Taxation and VAT

Taxation and VAT

by Andrew Patricio

Who is liable for tax?

In South Africa, every individual person of any age, every partner in a partnership and every CC or company, which earns income, is liable to pay tax.

Who is responsible for the payment of taxation?

· Companies and Close Corporations (CC).
· Directors of companies and members of CCs.
· Partners in partnerships.
· Sole traders or sole proprietors.
· Employees.
· Husbands and Wives.

How to determine "taxable income" of a business

Tax is payable on income earned in a period of assessment.

Allowable Expenses

An expense, which is "wholly or exclusively" incurred "in the production of income", is allowable.

Working from Home Expenses

If you use part of your home from which to operate your business, you may be able to claim a portion of expenses such as bond repayment, rates, electricity, telephone and the wages of domestic servants. The portion that you may claim is usually based on the percentage of the total floor space of your home to that which is used for business purposes.

The taxable income of the owners of a business will be as follows:

· In the case of a sole trader, the taxable income of the business is the taxable income of the owner.

· In the case of a partnership, the taxable income of each partner is his share of the taxable income of the partnership.

· In the case of a director of a company or a member of a CC, their taxable income is the earnings (salary) that they have drawn from the business.

Tax Free Income

· Certain lump sums received on retirement. You should seek professional advice about this.

· Up to a certain amount of interest received (R2000 for tax year 2000 and R3000 for tax year 2001)

· Dividend income.

· Receipts of a capital nature. Capital gains tax will be introduced in 2001 if you would like to read up more on this visit the SARS website at: www.sars.gov.za

Deductions

· Medical expenses - Any excess over the greater of 5% of taxable income.

· Retirement annuity funds - 15% of non-pensionable income.

· Donations - the greater of R1 000.00 or 5% of taxable income to public benefit organisations which includes universities, colleges, certain educational funds, children's homes and organisations caring for the aged and focused on AIDS.

How to calculate tax liability

For a CC or company

· For companies and close corporations, tax is calculated at a flat rate of 30% (currently) of the taxable income that they earn. In addition to income tax, companies and close corporations may be subjected to a "Secondary tax on companies" (STC) which arises where a company pays a dividend to its shareholders or a close corporation makes a distribution to its members. The tax is calculated separately from income tax at a rate of 12,5% (currently) of the amount of the dividend.

Calculating tax of a business owner

· Tax is calculated in accordance with tax tables for natural persons available from the SA Revenue Services which your accountant will have copies of.

· Tax payable is reduced by the amount of the tax rebate - a primary rebate (R3 800.00 - year 2001) and a secondary rebate for people over 65 (R2 900.00)

· As a director, member or sole proprietor you pay tax in your personal capacity at the same rate as an individual i.e. the more you earn the more you pay.

Provisional Tax

This is payable at the end of August and February by an individual or sole proprietor. For a CC or company provisional tax is payable half way through the financial year and at the end of the financial year.

Tax avoidance and evasion

· Evasion of tax is breaking the law - falsifying accounting and other records, under declaring or not declaring income. The penalties can be severe - triple taxes can be imposed together with a fine or up to two years imprisonment, or both.

· Avoidance is using legitimate ways in which to reduce tax payable. You would be well advised to seek the help of a competent tax advisor - often the tax savings that they make for their clients far exceed the fees that they charge.

Value Added Tax (VAT)

· VAT is a tax levied on the supply of goods and services.

· VAT is charged and accounted for at the rate of 14% and is borne by the final consumers of goods and services.

· If you expect your business sales to exceed R300 000.00 per year you must register for VAT at your local SARS office.

· Vat you charge is called - OUTPUT VAT

· Vat you pay your suppliers is - INPUT VAT

OUTPUT VAT - INPUT VAT = VAT PAYABLE

Calculate your VAT OUPUT

To calculate your OUTPUT VAT given your sales including VAT use the following formula:
(Total Sales Including Vat) X (14 ÷114)
Example: Sales R228 000 X (14÷114) = R28 000.00

Zero Rate VAT

· Exports, brown bread, milk, petrol, diesel and the sale of your business

Goods and Services Exempt

· Certain educational services, rail, bus, taxi-fares, rental for your home and life assurance.

As a vendor you are required to:

· Keep adequate records (5 years).

· Complete a VAT return and submit it to SARS by due date.

· Provide your customers with a VAT invoice with a VAT number clearly stated on the top. Include the words "Tax Invoice".

· Pay VAT to SARS every month, 2 months or 6 months depending on your agreement with the SARS.

Penalties will be charged if you:

· Pay your VAT late - 10% of the unpaid VAT.

· Avoid payment - up to double the amount you tried to avoid.

· Have claimed more input than you should have - up to double the amount you attempted to over-claim.

Bookkeeping

· Ensure that when you issue an invoice that it includes your VAT number.
· Ensure that every invoice you receive has the VAT number of the supplier.
· Ensure that you keep all invoices received and issued.
· Develop a good system to calculate your input VAT as well as output VAT

Remember

· Vat paid on capital items like equipment, light delivery vehicles and machines are deductible as and INPUT VAT.

· If you are claiming VAT for a capital item it is a good idea to attach a copy of the invoice to your VAT return.

· VAT does not cost you money; the consumer pays it.

·	In the case of a sole trader, the taxable income of the business is the taxable income of the owner.
·	In the case of a partnership, the taxable income of each partner is his share of the taxable income of the partnership.
·	In the case of a director of a company or a member of a CC, their taxable income is the earnings (salary) that they have drawn from the business.

·	Certain lump sums received on retirement. You should seek professional advice about this.
·	Up to a certain amount of interest received (R2000 for tax year 2000 and R3000 for tax year 2001)
·	Dividend income.
·	Receipts of a capital nature. Capital gains tax will be introduced in 2001 if you would like to read up more on this visit the SARS website at: www.sars.gov.za

·	Medical expenses - Any excess over the greater of 5% of taxable income.
·	Retirement annuity funds - 15% of non-pensionable income.
·	Donations - the greater of R1 000.00 or 5% of taxable income to public benefit organisations which includes universities, colleges, certain educational funds, children's homes and organisations caring for the aged and focused on AIDS.

·	Tax is calculated in accordance with tax tables for natural persons available from the SA Revenue Services which your accountant will have copies of.
·	Tax payable is reduced by the amount of the tax rebate - a primary rebate (R3 800.00 - year 2001) and a secondary rebate for people over 65 (R2 900.00)
·	As a director, member or sole proprietor you pay tax in your personal capacity at the same rate as an individual i.e. the more you earn the more you pay.

·	Evasion of tax is breaking the law - falsifying accounting and other records, under declaring or not declaring income. The penalties can be severe - triple taxes can be imposed together with a fine or up to two years imprisonment, or both.
·	Avoidance is using legitimate ways in which to reduce tax payable. You would be well advised to seek the help of a competent tax advisor - often the tax savings that they make for their clients far exceed the fees that they charge.

·	VAT is a tax levied on the supply of goods and services.
·	VAT is charged and accounted for at the rate of 14% and is borne by the final consumers of goods and services.
·	If you expect your business sales to exceed R300 000.00 per year you must register for VAT at your local SARS office.
·	Vat you charge is called - OUTPUT VAT
·	Vat you pay your suppliers is - INPUT VAT

·	Keep adequate records (5 years).
·	Complete a VAT return and submit it to SARS by due date.
·	Provide your customers with a VAT invoice with a VAT number clearly stated on the top. Include the words "Tax Invoice".
·	Pay VAT to SARS every month, 2 months or 6 months depending on your agreement with the SARS.

·	Pay your VAT late - 10% of the unpaid VAT.
·	Avoid payment - up to double the amount you tried to avoid.
·	Have claimed more input than you should have - up to double the amount you attempted to over-claim.

·	Vat paid on capital items like equipment, light delivery vehicles and machines are deductible as and INPUT VAT.
·	If you are claiming VAT for a capital item it is a good idea to attach a copy of the invoice to your VAT return.
·	VAT does not cost you money; the consumer pays it.