The Taxman Cometh
Albert Einstein himself said the hardest thing to understand in the world is the income tax. Tax is a serious issue and every company and individual is required to comply with the tax laws of the country. No one is above the law, not even famous soccer player, Lionel Messi, who was convicted of tax fraud to the the tune of £4.1m which equates to roughly R65,950,980. While he might be lucky enough to get away without serving actual jail time, that is not always the case for the average Joe. We all know the story of one of the most famous gangesters in history, Al Capone, who committed all manner of crimes but managed to stealthily evade the law. That is, until he was brought down by Elliot Ness, a dynamic young agent of the US Prohibition Bureau, on charges of tax evasion after having amassed a personal fortune estimated at $100 million.
Suffice to say, the South African Revenue Service (SARS) is the Elliot Ness to our Al Capone. As I’m sure you’re aware, SARS has been on a drive to collect their taxes and you do not want your business on the wrong side of the law. There are several types of tax legislations to comply with but the main taxes relavant to a small business are typically:
Income Tax
This is tax levied on the annual profits of your business. Tax on companies and close corporations (CC’s) is levied at 28%. However, if you qualify as a Small Business Corporation (SBC) your tax is only levied at 28% if your profit is above R550, 000, otherwise it is levied on a sliding scale. This is a great incentive for the small business owner as it eases the burden of tax on businesses that are still growing. There are, however, a number of conditions that must be met before the incentive applies. The SBC incentive applies if:
All shareholders or members throughout the year of assessment are natural persons who do not hold shares in any other private companies or members’ interest in any other close corporations or co-operatives other than those which:
are inactive and have assets of less than R5 000; or
have taken steps to liquidate, wind up or deregister (effective for years of assessment commencing on or after 1 January 2011).
Gross income for the year of assessment does not exceed R20 million (2013 : R14 million);
Not more than 20% of the gross income and all the capital gains consists collectively of investment income and income from rendering a personal service;
The company, close corporation or co-operative is not an employment entity;
The SBC may not be a “personal service provider”. A company is a personal service provider if a connected person in relation to the company renders services on behalf of the company and the person would otherwise have been regarded as an employee of the company’s client; or the client exercises control or supervision over the manner in which the duties are performed in cases where the duties must be performed mainly at the premises of the client; or more than 80% of the company’s income from services for the year of assessment consists of or is likely to consist of amounts received directly or indirectly from any one client or an associated institution in relation to a client. A company will not be regarded as a personal service provider if it (throughout the year of assessment) employs three or more full-time employees who are engaged in the business of the company of rendering the service on a full-time basis (other than shareholders of the company or connected persons in relation to them).
There are several other incentives available and if well planned, you could save your company a significant amount in taxes.
SARS also has available, a Turnover Tax, which is a simplified turnover-based tax system that applies to small sole proprietors, partnerships and incorporated businesses with a turnover of less than R1 million per year. Turn-over tax is great because of reduced record-keeping requirements and significantly lower rates than the rates under the standard tax system. It replaces Income Tax, VAT, Provisional Tax, Capital Gains Tax and Dividends Tax.
A company is obligated to submit their income tax return one year after the financial year end. During the course of the year however, a company must also submit provisional tax. Provisional tax is not a separate tax but rather a method of paying tax due such that the taxpayer does not have to pay large amounts on assessment. Paying provisional tax allows for the tax liability to be spread over the relevant year of assessment. This is done by estimating what your projected income for the year will be. Your first payment is due within six months from the beginning of the year of assessment and the second is due on or before the last day of the year of assessment. Taxpayers with a February year-end may also to submit a third payment seven months after the year of assessment and six months after year of assessment for all other cases.
Employees’ Tax
This is tax that is deducted from an employee’s salary by the employer; the employer deducts an amount that is subsequently paid over to SARS on the employee’s behalf. In addition, the employer is required to submit Skills Development Levy (SDL) as well as contribute to the Unemployment Insurance Fund (UIF). SDL is a levy imposed to encourage learning and development in South Africa and is determined by an employer's salary bill. Where an employer has a salary bill of more than R500, 000 during any 12 month period, the employer becomes liabile to contribute to the fund at 1% of the total amount paid in salaries to employees (including overtime payments, leave pay, bonuses, commissions and lump sum payments).
UIF gives short-term relief to workers when they become unemployed or are unable to work because of maternity, adoption leave, or illness. It also provides relief to the dependants of a deceased contributor. If an employer does not need to register with SARS for employees tax purposes, this tax can be paid directly to the UI Commissioner. All employees, as well as their employers, are responsible for contributions to the UIF at a rate of 2% of the remuneration paid by the employer to the employee, with each paying 1%.
Employees’ tax must be paid within seven days after the end of the month. If the last day for payment falls on a public holiday or weekend, the payment must be made on the last business day before the public holiday or weekend.
As an employer, you are also obliged to furnish employees with their income tax certificates at the end of the each tax year. These are called IRP5’s or IT3(a)’s in the case of employees from which tax has not been deducted. This information must also be furnished to SARS in the form of an Employer Reconciliation (EMP501). This helps to reconcile between the employees tax declared and paid to SARS via the monthly employees tax submitted. These employer declarations are submitted to SARS every 6 months.
Value Added Tax (VAT)
This is an indirect tax on the consumption of goods and services in the economy. If you are a VAT vendor, you levy VAT on your sales (outputs) and you are entitled to claim for VAT on your expenses and / or purchases (inputs).
VAT is levied at the standard rate of 14% on the supply of most goods and services and on the importation of goods. The VAT on the importation of goods is collected by Customs. There is a limited range of goods and services which are subject to VAT at the zero rate or are exempt from VAT. It is mandatory for a person to register for VAT if the taxable supplies made or to be made is, in excess of R1 million in any consecutive twelve month period.
Your business will submit VAT either every 2 months (Category A and B), every month if your taxable supplies exceed R30million (Category C), every 6 months if you carry on farming activities or you are a registered micro business (Category D) or every 12 months if you qualify for the criteria under this category. The VAT returns and payments are normally submitted / made on or before the 25th day after the end of the tax period.
Dividends Tax
This is the tax levied on dividends declared to the shareholders of the company. As from 1 April 2012, Dividends Tax is applicable to all South African resident companies as well as non-resident companies listed on the JSE. Dividends Tax is borne by the shareholder at a rate of 15%, subject to any reduction in terms of a double taxation agreement. The company declaring the dividend is required to withhold the tax and pay it over to SARS on behalf of the shareholder on or before the last day of the month following the month in which the dividend was paid.