Tax is a fact of life that entrepreneurs have to come to grips with. Failing to adhere to the law, or avoiding what is required by SARS, can have far-reaching implications for a small business, says Standard Bank.
"Tax impacts on all parts of a business, from the tax personally payable by the business owner, to tax payable by employees, and on purchases and sales to name a few. Getting tax affairs properly organised is therefore essential to a business’ survival," says Leigh Livanos, head of start-up business at Standard Bank.
"As with all financial matters, proper record keeping is vital. The more accurate the records, the easier it is to keep a business running efficiently. Preparing and submitting correct tax documents is a major part of this process," says Ms Livanos.
Businesses also need to be aware that not all business spending qualifies for tax deductions. Direct costs such as telephones, rentals, equipment and consumables, salaries, travel costs, logistics and depreciation of assets can be claimed. Expenses that are ‘not productive’ within the business cannot be deducted.
"To be deductible, expenses have to be incurred during the year of assessment and used for generating income. Capital expenses are excluded as deductions, but are claimed for under a different formula that is based on the anticipated life of the capital asset," says Ms Livanos.
The main types of tax to be considered by a small business owner can be broadly divided into income tax, dividend tax, various forms of employee tax and Value Added Tax (VAT). Some key factors around tax that need to be considered by the small business owner are:
This is the payment of estimated company tax at the halfway and final points of a company’s financial year. On assessment at year-end the final tax amount due is determined and necessary adjustments made.
If the final tax amount payable is higher than anticipated, the business owner, after completing financial statements, has seven months to pay in the difference as a voluntary top-up or face interest and penalty payments.
This is an 'input and output' tax added to sales prices and is set at 14%. The turnover threshold for a business' VAT registration is R1-million annually. However, if a business owner expects to exceed R1-million, then a voluntary registration for VAT is advisable.
There are requirements regarding the regular payment of VAT. It is advisable to check these and ensure that deadlines applicable to the business are met.
Taking money out of the business
"Money cannot be simply withdrawn from a business by the owner," says Ms Livanos.
"For instance, in the case of a person operating alone outside a formal company structure, everything that is earned is regarded as income and therefore attracts tax."
In the case of registered small businesses, there are only a few ways of taking money from the company. These are:
- As 'drawings' when an owner withdraws money that has been personally paid into the company. This is after tax money and tax is therefore not payable.
- As a salary that is taxed accordingly.
- After year-end when the company has made a profit after taxes have been paid. These are dividends and attract tax.
Managing cash flow when planning for tax payments
Managing cash flow effectively is essential when planning for tax payments. Key things that should be considered are:
- VAT payments on sales. These funds do not belong to the company, but to SARS. It is best to keep this money in a separate account to avoid the temptation of using the money in the business.
- Making sure that proper tax invoices are in place and are ready for audit. Finding out that these are incorrect when a SARS audit takes place can have a negative effect on cash flow.
"What categories of tax apply to a small company, what is due, and when it is payable can be intimidating and even overwhelming for an entrepreneur."
"Outsourcing the reconciliation of accounts and correct submitting of tax documents to a qualified person should be considered. The peace of mind knowing that a professional is looking after vital tax matters should be factored into the costs of outsourcing," says Ms Livanos.