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Author: Amanda Visser (Business Live)

Tax experts say small business owners have three options; a salary, dividends paid from after-tax profits and borrowing from the company.

Many people are under the impression that owning a business makes life easier. The harsh reality they tend to forget is that bosses have to finance themselves and everyone else working for them.

The decision on how to reward a business owner can be quite tricky, mainly because of the tax implications if the wrong choice is made. It could affect not only the bosses, but also those who are dependent on them for a living.

Tax experts say small business owners have three options; a salary, dividends paid from after-tax profits and borrowing from the company.

Chris Herbst, team leader at CH Consulting, says the option of using a loan account without paying a salary or a dividend “is almost never a good option. Some directors are under the impression that this option does not attract tax. They are wrong.”

The first factor to consider is the interest rate the company charges for the loan. In most cases, the company does not charge any interest.

Herbst says this implies that the owner is receiving a benefit due to the connection with the company. This equates to remuneration and, like everybody else, the owner must pay tax on the remuneration.

The Income Tax Act deems interest free or low-interest loans as a dividend. If the boss wants to take all the annual taxable profits, of say R400,000 as a loan, the company will pay 28% on the profits (R112,000).

If no interest was charged, the deemed dividend on R400,000 at 7.5% (the official rate of interest) will be R30,000. At 20% dividends, the withholding tax amounts to R6,000. The owner will be left with R282,000 and the South African Revenue Service (SARS) will get R118,000. The total effective tax rate will be 29.5%. But, says Herbst, the loan account for the following year will still be R400,000 if the owner does not repay it and the R6,000 dividend tax will again be liable.

Rodney Smith, director at Liandor Financial Accountants and board member of the South African Institute of Tax Professionals, says he also does not advocate loan accounts as a debit loan attracts an ongoing tax as a deemed dividend.

“The value of this deemed divided tax is currently quite low, but nothing prevents SARS from increasing this deemed tax in the future. I see this as a risk.

“Of greater concern is that a debit loan negates the separation between the estate of the firm and the estate of the owner,” he says.

In the case of insolvency, civil claims and employee claims, loans could effectively suck the personal estate of the owner into the pot available to the creditors, as the company will have a loan claim against the owner.

Herbst says his first option for business owners would be to extract a salary as an employee of the company. If the salary is R400,000 (the taxable profits of the company) it is important to remember that the first R195,850 will be taxed at 18%; the second portion of up to R305,850 will be taxed at 26%; and the third portion up to R400,00 will be taxed at 31%. However, the effective tax rate on the R400,000 is 23.24% and the tax payable on the salary of R400,000 will be R92,960.

If rebates or tax credits are ignored, the business owner will earn R307,040, SARS will receive R92,960 from the owner but no tax from the company because all the profits were paid as a salary.

“The main advantage for extracting the profit by way of salary is that the salary decreases the taxable income of the company by the amount of the salary,” Herbst says.

Bowmans tax partner Patricia Williams says the owner’s salary must be market related. If it is not, SARS may consider it to be excessive and disallow the deduction claimed by the company for the salary paid. “Also, a salary that is viewed by SARS as being too low, could give rise to SARS viewing the dividends paid by the company as being for services rendered, and not as a return to shareholders.

“In this case SARS may attempt to subject these dividends to income tax instead of dividends tax,” says Williams.

Another option for paying business owners is the deemed dividend. If it is R400,000, it will attract tax of R169,600 at a total effective tax rate of 42.4%. The company will pay 28% on the R400,000 leaving R288,000, which attracts dividend tax of 20% (R57,600).

Tax Audit Solutions head of global employment, expatriate tax advisory Shohana Mohan says there is no hard and fast rule when selecting a payment option. However, given the difference in tax rates for personal income taxpayers against the rate at which dividend withholding tax is applied, the most common extraction of income happens in the form of declaring dividends.

Mohan says each case is different and the choice made often depends on the business and personal circumstances.

Smith says he too would recommend a salary for business owners, who can maximise their contributions to pension funds and medical aid to reduce their taxable income.

He warns against buying a vehicle through the business accounts for personal use. Many have found the fringe benefit tax attributable to the vehicle to be “shocking and unaffordable”.

Williams says taxpayers often do not keep a proper record of their real business expenses, which are tax deductible, and include travel, entertainment, cellphone or internet expenditure.

This article first appeared on businesslive.co.za.

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Source: http://www.engineeringnews.co.za/article/sars-revenue-collection-increases-by-63-yy-but-misses-treasury-target-2018-04-03

The South African Revenue Service (Sars) collected R1.216-trillion for the 2017/18 financial year, representing growth of R72.4-billion, or 6.3%, year-on-year.

This was, however, lower than the R1.217-trillion target set by the National Treasury during the 2018 Budget speech.

The main sources of revenue that contributed were personal income tax, value-added tax (VAT) and company income tax.

Finance Minister Nhlanhla Nene on Tuesday said the 2017/18 financial year had been characterised by distinct and clearly delineated growth patterns.

Until December 2017, revenue in aggregate grew by 6.2% year-on-year.

For the period from December 2017 to February 2018, revenue growth accelerated to between 9.5% and 15.5%, strengthening aggregated year-on-year growth to about 7.3%.

Nene attributed this to an improvement in business confidence to levels last seen in 2015, resulting in an improved profit outlook and provisional payments.

From the above article it is clear that SARS is struggling and in my opinion will push, going forward, more stringent compliance audits to try to mitigate shortfalls in collections.

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Dear VAT Vendor

The Minister of Finance announced a VAT rate increase from 14% to 15% effective 1 April 2018 in the 2018 Budget Speech.

To assist you in preparing your VAT return (VAT201) submission, the South African Revenue Service (SARS) would like to bring the following to your attention:

The new tax fraction applicable from 1 April 2018

The new tax fraction to calculate the amount of VAT is as follows:

Rate of tax 15
________________________________________ =
100 + rate of tax 115

For example, if the VAT-inclusive price (final consideration) is R1 150, the VAT amount is calculated as follows:

R1 150 × 15/115 = R150 VAT

Effect on VAT Vendors:

Vendors should determine when supplies of goods and services are deemed to have taken place and also consider the special rules that apply when there is a change in the VAT rate to ensure that the correct rate of VAT is applied in respect of the supply, the acquisition and importation of goods and services. A comprehensive set of Frequently Asked Questions (FAQs) is available on the SARS website or you can click here to open the document.
How to prepare and submit your VAT201

Vendors whose tax periods span the old VAT rate of 14% and the new VAT rate of 15% (effective from 1 April 2018) will be required to declare these transactions on a single VAT201 return. The most impacted would be the Category B vendors whose tax periods are periods of two months ending on the last day of April 2018. Also impacted are the Category D vendors whose tax periods are periods of six months ending on the last day of August 2018. Category E vendors whose tax periods are periods of twelve months ending on the last day of the year of assessment will also be impacted.

Vendors who have tax periods that span the 14% and 15% VAT rate (Category B, D and E vendors) as well as future tax periods where the rate of 14% is applicable to certain supplies will be required to disclose their transactions as follows:

Output Tax

• for all standard rated supplies where VAT at 15% has been levied, please use the standard rated fields on the VAT201 that you would normally use to declare the output tax.
• for all standard rated supplies where VAT at 14% has been levied, please use Field 12 – “Other and Imported Services” on the VAT201, to declare the output tax.
Input tax

• for all capital and other goods and/or services supplied to you and charged with VAT at a rate of 15%, please use fields 14 and 15 on the VAT201;
• for all capital and other goods and/or services supplied to you and charged with VAT at a rate of 14%, please use Field 18 – “Other” on the VAT201, to deduct the VAT; and
• for all imports, irrespective of whether the VAT was charged at 14% or 15%, please use Field 14A and 15A on the VAT201 to deduct the VAT.
Please note:
• If you are using eFiling for the submission of your VAT201 and have saved a VAT201 for tax periods commencing on or after March 2018, the saved VAT201 will be removed so that the updated VAT201 with the correct rate of tax can be requested.
• The updated VAT201 will be made available soon. Please monitor the website for updates regarding the VAT201.

For more information please visit the Value Added Tax page on the SARS website www.sars.gov.za where you will find guides to help you complete and submit your VAT return, or contact the SARS Contact Centre on 0800 00 7277. You can also send an email to VATRateEnquiries@sars.gov.za with your enquiries.
ISSUED BY THE SOUTH AFRICAN REVENUE SERVICE

March 2018

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Dear Customer,

The Minister of Finance announced an increase in Value Added Tax (VAT) from 14% to 15%, effective 01 April 2018. Our products and services are subject to VAT and therefore the increase in VAT will result in price adjustments.

The updated invoice amounts will be reflected on ALL of our invoices and quotations from 01 April 2018.

We value your continued support.

Should you have any further queries or require further information or clarification, please do not hesitate to contact me directly on email: secretarial@iabcgroup.com or you can call us on: 011 312 9250 (Switchboard).

www.iabcgroup.com

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A worthwhile read:

Source: https://accountingweekly.com/job-disruption-is-coming-to-accounting-too/?utm_source=email&utm_medium=newsletter&utm_campaign=march-w3&utm_content=accounting_weekly

Tax SAIBA Accounting Weekly

Never before have the fundamental assumptions about the US job market looked so precarious. Automation, artificial intelligence, and robotics, among other technologies, are changing the skills and the skill level required of employees in many industries, including retail, transportation, and manufacturing.

This is according to an article in AccountingToday 

Amy Pitter writes that the accounting profession is experiencing similar changes, and the pace and pressure of that change is exploding into a major disruption. She says robotics is expected to eliminate 40 percent of basic accounting work by 2020. We’re in the early stages of the big data and artificial intelligence revolution in accounting, which already is being wholeheartedly embraced at the larger firms. “Blockchain, which may develop as the most significant disruptor of all, is only in its infancy. As blockchain gains traction, it promises to provide a viable replacement for the traditional third-party verifier of transactions, radically altering both the concept of audit and the role of auditors in ways that are only beginning to emerge”.

Pitter further writes:

These new technologies create a labour conundrum for the accounting industry. As routine work becomes commoditised, the traditional entry-level jobs are being eliminated. At the same time, there is an intense demand for accountants with more specialized and higher-level skills. But where are these accountants with knowledge of data analytics, cybertechnologies, critical thinking and great client skills going to come from? It’s hard to grow them organically with fewer entry-level jobs, and these higher-level skills are not necessarily being taught in college accounting programs.

The demand for data analysts and experts in the space where technology meets accounting is through the roof. Also, what we used to call “soft skills” are now being taken very seriously. Critical thinking, creativity, communications skills and the ability to be part of a team are skills that have become as integral to the job as debits and credits. One clear challenge for the academic community is to provide curricula that better mirror the reality in the industry – for new hires must embrace the evolving technology and also quickly become fluent in the new level of consultative services the technology will yield.

One thing that hasn’t changed is the human capital crunch in accounting, which has brought a profound culture shift in the profession. There was a time when staff at all levels were expected to be physically in the office nights and weekends during the “busy season.” Increasingly, a combination of enabling technology and employee expectations has turned those old ways on their ear, giving way to greater flexibility for employees – so long as they produce. Firms also are learning that Millennials are not a generation that wants to be seen and not heard. Indeed, they want to be consulted and see their ideas put into place.

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This is just a high level summary, should you need detailed information kindly email our secretarial team on:

2018/2019 Tax Table

Rates of tax for individuals

Following the changes announced in the Budget Speech on 21 February 2018, the rates of tax outlined below will be effective 1 March 2018.

 

Taxable Income (R) Rates of tax (R)
​0 – 195 850 18% of taxable income
​195 851 – 305 850 35 253 + 26% of taxable income above
195 850
​305 851 – 423 300 63 853 + 31% of taxable income above
305 850
​423 301 – 555 600 100 263 + 36% of taxable income above
423 300
​555 601 – 708 310 147 891 + 39% of taxable income above
555 600
​708 311 – 1 500 000 207 448 + 41% of taxable income above
708 310
​1 500 001 and above 532 041 + 45% of taxable income above
1 500 000

Tax Rebates:

Rebates
Primary R14 067
Secondary (Persons 65 and older) R7 713
Tertiary (Persons 75 and older) R2 574

Age Thresholds:

Age Tax Threshold
Below age 65 R78 150
Age 65 to below 75 R121 000
Age 75 and over R135 300

Medical Aid Tax Credits:

Medical Aid Tax Credits
Main Member R310
First Dependent R310
Additional Dependents R209

Subsistence Allowance:

Subsistence Allowance (RSA)
Meals and Incidentals R416
Incidentals Only R128

Prescribed Rate Per Kilometre:

Prescribed Rate Per Kilometre
Prescribed Rate Per Kilometre is R3.61 (2017/18: 3.55)

 

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We are pleased to announce that Sage South Africa accredited IABC several years ago  as an Approved Business Partner FOR product sales, implementation, support and training. IABC supports a wide range of Sage products including; Sage Evolution, Sage Partner & Xpress, Sage One Accounting & Payroll and Sage Partner Payroll & HR. IABC has since achieved Gold Re-seller status.

Feel free to contact us on E: sagepastel@iabcgroup.com T: 011 312 9250; web: www.iabcgroup.com

pastelCollection

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Are your declarations and refunds in line with the Vat Act and Tax Administration Act? Its all nice when we get the refunds but there could be comebacks.

“South African Revenue Service (Sars) commissioner Tom Moyane has been accused of illegally authorising the payment of a R70 million VAT refund to a Gupta-linked company, Daily Maverick’s investigative unit Scorpio reports.

According to the report, Oakbay Investments director Ronica Ragavan emailed Moyane on May 22 last year requesting him to pay the first of three VAT payments amounting to R70 million into Terbium Financial Services’ account for the benefit of Oakbay.

The Guptas appointed Terbium as a payment agent to manage the payment of staff salaries after the country’s four major banks in 2016 severed ties with the controversial family accused of state capture and corruption.

The payment of the VAT refunds was reportedly despite objection from several Sars officials who warned Moyane and its chief officer of legal counsel Refiloe Mokoena that the law doesn’t permit the payment of VAT refunds into third party accounts to prevent fraud and money laundering.” – News24

M Kalaluka

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Its that time of the year again, when we need to complete and submit income tax returns (ITR12) to Sars.

 

WHO SHOULD SUBMIT ITR12:

* If you are under the age of 65 and received an income of more than R59,750 from one or more sources or received more than R120,000 from a single source of employment, during the year of assessment 1 March 2011 to 29 February 2012;

* If you are aged between 65 and 75 and received an income of more than R93,150 from one or more sources or received more than R120,000 from a single source of employment, during the year of assessment 1 March 2011 to 29 February 2012;

* If you are over the age of 75 and received an income of more than R104,261 from one or more sources or received more than R120,000 from a single source of employment, during the year of assessment 1 March 2011 to 29 February 2012;

* If you:

– Conducted any trade in the Republic of South Africa (“Trade” is summed up as, including every profession, trade, business, calling, occupation or venture, including the letting of any property, but excluding any employment income.);

– Received an allowance such as travel, subsistence or office bearer allowance as per section 8(1)(a) of the Income Tax Act;

– Hold any funds or assets outside South Africa that a value of more than R50,000;

– Have a local capital gain/(loss) exceeding R20,000;

– Received any income or capital gain in a foreign currency;

– Held any rights in a controlled foreign company;

– Received an income tax return or you have been requested to submit ITR12 for the year in question.

 

METHODS OF SUBMISSION

There are various ways in which you can complete and submit your return;

1. eFiling: The most convenient and quickest way of completing and submitting tax (www.sarsefiling.co.za )

2. Branch: Filing electronically at a Sars branch (check www.sars.gov.za to locate a Sars branch nearest to you);

3. Post/ Drop box: Complete your return in writing and post yo Sars or drop it off in a Sars drop box.

 

DEADLINES FOR SUBMISSION AND PAYMENT OF TAX

* The deadline for all taxpayers who submit their tax return manually, by posting it or droping it off in a Sars drop box; is 28 September 2012;

* The deadline for all taxpayers who submit their tax returns electronically at a Sars branch; is 23 November 2012;

* Non-provisional tax payers who submit their returns via eFiling have until 23 November 2012;

* Provisional taxpayers who submit their returns via eFiling have until 31 January 2013.

If you should require further information or seek clarification, please call either Mr. Japhta Nkwana or Mr. M Kalaluka from our office on +27(0)11 312 3149 or email us: secretarial@iabcgroup.co.za

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SARS on Friday issued the Tax Administration Amendment Bill  for public comment. The Bill contains new provisions to regulate tax practitioners in South Africa. In essence tax practitioners, in addition to being registered with SARS, will also be compelled to register with a controlling body, such as SAIT and SAICA.  

The truth is that a significant number of tax practitioners are neither properly qualified nor registered to offer professional tax administration services. Our caution to the business fraternity and public at large is to be weary of these requirements and ensure that proper screening is done when appointing professional tax administrators and accountants.

Once the Tax Administration Amendment Bill is promulgated, all tax practitioners as defined in terms of section 239 and 240 of the Tax Administration Act (No. 28 of 2011), will also be required to register with a controlling body (as defined).

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We are proud to announce that IABC is now an accredited Pastel Evolution Business Partner, Pastel Accounting Forum Member, Authorised Resellers, Certified Installation Technicians, Pastel Certified Trainer and Product Consultants/ Technicians for Pastel Accounting Products. We are also Authorised Resellers and Installation Technicians for Pastel Payroll Products.

IABC was also awarded “Approved Training Centre” status by Softline for all Pastel Accounting related training, although our intitial focus will be on “on-site” end user training with selected class room and college based training.

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We are proud to announce that IABC is now an accredited Pastel Evolution Business Partner, Pastel Accounting Forum Member, Authorised Resellers, Certified Installation Technicians, Pastel Certified Trainer and Product Consultants/ Technicians for Pastel Accounting Products. We are also Authorised Resellers and Installation Technicians for Pastel Payroll Products.

IABC was also awarded “Approved Training Centre” status by Softline for all Pastel Accounting related training, although our intitial focus will be on “on-site” end user training with selected class room and college based training.

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iabc is an approved training partner for:
1. The Association of Chartered Certified Accountants (“ACCA”) – Silver Level Approved Employer – Trainee Development (in recognition of the support provided to ACCA students and affiliates working towards the ACCA professional scheme, Certified Accounting Technician (CAT) scheme or Diploma in Financial Management qualifications;
2. The Chartered Institute of Management Accountants (“CIMA”) – Approved CIMA Training Partner (in accordance with CIMA’s Quality Standards for the training of Chartered Management Accountants.

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The dti RECOMMENDS 01 MAY 2011 AS IMPLEMENTATION DATE FOR THE NEW COMPANIES ACT
The Department of Trade and Industry (the dti) acknowledges the high volume of the enquiries regarding implementation date of the Companies Act. In terms of the Act, implementation date of the Act shall be the date on which the Act is proclaimed.
The dti can confirm that after all the technical processes required have been completed. It has recommended to Presidency to provide 01 May 2011 as implementation date. The Department reiterates that all the necessary systems and processes necessary for the operation of the Companies and Intellectual Property Commission, including the appointment of the Commissioner and Deputy Commissioner, are on track.
 
Issued by:
Communication and Marketing, the dti
Head of Communication: Clement Manoko
Tel: (012) 394 1712 begin_of_the_skype_highlighting (012) 394 1712 end_of_the_skype_highlighting
E-mail: NManoko@thedti.gov.za
the dti

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Tax compliance, obstacles encountered by small and medium enterprises in South Africa – Taxation
W Abrie and E Doussy from University of South Africa conducted a meditary accountancy research in as to what are the tax compliance obstacles faced by SMEs in South Africa.

“It is internationally acknowledged that small and medium enterprises (SMEs) play a vital role in enhancing a country’s economic growth and in creating jobs. It is therefore in the public interest and in the interests of all governments to support SMEs.”
 
A study concentrating on the tax function in small and medium manufacturing concerns operating in the Gauteng Province in South Africa was recently undertaken. In the article (available on request), which is based on the study, the authors identify the main problem areas that manufacturing SMEs in the Gauteng Province have to cope with in administering government taxes. The article discusses the administration process only, and not the taxes themselves.
 
The authors have identified tax compliance requirements in South Africa as a stumbling block for SMEs. They suggest that the government seriously consider reducing the number of taxes SMEs have to administer, reduce the compliance requirements and make additional tools available to SMEs to assist them in administering taxes.
 
In 2009/10 fiscal year single “turnover” tax was introduced for small businesses and an attractive tax band offered to businesses which qualify as Small Business Corporations. In my opinion therefore, there has been a steady response from Government and related institutions in regard to minimizing red tape and burden of doing business by SMEs.
 
At iabc, we further believe that sometimes the burden and challenges faced by SMEs would be minimized via outsourcing for technical issues such as taxation, accounting and financial management to suitably qualified practitioners and consultants so then the business owners concentrate on what they do best, Business!

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MOST SMEs NOW AUDIT EXEMPT
By Usi Waida:

Most companies will be exempt from the mandatory statutory audit when the Companies Act No. 71 of 2008 becomes effective on 1 April 2011. This is a topical issue as there are pros and cons of this of legislation.
 
It has been noted globally and recently in South Africa that statutory audit of SME is expensive and creating unnecessary burdens on SME. An audit exempt company can now opt to be voluntarily audited. The majority of the eligible companies have chosen not to spend their limited funds on a voluntary audit.
 
For so many years the auditors have been relying, clinging on regulatory, mandatory or statutory backing for their existence. Firms who do not provide innovative tailor made services demanded by the client will suffer in fee reduction .If accountants benefited more than their clients this could explain why the stakeholders perceive no value in small audits resulting in statutory audit not being wanted by the owner managed shareholders.
 
There is also now an increased competition for providing assurance and audit related services to the released audit exempt SME’s hence some of the affected accountants will not want this legislation to go through. Independent professional accountants in good standing holding CA, ACCA, CIMA, and SAIPA qualifications can now provide the new statutory Independent reviews.
 
The audit profession is continuously being damaged as a result of company failures soon after obtaining clean audit reports as well as the negative interpretation of introducing audit exemptions to SME’s. The users of financial statements do not fully understand the responsibility of auditors especially on fraud detection. The misunderstanding on the responsibility is also partially being caused by accountants themselves who are giving contradictory views on the benefits and disadvantages of exempting SME from statutory audit. Yes, an audit can assist to detect fraud although fraud detection is not the main objective of auditing financial statements.
 
Briefly the main responsibility and objective of auditors is to express an opinion whether the financial statements give a true and fair view of the state of company’s affairs and whether the financial statements have been prepared in accordance with applicable financial reporting framework. It does not mean that unaudited accounts do not give a true and fair view of the state of company affairs and those creditors of unaudited SME companies will be affected. There is no Independent auditor’s report which states that auditor’s responsibility is to detect fraud. It’s not possible for auditors to certify non-existence of fraud given that audit is based on sampling. It is the responsibility of management to ensure that financial statements are free from material misstatement due to fraud.
 
Best practice now requires that fraud detection assignments should be awarded to fraud expects ,fraud specialist such Certified Fraud Examiners, Certified Forensic Accountants or auditors who are interested in forensic audit must do a forensic specialist course. One qualification can no longer fit in all business areas given the complexities of modern day businesses. Countries such as Nigeria, USA, Canada, and India have established Institutes of Forensic Accounting in order to align with modern business needs.
 
The companies act still requires companies to keep and maintain proper accounting records and those who do not comply will be committing a criminal offence.
 
WHAT ARE THE NEEDS OF SME’s
 
Accountants should have a detailed understanding of the economic purposes of companies. They must now develop innovative ways to satisfy the demands of the market. It can be a waste of time of taking a protectionist stance in trying to defend the benefits of statutory audit for SME’s , by the way most SME ‘s are owner managed. What is the benefit of auditing the owner? There is no point in reporting to shareholders how they have run their business since they are the same people. Actually these owners are best placed to tell the auditors how they run their business. If your existing audit client whom you have been auditing for many years has opted not to be audited. Ask yourself if you have been adding value to the client or you have just been relying on the statutory audit backing to provide an unwanted service. Most SME do not need a statutory audit they need business advice that add value to their businesses.
 
Accountants for SME should move away from just looking at historical figures they must expand their services to say: business advice, agreed upon procedures, business reviews, Outsourced CFO services, risk management and special purpose assignments in order to add value to client business.
SME that cannot prepare the financial statements still need the services of an independent accounting professional.
 
IMPACT ON THE AUDIT/ ACCOUNTING PROFESSION
In my view the audit profession could suffer in the short to medium term. If the audit exempt SME obtain good business advice they can grow to large auditable firms thereby benefiting the economy and the audit profession. Accounting firms will continue to merge in order to provide expanded services from a large pool of skilled human capital. There is still a big lucrative market for skilled accountants in South Africa.
  
Usi Waida, Fund Accountant – Investment Data Services Group (Pty) Ltd – usi.waida@idsfundservices.com

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POTENTIAL RISKS WHEN BUYING A BUSINESS – BUSINESS DEVELOPMENT
Having identified some of the potential benefits, let’s take a closer look at some of the risks associated with buying a business.

LOCATION: The business could be located in the wrong premises, and new premises might be required to ensure ongoing success.
LEASE: The rental may not be market related and escalation per annum too high. The lease could also contain very negative terms & conditions.
PROBLEMS AND LEGACY ISSUES: You may be taking over major problems that the previous owner has created and/or has not told you about. E.g. a key customer leaving!
 
When looking for potential business there are a number of ways you can source prospects. You could:
  • Look in newspapers under the businesses for sale column,
  • Place an advertisement in the newspaper,
  • Search on the internet,
  • Contact a business broker,
  • Contact other agents,
  • Speak to family and friends (for their contacts) or
  • Directly canvass businesses that appeal to you.
 Don’t buy what the broker wants to sell you just for the sake of buying a business. Look for and get the business you want and deserve. It probably won’t be 100% of what you want, but then why would you buy a business that you do not feel you can grow and develop?

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Leasing vs. Buying – Corporate Finance
An issue that needs to be considered right at the beginning of any decision to purchase assets is whether to buy or lease them. If you decide to buy, then also consider use of debt to finance the purchase.

Ideally, businesses should only buy appreciating assets and lease depreciating ones. Buying is best if you will be able to make use of the asset for longer than what the ‘rental’ period would cover. However, if buying the asset would deplete the company’s cashflow, then buying becomes unattractive.
 
Further, if cashflow is not adequate and working capital is critical, then financing the asset purchase using debt must be considered.
 
Asset finance can be considerably complex and any mistakes made in choice of available options can cost the company in terms of profitability as well as balance sheet strength.
 
The most important forms of asset finance are:
· Installment sale – (also know as Hire Purchase), refers to a credit agreement in terms of which goods are sold by the bank to a customer over a negotiated period of time, agreed interest rate and installments of periodical payments. Ownership of the goods or assets pass to the customer after payment of last installment (suitable for M/Vehicles, Furniture & Fittings and Equipment)
· Rental – (Operating Lease), provides the customer with uninterrupted use of an asset, rather than ownership (suitable for computer equipment, photocopiers and fax machines, generally assets which are replaced on a regular basis)
· Finance Lease – Like with Operating Lease, provides the customer with uninterrupted use of an asset, rather than ownership. The customer has the option to take ownership or return the asset to the bank at the end of the period. Difference compared to Rental mostly lie in the treatment of VAT (balloon and stepped up payments can be arranged to suit customer company cashflow.)

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Security around VAT Registrations and administration – Taxation
The South African Revenue Service has recently implemented a range of additional security measures to safeguard the VAT system from attempted abuse and fraud.

The new measures include more stringent verification of applications for VAT registration, investigations of existing VAT vendors who are under the turnover threshold and a review of risk measures for refunds. South Africa’s tax system is based on self-declaration and depends to large extent on the integrity of taxpayers to make full, accurate and honest disclosure and pay all tax that is due. The vast majority of VAT vendors are compliant and SARS thank them for making their fair contribution to the fiscus. However, monitoring of VAT registrations and refunds over the past six months by SARS has revealed a disturbing increase in attempted fraudulent registrations and other attempts to defraud the VAT system
 
As a result, applications must be accompanied by proof of ID, bank particulars and physical address of the business. Where applicants are unable to visit a SARS branch to apply in person or to send a legal representative, applications may be done via post but will require additional verification measures before activation. Where necessary, inspections of business premises will take place to check trading activity before activation of VAT accounts. SARS is also considering implementing additional verifications including the use of biometric tests (fingerprinting of applicants) for VAT and other tax registrations. In South Africa and internationally, the use of biometrics as a safety mechanism is growing in use and SARS is investigating this as a longer term solution.
 
Value-Added Tax (VAT) is a tax charged and collected by vendors on the sale of most goods or services. It is also charged on goods and some services, imported from places outside South Africa.
 
VAT is charged at a standard rate, which is 14%, and is paid each time a taxable supply is made. For certain goods and services, a special rate of 0% VAT (zero-rate) is applied, while a limited range of goods and services are exempt. Generally, businesses that are registered as vendors charge VAT on every sale of standard-rated goods and services (output tax) and claim credits for the VAT included in the price of their business purchases (input tax). The broad effect is that businesses are not affected by VAT and the economic cost of the VAT is actually borne by the final consumer, who cannot claim an input tax deduction. Output tax less the input tax in a particular tax period equals the amount payable/refundable to/by SARS.
 
Compulsory registration – If you are in business and making taxable supplies (i.e. standard-rated and zero-rated supplies), the value of these supplies is your taxable turnover. You must register for VAT within 21 days if your annual taxable turnover exceeds or is expected to exceed R1m
.Voluntary registration – If your annual taxable turnover is less than R1m but more than R20k, you can apply for voluntary registration if you can meet certain other conditions as well.
Calculating your annual turnover – Your annual taxable turnover is the gross business income (not the profit), excluding any: VAT included in your sales to your customers; Exempt supplies you make; and Sales not connected with your business in South Africa.
 
Commissioner may refuse to register a person for voluntary registration if any of the following requirements are not met by the applicant: The person has no fixed place of residence or business in South Africa; or Does not keep proper accounting records; or Has not opened a banking account in South Africa; or Has previously been registered as a vendor under VAT or General Sales Tax (GST) and failed to perform the duties of a vendor; or Has not met the minimum threshold requirement of R20 000 turnover for the past 12 months.
 
What does being registered for VAT mean? – If you are registered or required to be registered for VAT, you must – include VAT in the price of most goods and services you sell;
· keep proper VAT records and accounts;
· provide correct and accurate information to SARS;
· submit returns and payments on time;
· include VAT in your prices, advertisements and quotes;
· keep accurate accounting records for 5 years;
· produce relevant documents when required by SARS;
· notify SARS about any changes in your business, namely your address, trading name, partners, bank details and tax periods; and
· Issue tax invoices, debit and credit notes.
Adapted from VAT – Small Vendors Guide” – SARS”
Mwendabai
(011 – 312 3149/ mkalaluka@iabcgroup.co.za)

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