TAX TALK – What are the different types of tax and do you have to pay them all?
Navigating the South African tax scene may feel like a daunting task, especially with the ongoing changes to tax legislation. Let’s briefly break down four of the main types of tax in South Africa and find out which ones are applicable to you.
Income tax
Income tax is the normal tax payable by individuals or entities on the income or profits earned by them.
Most individuals who earn a salary or other type of income, for example investment, rental or pension income, will be liable for personal income tax. This also includes sole proprietors earning business or trade income.
Companies and close corporations are liable for corporate income tax on all income received by or accrued to them within a financial year.
Trusts are also subject to income tax, based on specific requirements.
Income tax is assessed and levied once a year by submitting a tax return to the South African Revenue Service (SARS).
Capital Gains Tax (CGT)
CGT is not a separate tax but forms part of income tax. A capital gain results from the disposal of an asset for proceeds that exceed its base cost and is taxed at a lower effective tax rate than ordinary income. Certain capital gains and losses are disregarded.
CGT is applicable to all individuals, trusts and companies.
Provisional Tax
Provisional tax is also not a separate tax, but rather an advance collection of income tax. This effectively spreads the tax payments over the financial year and ensures that the tax payer does not have a large tax debt to pay on assessment.
Two provisional tax payments are required in advance during the year of assessment, and a third “top-up” payment is optional after the year of assessment but before the issuing of the income tax assessment by SARS.
Any provisional tax payments made during the year are deducted from the income tax liability on assessment for the applicable year.
Subject to certain criteria and exemptions, non-salary earners and companies will be provisional taxpayers.
Value-Added Tax (VAT)
VAT is an indirect tax on the consumption of goods or services in the economy. In other words, you will be subject to VAT every time you buy or sell taxable goods or services.
Certain traders (vendors) are required to register for VAT if they carry on a trade and have turnover of R1 million and above. The vendor must then charge VAT on its supply of goods or services (output VAT), and will be entitled to deduct VAT charged to it (input VAT) when incurred for making taxable supplies. The vendor is liable to pay the difference between the output VAT and the input VAT or claim a VAT refund where the input VAT exceeds the output VAT.
VAT is currently levied at the standard rate of 15% (or in certain instances 0%), based on the price charged for the goods or services.
VAT is one of the ways that the government raises revenue, so VAT vendors are effectively collecting tax on behalf of SARS by levying VAT on top of the price of their goods or services.
Do some of these tax types apply to you? Not sure how to calculate them or when to submit your return? Remember to contact your accountant at BAN with any of your tax queries or concerns – we’re here to help!
TOP TIP – Do’s and Don’ts to Maximize your Accountant’s Effectiveness
Ever wondered how to partner with your accountant to ensure the success of your business? Follow these easy “Do’s and Don’ts” to take your accounting to the next level:
DO chat to your accountant regularly and inform them of any changes in your business or circumstances, no matter how small you may think it is. Your accountant has specialized knowledge and will be best able to assess how events may affect your tax compliance or commercial position.
DO honour the requests for information from your accountant. All business decisions are only as good as the information they are based on and likewise, the submission of tax returns, CIPC returns, budgets and management reports are no exception. The more thorough and timeous the information is that you send to your accountant, the better they can help you.
DO consider the advice your accountant gives you. They have spent years in the profession gaining expert knowledge and skills and are committed to adding value to you as their client. What may seem like arbitrary recommendations could be vital to save you costs, penalties or compliance headaches in the long run.
DON’T send documents required to submit tax returns late. The calculation of income tax and VAT is a complex process and takes a while to complete accurately. Your accountant needs sufficient time to work through your documents, perform the calculation and address any issues that may arise, all while making sure that your return is submitted by the due date.
DON’T forget that you are not your accountant’s only client. Your accountant strives to ensure that each and every one of their clients is afforded the maximum amount of expertise and diligence and prioritizes their time accordingly. Any delays caused has a knock-on effect on your accountant’s planning.
DON’T underestimate the value that your accountant brings to the table. Similarly to attorneys or doctors, accountants are highly trained professionals who focus specifically on the health of your finances. Should you have any concerns about whether the fees you are being charged match up to the perceived benefit received from your accountant, don’t hesitate to discuss this with them – you may be surprised to learn how much they are doing for your business!
DID YOU KNOW?
Management accounts are a valuable monthly reporting tool that enables you to keep a close eye on your business. Usually including an income statement, balance sheet and schedule of expenses, management accounts can be as detailed as you like and tailored to suit your reporting needs. They can also be extended to include cash flows, forecasts and budgets or ratio analysis, allowing you to easily keep track of the key indicators of your business. What better way to plan for the future!