Over the past few years I have owned and managed my own businesses and played the role of financial manager in each of them. There are a number of lessons I have learned, and I have seen how other businesses have paid the price because the owners did not understand how taxes work or did but failed to plan carefully for their tax liabilities.
Because I operate out of South Africa and majority of my customers are South African, I will address this topic from that perspective.
The reason this topic is specifically aimed at small business owners is because they are generally run by the owners who end up doing most of the administrative duties (including finances) themselves or hand it to someone that is ‘sort of’ capable. Large businesses can generally afford full-time bookkeepers who are fully capable and understand tax laws and accounting best practice. The owners of small businesses usually have an excellent understanding of the product or service they offer, but only have basic accounting capability. However, basic accounting capability does not translate into an understanding of business tax.
So, what are some of the tax types and events a small business owner will need to understand?
- Pay as You Earn (PAYE)
- Income Tax
- Provisional Tax
- Value Added Tax (VAT)
- Dividend Tax
- Capital Gains Tax
I will briefly give an overview of each of these tax types with some examples and lessons I have learned. Disclaimer – I am not a tax practitioner/expert, and this only serves as food for thought when starting up or running your own business, not advice. Please consult SARS, your accountant or a professional tax practitioner to validate what I discuss here. These are the bare minimum considerations and do not cover exceptional circumstances or technical details – those are to be discussed with a professional.
Pay as you earn is the tax payable based on the remuneration you receive from the business (salary, car allowance, phone allowance etc.). This must be deducted from your remuneration before you get paid, whether you own the business, or you are an employee. PAYE is normally due to SARS by the seventh day of the month. If that seventh day falls on a weekend, it is due on the last working day before that weekend. I paid 12 hours late once and incurred a penalty from SARS – they are strict. PAYE is calculated as a variable percentage of your remuneration depending on the earning bracket you fall in (the more you earn, the more you pay).
As a small business owner, consider this when you offer someone employment as it has a direct impact on their nett earnings (what they expect to see in the bank when you pay them).
This is the tax your business is liable to pay to SARS and is based on the profit your business made in a financial period. Generally speaking you have 12 months from your financial year-end to settle your income tax.
- Provisional Tax: I used the word settle because with Provisional Tax payments, SARS gives businesses the opportunity to pay in advance and reduce their tax liability based on predicted earnings. This means if you pay provisional tax, you will have less of a shock at your financial year-end when you are assessed. Provisional tax is paid as follows: First payment – within six months from the beginning of the year of assessment, second payment on or before the last day of the year of assessment and third payment – seven months after the year of assessment for taxpayers with February year-end and six months after year of assessment for all other cases.
Corporate Income Tax is calculated at 28%. Again, consult SARS or your accountant for details or changes.
As your business grows and depending on the nature of your business and customers, you might have to register for VAT. Some businesses prefer to deal with VAT registered suppliers which may force you to register. Your revenue will also dictate if you need to register for VAT.
A very important thing to understand about VAT is that it is NOT your business’s money. It is a value added tax and should be excluded from how you calculate your profit on a product or service. If an item costs you R60 and you sell it for R115 including VAT, your profit is R40, not R55 – the R15 belongs to SARS. If you are a start-up or recently registered for VAT, remember to exclude VAT from your cost and profit calculations.
Another important point around VAT is planning for your payments to SARS. Make provision for your VAT payments in your financial planning and be strict with getting your money in from customers. Once you have issued invoices you will be expected to pay the VAT to SARS, so make sure your customers pay those invoices on time to avoid cash-flow issues and penalties for late payment. Late payments incur an immediate 10% penalty.
This is tax you will pay on dividends you receive from the business. At a rate of 20%, dividend tax is lower than PAYE for high-income earners. However, trying to draw a smaller salary to pay less PAYE and draw your money out of the business as a dividend will not make much of a difference on either your business’s liability to SARS or your personal income as the owner(s) – SARS has that one covered. Your tax practitioner can explain the detail and provide advice related to dividend tax.
Capital Gains Tax
There is too much detail to discuss around CGT, so for that reason all I will say here is that you will be liable for taxes under certain circumstances when you sell (or dispose of) assets that your business owns. This is all dependent on things like the value of the asset, the type of asset and even based on physical characteristics of assets in some cases. Disposing of assets can incur CGT. So, to avoid disappointment, don’t spend the money in your head before you have consulted your accountant.
In summary, what I want new- and small business owners to take away from this is that your business’s financial well-being is greatly dependent on your understanding of and planning for your tax liabilities. Failure to plan financially and to pay your taxes can have dire consequences for your business. Not only will you incur financial penalties, costing you more money, you will also lose your good standing with SARS. Try doing business without a letter of good standing with SARS and you will quickly find doors shutting in front of you.
I have only touched on the basics here and encourage you to find a good accountant to work with so that your business fulfils its tax responsibilities and also to help you navigate the stormy waters of tax and grow your business, rather than get drowned.
All content is superseded by content published by SARS at sars.gov.za