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A quick view on the tax consequences of the Budget 2015

on Thursday, 05 March 2015. Posted in General, Tax

A quick view on the tax consequences of the Budget 2015

Photo title: And another business day is almost over... 

License: https://creativecommons.org/licenses/by-nc-nd/2.0/

This speech of Minister Nene was highly anticipated and perhaps feared by some. 

There are varying opinions on the tax changes that have been implemented. It seems as if the main opinion of tax experts is that it was reasonable. I must agree, I do not see major problems in how they have distributed the tax collection burden.

Firstly the increase in sin taxes is one that in my opinion is always a good measure. An interesting one is that they have increased the rate at which individuals are taxed. This is a first since 1995. An important aspect to note here is that if you earn below a certain point you are still better off than the previous year (excluding inflation). For an individual below the age of 65:

  • earning R150 000 per year will pay R44.25 less tax per month in the 2016 tax year compared to the 2015 tax year
  • earning R250 000 per year will pay R30.37 less tax per month in the 2016 tax year compared to the 2015 tax year
  • earning R380 000 per year will pay R19.79 more tax per month in the 2016 tax year compared to the 2015 tax year
  • earning R600 000 per year will pay R92.91 more tax per month in the 2016 tax year compared to the 2015 tax year
  • earning R1 700 000 per year will pay R962.58 more tax per month in the 2016 tax year compared to the 2015 tax year

Thus it is clear that the higher income earning individuals are targeted for the increased tax revenue. For centuries there have been lengthy debates on how fair this approach is. The high net worth individuals makes out roughly 11% of this taxpayer base and they are responsible for roughly 60% of the income from this class. The tax rate of trusts has also increased from 40% to 41%. This will also have the biggest effect on high net worth individuals.

However the lower income earners must not feel that they have escaped the burden as the fuel levy has been used to collect taxes from them. The fuel levy has increased by 30.5 cents per litre. The road accident fund levy was also increased by 50 cents per litre. Almost all people irrespective of your income will be affected by this increase, whether you travel with public transport or your own vehicle. A knock on effect on the food prices will increase the burden.

It was anticipated that the broad based collection of taxes will increase, but it was not clear how. It could have been an increase in the VAT rate, which has remained unchanged at 14%. The recent decrease in oil prices has made an increase in the fuel levy an easy choice for Minister Nene. The possible problem is that the oil prices will rise again (in my opinion that can be soon) and then the man on the street will feel the burden even more.

Another option was to increase corporate taxes; however it remained unchanged on 28%.

There will be greater relief for Micro businesses where the tax free portion has increased from R150 000 to R335 000. However the requirements to be a micro business eliminate the majority of small businesses. The revenue cap of R1000 000 is understandable; however the main eliminator comes with the exclusion of personal service providers, which is defined by the fourth schedule as:

‘Personal service’ means: Any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftsmanship, education, engineering, entertainment, health, information technology, journalism, law, management, performing arts, real estate, research, secretarial services, sport, surveying, translation, valuation or veterinary science if that service is performed personally by any person who holds an interest in that company or close corporation. However, the services will not count as personal services if the company or close corporation also employs at least three other full-time employees throughout the year of assessment in its business of rendering services and none of those employees is a shareholder or member or its connected person.

In my opinion this discourages persons that have obtained a professional qualification.

Other points to note are:

  • The tax exemption on interest earned has remained the same at R23 800 for persons below the age of 65 and R34 500 for persons above the age of 65
  • The monthly medical aid tax credit has increased from R257 to R270 for the main member and the first dependant and from R172 to R181 for each additional dependent
  • The primary rebate has increased from R12 726 to R13 257 (4.17%, below inflation) and the secondary rebate has increase from R7 110 to R7 407 (4.17%, below inflation). This was taken into account with the tax calculation for the various salaries for individuals above

I conclude by saying that although it does not look to rosy, in my opinion, given the circumstances Minister Nene did an acceptable job.

Author: Chris Herbst

https://www.chconsulting.co.za/contact

How to pay yourself if you are a small business owner – Part 1

on Tuesday, 13 January 2015. Posted in Accounting, Consulting, Start-ups, System Implementation, Tax

Actual transfer of the cash from business to owner

How to pay yourself if you are a small business owner – Part 1

Photo title: Money being cut into many pieces. Source: TaxCredits.net

Licence: https://creativecommons.org/licenses/by/2.0/legalcode

What is the most tax effective and correct way to get the profit of your business in your personal bank account?

This is a problem that numerous small business owners struggle with. I will attempt to clarify some of the issues relating to this, give advice on the correct practical way to handle the profit extraction and the tax implications thereof. This will be done in a series of blog entries. At the end of each entry I will give the business owner a practical change to implement in his/her business.

Sole proprietor

I would first like to clarify that if the business trade as a sole proprietor, I will still refer to the business as a separate entity. Substance over form, the business is still a separate entity although it has the same legal personality as the owner.

Sole proprietors frequently have one bank account for their business and their personal account. This causes a lack of segregation and at the end of the day there is no transfer of cash from the business to the owner, as the cash is already in the account of the owner. A situation like this makes it very difficult to keep track of how much money the owner is actually receiving from the business.

Although this was not possible at all banks in the past, it is now possible to open a business account when the entity has a legal form of sole proprietor. I have verified that is possible at FNB, I am not sure about the other major banks. If your current bank does not allow this, they will allow a cheque and savings account or an additional savings pocket. You can then use one of the accounts for business and one for personal.

The bottom line is that there needs to be an actual transfer with a paper trail from business to owner.

Close corporation or Private Company

This type of legal entity will have a separate bank account in its own name. The danger here is that the owner uses the business account to pay for personal expenses. This is not illegal, but it creates a lack of segregation and increases the administrative burden of processing the bank account of the business in the relevant accounting software. If this method is used the loan account of the owner (which will be debited with each personal expense) will give rise to a deemed dividend if it has a debit balance, this will be discussed under the tax consequences.

Also here I strongly recommend that there is an actual transfer from the business account to the personal account of the business owner.

Practical change to implement for part 1

Whether you are a trading as a Sole Proprietor, Close Corporation or Company, you need to implement discipline in your business by doing an actual transfer from the business account to your personal account whenever you extract profit to yourself. When you do this transfer on your internet banking, clearly label the description something like “Profit Distribution – Name – Month” or “Salary – Name – Month”.

Author: Chris Herbst

Contact: https://www.chconsulting.co.za/contact

Emotional bursts of doing nothing

on Wednesday, 02 April 2014.

Emotional bursts of doing nothing

Image used: Barely Noticed Stuttgart: www.barelynoticed.de

License: https://creativecommons.org/licenses/by/2.0/legalcode

This past year I have noticed that in the small business world there is various small business owners that have some or other trigger to make them realise they need systems and that paying taxes is indeed not a myth. This trigger is usually something like the need of a tax clearance certificate for a government tender or something in line with this. In some cases the business owner wakes up one morning with a realisation that they will need to start keeping records and complying to statutory obligations.

Whatever the trigger may be, it can go three ways.

1. Ignorance is bliss

They ignore the trigger and are very contend with their decision.

2. Taking definitive action in doing nothing

The most dangerous is these owners that take action and never continue with it. What I mean by this is that they for example (I have experienced this a few times) contact an accountant and set up a meeting to now get their affairs in order. This sounds great, but this meeting usually gets cancelled and then postponed to a later date. Then the next meeting gets postponed or they tell the accountant they will let them now about a future date. This then continues in an infinite loop of nothingness. The danger here is that the business owners tells themselves that they have taken action, but action in doing nothing is like any number times zero, it still equals zero. The characters in number one at least know they have done nothing, yes they are contend with that but at least they know that denial is not a river in Egypt.

The reason for this procrastination is most likely operational slavery. Which you can read about:

http://www.chconsulting.co.za/blog/item/new-financial-year-time-to-get-your-house-in-order

3. Most likely the owners of future successful businesses

They take action and follow through on their decision. 

Author: Chris Herbst

Who should register for provisional tax?

on Tuesday, 14 January 2014. Posted in General, Tax

Who should register for provisional tax?

Who should register for provisional tax?

Let’s start with why provisional tax exists. It is simply a way to spread the tax amount due by the person or company over a period of time. This is to ensure that a large amount of tax is not due when the relevant assessment has been completed. Basically it is similar to Pay As You Earn (PAYE), except it is less frequent. Where PAYE is due monthly, provisional tax is due every 6 months. Straight to the point, SARS wants to ensure that they get their money while it is most likely that you still have cash.

To answer the question of who should register for provisional tax, it is any person that derives any income other than a salary. In other words any income on which PAYE is not paid. Thus if you earn a salary and for example earn rental income you should register. From the SARS website:

“Any person who receives income (or to whom income accrues) other than a salary, is a provisional taxpayer. A provisional taxpayer is defined in paragraph 1 of the Fourth Schedule of the Income Tax Act, No.58 of 1962, as any –

  • person (other than a company) who derives income, other than remuneration or an allowance or advance as mentioned in section 8(1);
  • company; or
  • person who is told by the Commissioner that he or she is a provisional taxpayer.

Excluded from being a provisional taxpayer as defined are any –

  • approved public benefit organisations or recreational clubs;
  • body corporates, share block companies or certain associations of persons; and
  • persons who are exempt from paying provisional tax, namely:
    • Non-resident owners or charterers of ships or aircraft;
    • Any natural person who is under the age of 65 and who does not earn any income from carrying on a business – provided that person’s taxable income will not be more than the threshold (R63 556 for 2013 and R67 111 for 2014); or the taxable income of that person (earned from interest, foreign dividends and rental) will not be more than R20 000;
    • Any natural person who is 65 years or older – provided that person’s taxable income will not be derived in any way from carrying on any business; will not be more than R120 000; and will not be derived otherwise than from remuneration (such as salary), interest, foreign dividends or property rental.
      Examples of income that will make you a provisional taxpayer include rental income, interest income or other income from the carrying on of any trade. 
      Companies automatically fall into the provisional tax system. There is no formal registration or deregistration needed to be a provisional taxpayer. If a taxpayer is liable for provisional tax, he or she merely needs to request and submit an IRP6 return.”

The timeline for provisional tax is as follows:

There are three provisional tax payments; the first is due within six months from the start of the relevant tax year, the second within twelve months and the third within nineteen months if the taxpayer’s year end is 28 February or within eighteen months in any other case.  Note that the third return is voluntary and not compulsory. Thus if you are an individual or company with a 28 February year end;

  1. Your first return is due 31 August
  2. Your second return is due 28 February
  3. Your third voluntary return is due 30 September

Visual timeline (example 2014 tax year):

01 March 2013 Start of 2014 tax year

31 August 2013 First provisional tax return (201401) due

28 February 2014 Second provisional tax return (201402) due

30 September 2014 Third voluntary provisional tax return (201403) due

31 January 2015 Income tax return (2014) due                             

Please contact us if you have any queries or would like us to handle your provisional tax

http://www.chconsulting.co.za/contact

 

Business growth and good coffee takes time

on Tuesday, 02 April 2013. Posted in General, Consulting, Start-ups, System Implementation

Business growth and good coffee takes time

Why do some small businesses not grow? I believe the main reason is that these small businesses wants their growth the same as their coffee. When their budget is tight they are indeed prepared to make the coffee themselves, so they make instant coffee. When funds become available they buy freshly roasted coffee from a drive through, instantly.

My point is that whether these small businesses have funds or not, they want growth to be instant. Some of these small businesses do implement measures for growth and then they quickly realise there is no instant results. So in most cases the measures fade away because no results are visible. Most real sustainable growth happens over time, similar to planting a seed today and only harvesting the crop in a future season and the crop may fail a few times along the way.

Being a coffee enthusiast myself, I can tell you that a good cup comes at a cost. I prefer to buy my beans from the roaster or a retail outlet that is directly affiliated with a local roaster, meaning they get freshly roasted coffee at least weekly. I do not buy the beans that are on the shelves on most supermarkets as they are in most cases guaranteed to be stale after a month from roasting date. Further I do not buy ground coffee as with that the freshness along with the taste is basically lost 3 minutes after grinding it. I buy beans and grind it myself, preferably with a hand manual grinder. An electric grinder is fine if it is a decent burr grinder, but the decent ones are usually the industrial ones and are rather expensive for the home user. You have the electric blade grinder as a cheap alternative but it gives you an inconsistent grind (coffee particles vary in size) and the heat of the rotating blades damages the coffee's taste. There is a reason to this madness, if done correctly you will get the most amazing and authentic coffee taste. Coffee should never be bitter. And you should never kill coffee with sugar! The reason people drink sugar in their coffee is exactly because it is prepared incorrectly and then tastes bitter.

Please reread the above paragraph with instant versus patient, cheap versus quality and healthy versus unhealthy in the back of your minds. Now compare the analogy to your own business and measures for growth, if any.

I want to communicate to small business owners that they must not give up on implementing strategies to grow, rather develop patience and a long term view. Be relentless in implementing small additions to your main vision of growth and direction, but remember it takes time, so also be relentless in developing patience.

http://www.chconsulting.co.za/contact