The 2018 budget speech was delivered on 21 February 2018, this article will summarise the most important tax amendments.
This was a difficult budget and it was indeed tough on the taxpayer. You could argue that the VAT rate increase is extremely harsh, however in my opinion the only other option was to further burden the higher income earners with income tax or increase the corporate tax rate. Neither of which were really an option since in my opinion both the individual taxpayer and corporates are over burdened as it is.
Make no mistake, the higher earning individuals have not escaped the recoupment of the shortfall. The top 3 brackets on the individual tax table brackets were not adjusted for inflation. Meaning that if your salary increases with inflation you will possibly fall in a higher tax bracket due to your salary being adjusted for inflation but not the tax table brackets (the so called bracket creep).
Please note this article was sponsored by Fairtree Capital
The main points:
- A taxpayer can make an investment in a Section 12J company and this investment is 100% tax deductible if held for a period of 5 years or longer.
- If the taxpayer is an individual with a marginal tax rate of 45% or a trust, the taxpayer can invest R1 million and will effectively be paying R550 000 (R1 million - R450 000) for the investment since the full investment amount is tax deductible in the year of investment (provided the taxpayer has taxable income of R450 000 or more).
- A company (excluding a SBC which will be taxed at different rates) can invest R1 million and effectively be paying R720 000 (R1 million - R280 000) for the investment since the full investment amount is tax deductible in the year of investment (provided the company has taxable income of R280 000 or more).
- When the section 12J investment is realised in the future, the base for the capital gain will be 0 due to the initial benefit of 100% tax deductibility.
What is a Section 12J company?
The government has identified small and medium-sized entities (SMEs) as a major contributor to future economic growth. One factor that hampers the growth of SMEs is a lack of access to equity funding.
In order to alleviate this problem the government has added Section 12J to the South African Income Tax Act as a catalyst for equity funding for SMEs. Section 12J provides a marketing vehicle to venture capital companies (VCCs) due to the tax incentive.
Please note that the information below is an opinion and cannot be used to rely on as formal tax advice. In order to obtain formal tax advice regarding your tax situation, please contact us directly for a consultation.
For the lazy reader I start with a summary:
- It is my opinion that Bitcoin will be classified as an asset for tax purposes in the current ambit of the income tax act.
- It is my opinion that the gains made on the sale of Bitcoin will be taxed as trading income (except in the unlikely case where it was held as a long term investment where it will be taxed as capital gains).
- See the example at the end of the article.
The View of SARS
SARS has not given their interpretation for the specific tax treatment of cryptocurrency yet. There is a common misconception that this means that no tax has to be paid on cryptocurrency gains. This is not the case, as the income tax act does make provision for gains on cryptocurrency albeit not directly. According to an article published by IOL, in Personal Finance, SARS has made their current position clear “Transactions or speculation in Bitcoin is subject to the general principles of South African tax law and taxed accordingly” (https://www.iol.co.za/personal-finance/youre-liable-for-tax-on-bitcoin-gains-11508366).
Many tax practitioners have reverted to the easy option of using the basic amount as an estimate for provisional tax. Many tax professionals are also under the incorrect impression that this is within the ambit of the income tax act to use the basic amount as an estimate.
The actual purpose of the basic amount is twofold:
1. It serves as the minimum estimate.
2. It is used as a limit to calculate underestimation penalties if the taxpayer's assessed income it below R1 million.
A brief examination of the income tax law will substantiate statements one and two above:
A question that we often receive from directors is how to compensate yourself if the company is owner managed. In other words a business where the owners are the directors and have discretion in how they are going to structure their own remuneration, or how they are going to extract the profit from the company. Let us explore three possible scenarios.
1. Building up a loan account
We often find that the owners draw money at will and build up a loan account with the company. Some directors are under the impression that this method attracts no tax. They are wrong.
The first factor to consider here is the interest rate that the company is charging the director. In most cases this is 0%. In normal circumstances a company would charge an interest rate to someone it lends money to. Thus in this case the 0% or lower than market related interest rate is directly attributed to the fact that the director is a connected person to the company. In other words the director is receiving a benefit due to his / her employment or connection with the company. This equates to remuneration and as you know remuneration is taxable.
We will address the following two questions we ended part 1 with:
1. The influence of our fair rate of return/discount rate ( 15% in example ) has on the valuation, or how we determine the correct rate.
2. How long we assume the company will exist (three years in the example).
This article will first explain the rational for the new system, then the difference with the previous system and finally on a practical note provide you with steps to obtain your tax compliance status on e-filing.
The new Tax Compliance Status system will be managed online via e-filing.
SARS has decided on the new Tax Compliance system for the following reasons:
All contributions to pension, retirement annuity and provident funds can be deducted from the individual's taxable income. The deduction is capped at a rate of 27.5% of the greater of remuneration and taxable income. In other words, if say your total pension fund contributions for the year was R100 000, your taxable income was R200 000, and your remuneration was R300 000, then your deductions would have been limited to 27.5% of R300 000 (since R300 000 is greater than R200 000). Thus your deductions would have been limited to R82 500.
From our example above you would notice that R17 500 (R100 000 - R82 500) were not allowed for a deduction in the relevant tax year. However, the deductions that were not allowed is carried over to the following tax year and deemed as contributions for that tax year. In other words say for the next tax year your pension contributions were R100 000, your taxable income R300 000 and your remuneration R400 000. Thus your allowed deduction would be R400 000 x 27.5% = R110 000. You only contributed R100 000, but now you can also deduct R10 000 of the R17 500 from the previous year, thus a total deduction of R110 000. The remaining R7 500 is now carried over to the following tax year.
Some technical points:
Update: Article updated for the 2018, 2019 and 2020 tax year.
The focus in the explanation below is on a person without tax knowledge that would simply like to understand what they are allowed to deduct for their tax.
All the amounts used below are for the 2018 tax year, i.e. 01/03/2017 – 28/02/2018.
Image license: https://creativecommons.org/licenses/by/2.0/
Image title: Plan and Valuation of Pews
Business valuations are a combination between well-developed financial principles (science) and professional judgement (art). From the onset there is one principle that needs highlighting:
Photo title: And another business day is almost over...
This speech of Minister Nene was highly anticipated and perhaps feared by some.
Photo title: Money being cut into many pieces. Source: TaxCredits.net
What is the most tax effective and correct way to get the profit of your business in your personal bank account?
Image used: Barely Noticed Stuttgart: www.barelynoticed.de
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.
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 –
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.
We are entering a new financial year for the majority of small business owners and individuals. In follow up to my previous blog regarding the small business sins, I believe a new financial year is a great time to start fresh.
For the majority of small business owners, time and money is a scarce resource. Hence implementing a proper structure and system is not at the top of their priority list. Most only spend some resources on complying with statutory obligations for SARS and CIPC, because they have to do so by law.
There are some profound underlying changes that occur when you get your house in order, but for now let’s focus on some of the more obvious ones. The typical small business owner does not want to spend time on creating a structure for their business because they perceive this as a waste of time. The reason they believe it is a waste is that they think they should rather spend their time on making more sales or getting more clients or to just do what they have to do to survive.
I believe the majority of small businesses struggle because they are obsessively focussed on operations and seldom care about words such as administration, systems, structure, controls, data analysis, customer relationship management, budgeting, financial reporting, professionalism, technological advancement, strategic planning …. They just don't have time for all this. They believe this is for bigger businesses. Let's call this Small Business Sins (SBS).
I believe this is what keeping them from becoming a bigger business.
Let's look at an example regarding one of the neglected areas mentioned above, take accounting systems: