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Small Business Owners: Don’t Overlook Your New Compliance Requirements!

Small Business Owners: Don’t Overlook Your New Compliance Requirements!

Compliance requirements for businesses are becoming more onerous.

Small businesses in particular increasingly have to perform a balancing act between optimising their limited resources on the one hand and weighing up the consequences of non-compliance on the other.

Now we are faced with new accounting reporting standards – standards you should both know about and prepare for. We’ll focus on one particularly important one, the “Revenue from Contracts with Customers” requirement.

Another crucial development is a recent CIPC warning about non-compliance with disclosure requirements relating to remuneration of directors and prescribed officers.

Small business has limited resources and optimising these resources is a balancing act. Part of this balancing act includes the role of compliance.

These requirements have increased as new laws are rolled out along with other regulations, such as BEE and FICA, which also need to be considered.

One needs to carefully weigh up the consequences of not complying with laws or regulations. It is no excuse to say “I was not aware of that requirement” – the onus is on the business to take the time to understand what it needs to know.

Be aware that new standards have become effective in 2019.

The most important of these is “Revenue from Contracts with Customers”. This could be depending on your business, fundamentally alter the way your company recognises revenue (such as construction and telecommunication industries) and even if it does not, disclosure requirements in the notes to your Annual Financial Statements (AFS) may change.

These notes will have knock-on effects, for example, to bonus schemes tied to sales which may need to be altered. This will affect how you disclose remuneration in the AFS and could in turn impact how much additional tax your staff need to pay. In turn, this will change your PAYE (Pay as You Earn) and will roll through to the EMP 201 and EMP 501 (monthly and annual earnings declarations to SARS).

This is only one of several new standards, so speak to us to assess the effect on your business.

Banks and other financial institutions rely on your AFS to determine the health of your business. Not complying with these standards could result in an audit qualification, in turn resulting in a negative perception of your business by key stakeholders.

Small Businesses: Make the Most of Your Tax Breaks!

Small Businesses: Make the Most of Your Tax Breaks!

Whether you have recently started a new venture or have had a small business for a while don’t forget that SARS offers two types of favourable tax treatments for small entities:

  • Turnover Tax on micro businesses
  • Tax on Small Business Corporations (SBCs).

Turnover Tax

This is a tax on entities with a turnover of R1 million or less per annum. Tax rates are:

TURNOVER TAX FOR MICRO BUSINESSES – NEW TAX TABLE
Taxable TurnoverNew Turnover Tax Rates
R0 – R335,000Nil
R​335,001 – R500,000​1% of taxable turnover over R335,000
​R500,001 – R750,000R​1,650 + 2% of taxable turnover over R500,000
​R750,001 and aboveR​6,650 + 3% of taxable turnover over R750,000

 

The maximum tax payable is R14,150 per annum assuming a turnover of R1 million. This is a very low amount – for example, assume the entity is a company and makes R200,000 taxable income, then it will pay R56,000 in income tax versus R14,150 above.

Turnover Tax businesses pay no other income taxes (such as Provisional Tax and Capital Gains Tax) but will need to collect and hand over Employee Tax, and VAT should the business entity choose to voluntarily register for VAT.

In terms of who may register for the tax the field is broad – companies, sole proprietors, partnerships, close corporations and cooperatives are eligible.

Another break is that these entities need only keep limited records as follows:

  1. Income received
  2. Dividends declared
  3. Any Asset over R10,000
  4. Any Liability over R10,000 at year end.

There are restrictions placed on the business, the main ones being:

  • Owners cannot hold investments in other companies except listed entities and other public-interest entities such as bodies corporate;
  • The business must have its year end on 28 February (to comply with SARS requirements in terms of dates when tax payments are to be made);
  • If more than 20% of income received is from investments or professional services, the business will not qualify;
  • NGOs, public benefit organisations and recreational clubs cannot apply;
  • Labour brokers and personal service providers are also not eligible;
  • The proceeds from the sale of capital assets cannot exceed R1.5 million in a three year period.

As soon as turnover exceeds R1 million in a business’ financial year, it must de-register as a Turnover Tax entity.

Turnover Tax is not that popular with organisations. Commentators have speculated this is due to:

  • The SARS administration workload.
  • Keeping only limited records reduces the business’ ability to analyse how well (or badly) it is doing. Having information is particularly important in the early stages of a business.
  • A further important aspect is that with turnover tax you cannot deduct your expenses – so if your business is a loss-making one (as many start-ups are) or if its taxable income (revenue less expenses) is minimal, you could well pay more tax on the turnover tax basis than on the normal income tax basis. You cannot carry forward any losses you incur from one year into the next year as this is only a tax on turnover. Over time, this can negatively affect cash flow.
  • To qualify for the Turnover Tax, you must register before the tax year starts and thus you need to weigh up carefully if Turnover Tax is best for your business.

Small Business Corporations

SBCs are one step up from Turnover Tax entities and must be:

  1. A company
  2. A close corporation
  3. A personal liability company or
  4. A cooperative.

Turnover cannot exceed R20 million a year and once taxable income goes above R550,000 the SBC becomes liable for the 28% corporate tax rate.

SMALL BUSINESS CORPORATIONS – NEW TAX TABLE
Taxable IncomeNew SBC Tax Rates
R0 – R79,000Nil
R79,001 – R365,0007% of taxable income over R79,000
R365,001 – R550,000R20,020 + 21% of taxable income over R365,000
​R550,001 and aboveR58,870 + 28% of the amount over R550,000

 

These are attractive rates as a normal company would pay R154,000 when taxable income is R550,000 – so at that level, SBCs save just over R95,000 in tax.

The restrictions applicable to Turnover Tax (above) also largely apply to SBCs. Also, the company’s shares must be held by only “natural persons” (some trusts also qualify – take specific advice if applicable). Importantly all shareholders in an SBC may only hold shares in that one SBC and no other company, CC or co-operative (there are some exclusions including for listed share investments), otherwise it will be disqualified from the special tax regime.

In addition, SBCs qualify for accelerated tax depreciation – if plant or machinery is used in a process of manufacture then the whole cost can be written off in the first year of acquiring it. Other assets also qualify for faster tax write-offs.

As a rule of thumb, if choosing between the two tax regimes, SBC favours capital-intensive or low mark-up entities.

Take advice!

Both the Turnover Tax and SBC allowances can be attractive to small businesses, but the above is of necessity only a summary.

Contact us if you think your business may qualify for, and benefit from, either of these dispensations.

Tax and Solar Energy Plants: Your Business Can Deduct the Costs Upfront

Tax and Solar Energy Plants: Your Business Can Deduct the Costs Upfront

In a recent binding ruling, SARS confirmed it will allow the cost of solar power units.

The capital costs that may be deducted are:

  • Photovoltaic solar panels;
  • AC inverters;
  • DC combiner boxes;
  • Racking; and
  • Cables and wiring.

In addition, related allowable costs of installation are:

  • Installation planning expenses;
  • Panels delivery costs;
  • Installation expenses; and
  • Installation safety officer costs.

If the solar unit per site generates less than 1 megawatt of power, the full cost is allowable in the year the plant was commissioned according to the ruling. If the equipment generates 1 megawatt or more energy, then 50% can be deducted in year one, 30% in year 2 and 20% in year 3. Note that if the company is an SBC (Small Business Corporation), the capital allowances under the SBC tax allowance regime (i.e. 50/30/20) must be claimed.

Remember the normal rules apply in terms of qualifying for a deduction – the plant must be owned by the taxpayer, it must be used for the purposes of trade by the taxpayer and the plant must be brought into first time use by the taxpayer.

This is good news for people tired of load shedding. 

SARS – Important Update on VAT for E-Services from Foreign Suppliers

SARS – Important Update on VAT for E-Services from Foreign Suppliers

This has been causing waves since SARS stated its intentions of making electronic services subject to VAT last year. Now the final regulations have been published and are effective from 1 April 2019. 

Of significance is the change in the definition of electronic services – in the original draft regulations e-services were specifically listed but the new definition is very wide – “any services supplied by means of an electronic agent, electronic communication or the internet for any consideration” (our emphasis). 

Furthermore, the inclusion of business to business (B2B) supplies is a significant departure from the global trend to only include business to consumer (B2C) supplies as the former is an “in and out”, increasing the tax administrative cost rather than tax collections. 

The exclusions from the definition are still – 

  1. Educational services supplied from a place in an export country and regulated by an educational authority in terms of the laws of that export country; or
  2. Telecommunications services; or
  3. Services supplied from a place in an export country by a company that is not a resident of the Republic to a company that is a resident of the Republic if –
    • Both those companies form part of the same group of companies; and
    • the company that is not a resident of the Republic itself supplies those services exclusively for the purposes of consumption of those services by the company that is a resident of the Republic.

If in doubt, speak to us

 

Companies: Don’t Inadvertently Encourage Unethical Behaviour

Companies: Don’t Inadvertently Encourage Unethical Behaviour

In a recent interview of a prosecutor, he expressed surprise that most of the people charged with commercial crime were normal and honest. Yet in a recent survey of a company, 41% of the staff had observed unethical behaviour over a twelve month period.

What causes this dichotomy?

Leadership giving a bad example

It is human nature for staff to hold management to a higher standard. This places an obligation on management to assess the effect of their actions on employees. For example, take a manager who is vying for a promotion and is aware that one of the selling activities he is responsible for is potentially resulting in product returns from customers. One of his staff has to write a monthly report on selling strategies and the report received by the manager indicates the need to investigate the selling strategy to establish if it is causing product returns. The sales manger faces two choices:

  1. Forward the report up the line knowing it may weaken his/her chances of promotion, or
  2. Say to the employee that as the reason for the product returns isn’t clear, let’s do our own investigation to verify if the strategy is the cause of product returns. Only then should we inform senior management.

If the manager chooses the second option, it tells the employee the manager is prepared to compromise on transparency and ethical behaviour.  If the employee or other members of the manager’s staff then act dishonestly, it will be impossible for the manager to act since the manager is now effectively compromised.

Discouraging whistle-blowers and employees who speak up

If staff are aware of a culture where speaking out on unethical behaviour is either ignored by management or, worse, the staff member speaking up is victimised, then accountability essentially goes out of the window.

Speak to your staff often about the importance of ethical behaviour – not just when staff or management are caught out. It is important that staff are made aware that ethics is not a relative matter but often involves painful choices.

Setting unrealistic goals

If staff are measured on goals that are virtually impossible to achieve, then there is the likelihood they will cut corners or “fudge” the results. No one wants to be seen as a failure or underachiever, so set realistic goals.

Setting conflicting goals

Some goals can encourage staff to act dysfunctionally – if say management wants to see a growth in sales but also needs to cut marketing costs, then sales staff could decide to oversell to customers. In the short term, this will mean achieving sales targets but it will also lead to customers returning the excess stock, increasing administration costs and risking the potential for stock write-offs.

Staff see this situation as unfair and thus could think they are entitled to act in a way clearly against the interests of the business.

Think through the objectives you set for your staff and always act in a fair and transparent manner – in the long term it will be worthwhile. The last thing you want to do is to inadvertently encourage your employees to act in an illegal or unethical manner.

What is Section 12H Learnership Allowance?

What is Section 12H Learnership Allowance?

Section 12H Learnership Allowance was implemented to motivate employers to encourage skills development among their employees.

The amendments to Section 12H Learnership Allowance are effective from 1 October 2016 and applicable to all learnership agreements (an agreement registered with SETA (Skills Education Training Authorities) ) entered into on or after that date but before 1 April 2022.

It must be noted however that the old Section 12H Learnership Allowance criteria will apply to agreements entered into before 1 October 2016.

All examples listed below are based on the new amendments.

The amount payable in terms of the allowance has also been amended to take into account the learner’s qualification level.

The allowance is made up of both an annual allowance and a completion allowance.

The annual allowance is deductible in each year of assessment during which the learnership agreement is in force.

The employer will qualify for the annual allowance if –
  • during any year of assessment the learner is a party to a registered learnership agreement with the employer;
  • the learner holds an NQF-level qualification from 1 to 10;
  • the agreement was entered into pursuant to a trade carried on by that employer; and
  • the employer has derived “income” as defined in section 1(1) from that trade.
The allowance applies only to a period during which a learner is a party to a registered learnership agreement with an employer. Thus an employer will not qualify for the annual allowance during any period in which –
  • a learnership agreement is not registered; or
  • a learner is not in employment.

The annual allowance is a pro rata portion if the learner is a party to a registered learnership agreement for less than 12 full months during the year of assessment.  Apportionment will therefore apply if the learnership agreement commenced or ended partway through the year of assessment.

The completion allowance is a once off allowance available to an employer on completion of the learnership agreement in addition to the annual allowance.

For learnership agreements of less than 24 months, the completion allowance equals one full year’s annual allowance. For learnership agreements of 24 months or more it is multiplied by the number of completed years service.

The completion allowance is only available for contracts one year or longer and is calculated on completed years of service.

The employer will qualify for the completion allowance if –
  • during any year of assessment the learner is a party to a registered learnership agreement with the employer;
  • the learner holds an NQF-level qualification from 1 to 10;
  • the agreement was entered into pursuant to a trade carried on by the employer;
  • the learner successfully completed the learnership during the year of assessment; and
  • the employer derived “income” as defined in section 1(1) from that trade
There are conditions on how each of these allowances will be apportioned in respect of the period of the registered learnership agreements.
For instance:

A company whose financial year end is February and entered into a learnership agreement (NQF 1) for 16 months on 1 May 2019. The company will be entitled to the following allowances:

28 February 2020

  • Annual allowance of R33 333 ( R40 000 x 10/12)

28 February 2021

  • Annual allowance of R20 000 (R40 000 x 6/12)
  • Completion allowance of R40 000

A longer learnership agreement, say extending for 48 months with a completion allowance of R40 000 for every 12 months completed will result in a completion allowance of R160 000. (R40 000 x 4)

 

Below is a summary of the NQF criteria for learners:
 

Learners (non-disabled)

·           Annual allowanceo   NQF level 1-6 – R40 000

o   NQF level 7-10 – R20 000

·           Completion allowanceo    NQF level 1-6 – R40 000

o    NQF level 7-10 – R20 000

 

Learners (with disabilities)

 

·           Annual allowanceo    NQF level 1-6 – R60 000

o    NQF level 7-10 -R50 000

·           Completion allowanceo    NQF level 1-6 -R60 000

o    NQF level 7-10 -R50 000

An employer may not claim an annual or completion allowance if:

• The learner has previously failed to complete a registered learnership agreement within the same organisation; and
• The learnership agreement contains the same modules or material as the previous registered learnership.

 

Contact Tuffias Sandberg for more information on how the Section 12H Learnership Allowance can benefit your organisation.