THREE FINANCIAL TIPS FOR SMALL BUSINESS ENTREPRENEURS

B1Here are three things which small business owners should consider implementing to improve their chances for long-term success.

  1. Do Not aim to match or beat prices offered by competitors 

Price may win among big retailers that include, as well as countless other larger businesses in a variety of categories – but smaller businesses know all too well they typically can’t compete in this big-box space when it comes to money. Instead? This is where smaller businesses have the chance to thrive in offering other experiences that stand-out from prices alone. Of course, price will factor into the overall impression any business leaves on consumers, but when combined with other experiences price can often become overlooked thanks to the many other factors that can outshine it.

  1. Create a loyalty program that encourages repeat customers 

Big or small, businesses gain the opportunity for increased customer retention and more frequent spending when loyalty programs are offered. You can create one that is digital, mobile, or even old-fashioned by using paper and a hole puncher, but the idea is that you create one that makes sense for your business and your customers.

Another tip to help your loyalty program thrive? Give it extra TLC so that it stands out among your other marketing efforts, including your business newsletters, via social media and of course, whenever you’re tending to customers and during any customer communication. Aim to have it stand out as a well-respected perk to customers experiencing your business.

  1. Have a lean start-up

Big companies like Starbucks test new concepts on smaller markets before launching their products worldwide. Small companies can learn from this approach. Develop a prototype to get the product out, launch it in smaller markets, test it, get feedback, pivot, and then refine it. By using this cost-effective process, you’ll have a refined product or service designed to the taste and needs of potential clients because they told you what they liked and wanted along the way.

As the economy continues to improve, small businesses will have more opportunities to expand and grow. By taking advantage of opportunities that exist now, you’ll improve your chances of success.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

References:

Glassman, Barry. “The Best Financial Advice For Small Business Owners Now”. Forbes.com. N.p., 2014. Web. 29 June 2017.

Leinbach-Reyhle, Nicole. “3 Small Business Tips Uniquely Aimed At Entrepreneurs”. Forbes.com. N.p., 2016. Web. 29 June 2017.

DIVIDENDS TAX RETURNS

B2With effect from 1 April 2012, dividends tax was introduced to replace the then “secondary tax on companies” (or “STC”). The tax is currently levied at 20%. The dividends tax regime brought with it a requirement for dividends tax returns to be submitted periodically (if even no liability for dividends tax arose) and we wish to bring to our clients’ attention when this would be required.

From 1 April 2012, dividends tax returns were required for all taxpayers who paid a dividend.[1] Although not initially required, but the Income Tax Act was subsequently amended retrospectively to provide therefor. Returns were, from that date, not required for dividends received though. However, through various amendments being introduced, the scope of the dividends tax compliance regime was broadened significantly. With effect from 21 January 2015, dividends tax returns were also made compulsory for all dividends tax exempt (or partially exempt) dividends received.[2] The most significant implication flowing out of this amendment is that from this date, all South African companies receiving dividends from either South African companies, or from dual-listed foreign companies (to the extent that the dividend from the foreign company did not comprise a dividend in specie). The requirement for dividends received from dual-listed foreign companies to also carry with it the requirement for a return to be submitted was however removed a year later, with effect from 18 January 2016.

Where dividends are paid by a company, or dividends tax exempt dividends are received by any person from South African companies, the relevant returns (the DTR01 and/or DTR02 forms) must be submitted to SARS by the last day of the month following the month during which the dividends in question were received or paid. In those instances, where a dividends tax payment is also required, payment of the relevant amount of tax is to be effected by the same date too.[3]

Although the non-submission of dividends tax returns at present to not carry any administrative non-compliance penalties, we always encourage our clients to ensure that they are fully compliant with relevant requirements prescribed by tax statutes. We would therefore encourage our clients to revisit their dividends history and ensure that their records and returns are up to date and as required by the Income Tax Act.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

References:

[1] Section 64K(1)(d) of the Income Tax Act, 58 of 1962 (“the Income Tax Act”), as it read at the time.

[2] Section 64K(1A) of the Income Tax Act. Dividends received from regulated “tax free investment” accounts do not require a return to be submitted.

[3] Section 64K(1)(a) to (c)

 

THE VAT CONSEQUENCES OF CHANGE IN INTENDED USE OF GOODS

B3It happens ever so often that a business would purchase goods, and subsequently apply those goods in a different manner than it had initially intended to at the time that those goods were acquired. For example, a sole proprietor dealing in motor vehicles may decide to take one of those vehicles and apply it towards personal use. So too a property developer may decide to rather use one of its properties, up for sale, as new office premises for itself.

It is often said in tax circles that Newton’s law (that every action has a reaction) should be extended: every action also has a tax consequence. This is certainly also true where asset continue to be held by taxpayers, albeit with a different intention of how the asset is to be applied.

Where an asset is applied differently from what it has been applied towards in the past, certain tax consequences arises, both on a VAT and income tax account. This article deals specifically with the VAT consequences of such a change in use.

From a VAT perspective, where goods are no longer applied for purposes of the furtherance of a VAT enterprise, those goods are deemed to have been supplied by that VAT enterprise. As a result, output tax is required to be accounted for by the taxpayer on the open market value[1] of those goods deemed to have been supplied.[2] There is some logic to this from a theoretical perspective: the VAT vendor would have claimed input tax when it acquired the goods in question originally. Section 18 is therefore the statutory mechanism whereby the input tax claimed (on the basis that the goods would have been applied towards generating taxable supplies) is effectively reversed.

Where the goods are only partly used for purposes other than in the furtherance of the VAT enterprise, the input tax adjustment will also only be partly required to be accounted for.

An interesting exception to the above is where property developers let their properties temporarily for a period of less than 3 years. In practice, it quite often happens that property developers may decide to let property on a temporary basis due to the slow turnover of stock associated with the industry. Even though technically trading stock of the VAT registered developer would then be used for purposes not forming part of its property selling enterprise, the VAT Act[3] allows for a temporary reprieve from having to account for output tax, and does so based on practical considerations. This pragmatic approach presents an alternative to what would otherwise have only amounted to a cash flow issue: property developers may be required to account for output VAT once the property stock-in-trade is used to supply residential rental income, only to be reutilised as trading stock once sold in a year or two later (and when input tax may then be claimed again). Although therefore of little consequence to SARS (which remains neutral after the rental period in the example), many property developers are heavily dependent on cash flows and would be severely prejudiced, and many would be forced to close shop, had it not been for this practical concession granted in this limited instance.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

References:

[1] Section 10(7) of the VAT Act, 89 of 1991

[2] Section 18(1) of the VAT Act

[3] Section 18B of the VAT Act

GONE ARE THE DAYS OF TAX-FREE SALARIES ABROAD

B4Many South African taxpayers earning a salary abroad have for many years been able to benefit from so-called “double non-taxation”. This would be the case where salaries are earned in countries where the employer country would not tax salaries earned in that country, and where a domestic South African income tax exemption would also be available to such South African employees. The UAE for example is renowned therefore that it levies very little, if any, taxes on non-resident employees employed in that jurisdiction. This regime interacts quite well with the South African exemption from income tax provided to South African employees working abroad and in terms of which South Africa would in many cases also not levy income tax on salaries so earned abroad. In other words, a salary earned abroad may potentially not be taxed in either the country of source or residence (i.e. South Africa).

In terms of section 10(1)(o)(ii) of the Income Tax Act[1] salaries earned abroad would be exempt from South African income tax if the salary is earned for services rendered outside of South Africa, and the employee would be absent from South Africa for at least 183 days in a tax year, of which at least 60 are consecutive.

In the annual national budget speech earlier this year, Government warned of its intention to withdraw relief for South African individuals working abroad and effectively achieving double “non-taxation” on salaries so earned. This threat has now been borne out by the proposed withdrawal of the exemption in section 10(1)(o)(ii) of the Income Tax Act, proposed in terms of the draft Taxation Laws Amendment Bill published on 19 July 2017. As is explained by the draft Explanatory Memorandum to the Bill,

“It has come to Government’s attention that the current exemption creates opportunities for double non-taxation in cases where the foreign host country does not impose income tax on the employment income or taxes on employment income are imposed at a significantly reduced rate.”

The draft Bill proposes that section 10(1)(o)(ii) be deleted effectively for tax years commencing on or after 1 March 2019. This would effectively mean that South African residents will be taxable in South Africa on salaries earned abroad to the extent that the source country does not levy tax on the income so earned. To the extent however that income is taxed abroad too, South Africa should grant a credit against taxes payable here in terms of either an applicable double tax agreement or the provisions of section 6quat of the Income Tax Act.

It is noted that National Treasury has since, during the recent hearings in front of Parliament’s Standing Committee on Finance, hinted at the current repeal only to be effected for foreign remuneration earned in excess of R1 million per year of assessment. It has also been suggested for the (partial) repeal to be delayed for a further tax year, in other words to only take effect for years of assessment commencing on or after 1 March 2020. We await the final version of the Bill in anticipation to see whether these proposals are to be enacted.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

THE “IN DUPLUM” RULE AND TAX LEGISLATION

B3The “in duplum” rule originated from the South African common law and has been applied through South African case law for over 100 years. This common law rule specifies that interest on a debt will cease to run (or accrue) when the total amount of arrear interest equals the amount of the principal debt outstanding.

A statutory “in duplum” rule was later introduced into South African law in the National Credit Act[1]  which came into effect on 1 June 2007. This rule however does not only apply to unpaid interest but also limits, together with the unpaid interest, other finance related charges (eg. initiation fees, service fees, credit insurance, default administration fees and collection costs).

The granting of zero or low interest loans between related parties may result in a loss to the fiscus in certain instances. For example, less employees’ tax (“PAYE”) collection where an employer who grants a zero or low interest loan to an employee, the avoidance of donations tax where a person transfers assets to a trust in exchange for a zero or low interest loan or the possible avoidance of dividends tax where a company grants a shareholder a zero or low interest loan. The Income Tax Act[2] contains various specific anti-avoidance rules which seek to counter these possible tax benefits by taxing the difference between the amount of interest actually incurred and the amount of interest that would have been incurred at the official rate. These provisions in the Income Tax Act, using the “official rate of interest” to quantify the possible tax benefits, include section 7C (possible donation arising when a zero or low interest loan is advanced to a trust by a connected person), section 64E(4) (deemed dividends in respect of a zero or low interest loan made by a company to a shareholder) and the Seventh Schedule (fringe benefits in respect of a zero or low interest loan between an employer and employee).

SARS is of the view that some taxpayers are relying on the “in duplum” rule to circumvent the abovementioned anti-avoidance rules. In this regard, it is proposed in the recently published draft Taxation Laws Amendment Bill to introduce a new section 7D to the Income Tax Act. The proposed provision states that the anti-avoidance rules dealing with zero or low interest loans should apply in spite of the application of either the statutory “in duplum” rule or the common law “in duplum” rule.[3]

The proposed amendment will come into effect on 1 January 2018 and if enacted will apply in respect of interest incurred or deemed to have been incurred on or after that date.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

References:

[1] No. 34 of 2005

[2] No. 58 of 1962

[3] Clause 5 of the Draft Taxation Laws Amendment Bill

THE INCOME TAX CONSEQUENCES OF CHANGE IN USE OF ASSETS

B1Taxpayers may acquire assets as either trading stock or as capital assets, and later hold those assets with a purpose different from that with which such assets were acquired. For example, a share investment initially acquired with speculative intent (i.e. as trading stock) may subsequently form part of a strategic long-term asset held by the taxpayer as a capital asset. So too may a furniture retailer for example use its trading stock to furnish its own office.

Where assets that had thus far been held as trading stock commence to be held as capital assets (and vice versa), certain tax effects are triggered on either an income tax or capital gains tax (“CGT”) account. This will depend whether an asset used to be held as trading stock or as a capital asset:[1] the tax treatment is linked to a deemed realisation of the asset.

Where an asset has previously been held as trading stock, the taxpayer will be deemed to have disposed of that trading stock (if a deduction for acquiring that item of trading stock has been previously claimed) under the below circumstances:

  • The asset in question is subsequently used for domestic or private purposes;
  • The trading stock is sold at less than market value and not in the ordinary course of the taxpayer’s trade; or
  • The trading stock is either donated or distributed as an in specie dividend

The “recoupment” for tax purposes may also kick in even if the taxpayer continues to hold the item of trading stock, in other words if the taxpayer does not actually dispose of that asset. This will be the case when:

  • The taxpayer applies the trading stock other than in the ordinary course of trade; or
  • It is no longer held as trading stock (in other words, as a capital asset).[2]

Effectively therefore, the Income Tax Act seeks to invoke tax consequences where a tax deduction had been previously claimed for the acquisition of an item of trading stock. The deemed disposal has the effect as though that item is now disposed of as trading stock when it ceases to be so applied or sold by the taxpayer. In other words, the Income Tax Act seeks to treat the trading stock as being sold once it ceases to be held as such.

A similar regime exists for CGT purposes.[3] A capital asset is deemed to be sold for CGT purposes when the taxpayer starts to hold it as trading stock, or where a personal-use asset is no longer held as such. Similar to the trading stock regime, these instances will give rise to a deemed disposal for CGT purposes, thereby triggering a CGT cost on a change in use of the asset irrespective thereof that the former capital asset has not actually been disposed of.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

References:

[1] Even though “trading stock” is defined in section 1 of the Income Tax Act, 58 of 1962, to a large extent the intention with which an asset was acquired will be determinative of whether the asset will form part of a taxpayer’s trading stock or be a capital asset.

[2] Section 22(8) of the Income Tax Act

[3] Paragraph 12(2) of the Eighth Schedule to the Income Tax Act

ESTATE PLANNING FOR YOUNG ADULTS

B2It is very important for you to plan your estate, which could include a living will, a last will and a living trust. This can help families prepare for difficult times when you are no longer around to assist or advise them. Our lives get busier and more complicated by the day, so estate planning for young and old becomes increasingly important. Young people should consider preparing certain estate planning documents.

When to start with estate planning?

At the age of 18 a young man or woman officially becomes an adult in the eyes of the world. This means that you are entitled to make important financial, legal or health decisions about your life. But what if something happens and you are unable to make these decisions at a critical time? Such situations can range from a small inconvenience to a life-threatening crisis, but if your estate is in order, it can speak on your behalf. Consider the following:

  1. Financial power of attorney

A financial power of attorney allows you to appoint someone you trust, like another family member, to make financial decisions on your behalf. This document can be activated when you are incapacitated or right after it has been signed, and it will remain effective until you can resume charge of your own decisions again.

A financial power of attorney will allow the appointed person to handle important legal and financial matters on behalf of the grantor. In the case of a business or financial situation which involves the young adult, such as a passport or car registration renewal, it is convenient for the power of attorney to act on his/her behalf if they cannot tend to the problem. This arrangement may come in very handy when there is a legal situation which requires quick action and the young adult is unable to attend. Families with a disabled family member can also benefit from the security of a power of attorney.

  1. Living will

A living will enables you to state specific medical wishes if you are alive, but unable to communicate them. Artificial life support in the case of a coma or terminal illness is an issue often discussed in such a document. Preferences regarding administering of pain medication, artificial nutrition and other treatments can be dictated in this document.

  1. Health care power of attorney

With this type of power of attorney, you give someone else the power to make health decisions on your behalf. These decisions, regarding serious health and emotional problems, will be made based on instructions which you have given to your power of attorney beforehand. Sometimes a living will is combined with a health care power of attorney, because both of these can be revoked, i.e. it can be cancelled at any time by destroying it, communicating your wishes to your doctor, writing a letter regarding the cancellation or by creating a new living will and health care power of attorney, indicating that the new will revokes all the previous ones.

Start the conversation

Every family’s legal needs are different, so perhaps you should take the first step in being prepared for the worst. Remember that every time your family changes, such as when a child is born, you need to adapt your will to include them. Start the process and be prepared.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

THE IMPORTANCE OF HAVING A GOOD ACCOUNTING SYSTEM

B4If your business doesn’t have an effective accounting system in place, you run the risk of making serious errors in your finances. Furthermore, a good accounting system simply makes life easier and allows you to focus more on growing your business.

  • It helps you evaluate the performance of your business: A good accounting system gives you a thorough overview of the financial performance of your business. If you don’t have an accounting record, how will you know if your business is growing or shrinking? So, your account records help you know if your business is growing, stagnant or slowing down.
  • It helps you manage cash flow and meet deadlines: Cash flow management means knowing what you do with the cash that comes into the organisation. Your accounting system helps you know areas that need cash. For instance, cash may be needed to finance your debts, or make major renovations or order for new stocks, and it is your accounting system that will help you know this. In short, no business will growth further without a good cash management system. Also, your accounting books help you know when bills like your rent needs to be paid.
  • It’s needed for business goal setting: Your accounting system will help when setting new business goals for the week, month or year, as seeing the business performance for the last financial year will help you project and set goals for the New Year and plan ahead for the business.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

BRACKET CREEP, VAT AND THE 2017 BUDGET

B4Year on year the personal income tax tables are adjusted and based on which individuals are taxed based on an increasing sliding scale based on their income earned and therefore into which tax bracket they would fall. The annual adjustments are partly to provide for tax relief or an additional burden on certain salary earners, and partly to provide for the effect of inflation.

Consider for example the primary rebate of 2015/2016 (R13,257) compared to that of the 2016/2017 tax year (R13,500). This has now been increased to R13,635 for the 2018 fiscal year. Applying the lowest tax threshold of 18% thereto, this translates into the annual income tax free receipts of R73,650 in 2016 being increased to R75,000 in 2017, and to R75,750 subsequently for 2018.

This means that the threshold at which individuals are taxed increased by 1.8% and 1% effectively over the past two years. In non-real terms therefore tax relief was effected for those individuals earning at the lower end of the tax bracket: where a salary of R6,138 per month would have been income tax free in 2016, this amount in 2018 is now R6,313.

Taking into account that inflation is considered to have averaged between 5% to 7% over this period though, in real terms therefore even those on the lower end of the income are paying more taxes on income in real terms in 2018 than would have been the case in 2016. The effect of so-called “bracket creep” (whereby taxes are effectively increased through the effect of tax brackets not being adjusted sufficiently to cater for inflation) is a phenomenon acutely effecting not only the rich, but the poor too, and especially so over the past two years.

The observation above is relevant in the context of the debate surrounding the potential change in the VAT rate. VAT is considered to represent a regressive tax system whereby everyone, rich or poor, pays the same amount of tax based on consumption of goods (subject to certain basic goods that are exempted). The personal income tax regime in contrast represents a progressive tax system whereby the rich are taxed proportionately more and at increased rates based on their respective income levels. The political dynamics therefore dictate that a pro-poor tax system be focussed more heavily on income tax with increasing tax brackets rather than a flat VAT rate applied to everyone across the board. It is for this exact same reason why there is so much rhetoric and political noise in the media opposing an increase in the VAT rate, especially where the pro-poor movements such as the trade union movement and the SACP are involved.

What the above effect of bracket creep illustrates though is that Treasury is nevertheless, in an indirect manner, systematically also increasing the tax burden on the poor through bracket creep, yet in a more subtle manner whereby it is at the same time avoiding getting involved in the political quagmire that is the VAT rate. An implicit acknowledgement perhaps from Treasury that the wealthy alone cannot absorb increased tax burdens?

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

EXEMPTION FOR FOREIGN SALARY EARNERS

B1South African tax resident individuals are liable to income tax on their worldwide income. In other words, where a South African tax resident individual were to earn a salary for employment which may from time-to-time be exercised outside of the borders of the Republic, that income earned is still included in that South African tax resident individual’s gross income.

An exemption is available though to South African employees where the extent of the services rendered abroad are significant.[1] The exemption is however limited to income earned in the form of remuneration from an employer and only to the extent that the remuneration received is for those services rendered abroad. In terms of the relevant provision, salaries earned in whatever form for services rendered outside of South Africa will be exempt from income tax in South Africa where the employee has been absent from the Republic for:

  • At least 184 days during a 12-month period (in other words for more than 50% of a 1-year period); and
  • More than 60 days of the above will have continuously been spent beyond South Africa’s borders.

As above, it is important to appreciate that it is not the entire salary earned by the employee for the year of assessment which will be exempt from South African income tax. The exemption is limited to only so much as relates to services rendered abroad. In other words, to the extent that the salary is earned for services that will be rendered in South Africa, that portion of a salary earned will still be taxable in South Africa.

The exemption is typically applicable to employees seconded for periods of time to render services abroad. It is quite likely that even though the income earned may be exempt from South African income tax, that the country in which the services are rendered will seek to levy tax on the employee’s income based thereon that the source of the income earned will be in that other country.

It is therefore possible for employees to benefit from the exemption on foreign earned salaries, whilst also paying very little income tax in the other country, if such a country is one with very low individual income tax rates (typically countries in the Middle East, such as Dubai). This incidence of “double non-taxation” has recently drawn the attention of National Treasury, and the Minister of Finance warned in this year’s Budget Speech that South Africa is considering rescinding the exemption if the other country in which the employment services are rendered does not seek to significantly tax the income earned by the employee.

[1] Section 10(1)(o)(ii) of the Income Tax Act, 58 of 1962

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)