister of Finance.

The ETI is available for employees who meet the following criteria:

•  Earns a monthly wage from R2 000 and R6 000

• In possession of a valid SA ID, Asylum Seeker Permit or Refugee ID

• Aged between 18 and 29 years old (not applicable in Special Economic Zones)

This news was especially good for small businesses operating in this tough economic environment.. Business owners are encouraged to take full advantage of government incentives such as the ETI to drive growth and access resources at the Jobs Fund and through industrial business incentives.

 

2.      Directors of private companies are no longer automatic employees

Directors of private companies were historically excluded from the definition of an employee in terms of the fourth schedule of the Income Tax Act as they did not receive regular remuneration throughout the year. This gave them an advantage over normal salaried employees who had PAYE deducted from their salaries on a monthly basis, but in 2017 were included in to the definition in order for SARS to receive employees’ tax and prevent tax avoidance.

Directors of private companies have now been removed from the definition of employees and now must apply the definition of remuneration to determine whether employees’tax must be deducted from payments made to them. It is important to note that directors that run their business full time or act in an executive role for the business, would almost certainly satisfy the definition of remuneration for payments made for these services.

However, if directors operate in a non-executive capacity in relation to a company, there may be some benefit in having a conversation with the accountant and the tax consequences of amounts they receive from the company.

 

3.      Penalties for outstanding income tax returns

SARS has begun imposing administrative penalties for outstanding income tax returns that have not been filed by companies. It is compulsory for all registered companies (trading or dormant) to submit income tax returns. Income tax returns are due 12 months after the year-end of the business, in addition to provisional tax returns that must be submitted earlier.

Cwele offered some insight into registered businesses: “It is important to note that companies registered through the CIPC are automatically registered for income tax with SARS regardless of whether they have begun trading or not. They are also required to submit annual returns.”

The penalties range from R250 to R16 000 per month that non-compliance continues, which is determined by the company’s “tax” size. If you have a dormant company, file your tax and annual returns immediately to avoid penalties.

 

4.      VAT: issuing a second invoice to correct details

SARS routinely disallows input for purchases that have inaccurate or incomplete details on VAT invoices. “Businesses that are registered for VAT need to ensure the validity and accuracy of their VAT invoice details to support customers that are also VAT vendors, to be able to claim input VAT on their purchases. Incorrect details result in many businesses receiving requests to adjust invoice details from their customers,” Cwele warned.

The VAT Act only allows vendors to issue one invoice in respect of a specific supply. This introduced uncertainty for vendors about whether correcting details on an invoice that was already issued would result in more than one invoice being issued for a supply. New amendments to the Act now clarify that vendors have 21 days to correct the details of an invoice which does not affect the timing of the supply and not resulting in more than one invoice being issued for a supply.

“Some old accounting systems do not allow invoices to be updated after the VAT period has been closed, but modern accounting systems such as Xero do not have these limitations; providing more reasons for businesses to embrace cloud-based accounting solutions.”

 

5.      Non-compliance from tax practitioners

In an effort to enhance taxpayer protections, SARS has introduced new regulations regarding non-compliance by tax practitioners. This follows a principle that a tax practitioner whose own tax affairs are not in order,should not be responsible for those of others. It was introduced to combat increasing non-compliance by tax practitioners who sometimes ‘forget’ to submit their own tax returns during the busy tax season, and alleviate the risk for entrepreneurs who may commission services and advice from these practitioners.

On how to ensure that your practitioner is compliant, Cwele said: “It is important to request a tax clearance certificate from your accountant and their firm to not only ensure they are operating under the law but as one of many ways to ensure you are getting accurate support.” Although SARS does allow a reduction in some penalties for taxpayers who relied on bad advice from accountants, the tax liability with interest still remain due and can materially affect the cash flow of a growing business.

Reach out to OutsourcedFinance today if you have any questions regarding your businesses tax affairs or if you are unhappy with the service you currently receive.


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Corruption and state capture have dominated the collective consciousness of South Africa’s society over the last few years, with many people growing apathetic and tired of the narrative. Honest South Africans fear that high-profile individuals implicated in corruption won’t be convicted of their crimes as the legal process requires concrete evidence of crimes. However, many corrupt people forget about the tools SARS has to hold them to account, similar to the case of Al Capone.

If you are not familiar to the Al Capone tax case, here is a useful link.

So what does a person who has been involved in corrupt activities have to worry about from SARS? Outsourced Finance’s director, Malusi Cwele, illustrates through an example of how SARS can catch a bribe payment to a government official to influence the outcome of a tender process.

Paying the bribe

The main tax consequence from the perspective of the business paying the bribe is that bribes are not a valid tax deduction.  If you use business resources to pay a bribe, it cannot be classified as ‘business development’ or ‘consulting services’. This is the first thing a seasoned auditor will look for when checking for signs of tax evasion. Section 23(o)(i) of the Income Tax Act prohibits the deduction of any payments resulting from corrupt activities.

If you have claimed bribes as a tax deduction in your business by the usual technique of requesting an invoice for ‘business development’, that represents the falsification of your books and overstatement of deductions, which is tax evasion.

If you have not yet filed your tax return and signed your financials, it is recommended that you offer voluntary disclosure to SARS to minimise your penalties. However, this won’t remove the crime and it would be important for you to consult a lawyer.

Receiving the bribe

The main tax consequence from the perspective of the person receiving the bribe is non-disclosure of income received – as bribes can be considered as gross income. If you don’t consider the bribe itself theft or fraud (which would not be gross income), by not declaring the bribe, you have committed tax evasion. This is because it may represent fraudulent non-disclosure of income, regardless of whether the bribe was paid in cash, meat or through your distant cousin twice removed.

If you have received a bribe and have not yet filed a tax return related to the time you received the bribe, it is better for you, in the long run, to come clean to SARS to lessen your penalties. Consult a lawyer for the best advice going forward.

Recommendations

Naturally, Outsourced Finance’s primary recommendation is not to pay bribes or be involved in corruption. Corrupt activities steal from the poor and hold our country back.

Never forget that FICA and other regulations allow the government to collect and process data about cash and electronic transactions.

If any scenario from the above is true for you, we recommend consulting your lawyer for advice. Tax evasion is a criminal offence and the Tax Administration Act provides for a fine or imprisonment for up to five years. Now that won’t look good on your next funding application – not recommended.

Need assistance with making an honest success of your business? Contact Outsourced Finance to help lead you in the right direction.


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Earlier this month, SARS announced a few changes and enhancements for the 2019 tax season. These include a revamped SARS MobiApp for simplified returns, improvements to e-filing and more streamlined services at branches. However, the change that dominated media attention is the increase to the tax return threshold to R500 000. This is not to be confused with the tax threshold (i.e. when you start paying tax) which remains R78 150 for individuals younger than 65 years for 2019.

Criteria for tax return threshold

The change means that individuals who earn R500 000 or less per year and meet certain criteria, will not need to complete income tax returns for 2019.

SARS explained that taxpayers who meet the following criteria will not need to file returns:

• Employed by one employer for the full tax year (1 March 2018 – 28 February 2019) and received an IRP5.

• Total employment income per year before tax does not exceed R500 000 and capital gains that do not exceed R40 000 per year.

• Earned no other form of income for the tax year (e.g. car allowance, business income, rental income, taxable interest or income from another job).

• Do not have any additional allowable tax-related deductions to claim (e.g. medical expenses, retirement annuity contributions and travel expenses).

If an individual meets the criteria above, they are not required to complete a return. However, this does not mean that the individual is not required to pay tax. The tax threshold remains R78 150 for those under 65 years for 2019 tax season.

Benefits of submitting a return anyway

While the increased threshold might be attractive to many taxpayers, there may be benefits of filing a tax return even if you meet the criteria. Some benefits include:

1. CLAIMING DEDUCTIONS AND REFUNDS

If you have allowable tax-related deductions such as medical expenses, travel expenses and retirement contributions, it is advisable to submit a tax return. If you are due refunds for whatever reason, these will not be paid out by SARS without completing your tax returns.

2. ACCESSING RETIREMENT FUND PAYOUTS

If you need to draw lump sums from your retirement fund because of retrenchment or other reasons, SARS will first apply your payout to any outstanding tax debt you may have and not authorise the directive to your fund because of outstanding tax returns.

3. ACCESS TO FINANCE AND TAX COMPLIANCE

There are many activities that may require tax clearance – such as accessing finance from a bank or private funder and long-stay visas to some countries. At the moment, tax clearance certificates can only be issued if you have filed income tax returns and have no debt outstanding.

Tax season starts on 1 July 2019 for taxpayers using e-filing or the SARS MobiApp and 1 August 2019 for all taxpayers.

Need advice or help to make sure your tax compliance is in order before it’s open season for tax? Contact us, we’ll be happy to help.


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