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New Year, New Business – How to Pick the Right Legal Entity for It

Written by Nicole Ross Attorneys on . Posted in Business, Tax.

 “Owning one’s own business is an adventure – enjoy it every step of the way.” (From the SME Toolkit article referenced below)

First, three questions to ask yourself…

If you dream of going into business for your own account in 2023, ask yourself these questions before you get started –

  1. Am I an entrepreneur? You have an amazing idea, you can’t wait to launch your new business, success and wealth beckon! But wait a second – are you really suited for the hurly-burly of entrepreneurship? It can be hugely rewarding, not just in the financial sense but also in terms of lifestyle and life satisfaction. But it also carries far more risk than the classic “9 to 5 employee” option, so think long and hard before choosing. There are many online quizzes to help you decide – try for example DeLuxe’s “Quiz: Are you ready to start your own business?” here.
  2. What’s my plan? Without a plan you sail rudderless through some very treacherous and shark-infested waters. Start-up failure rates are high, but luckily there is plenty of advice available to help you plan your course. Read for example the Business Partners “Ten Simple Rules For a Successful Start-up” on SME Toolkit.
  3. What legal entity should I use to trade? Don’t make the rookie mistake of setting sail in just any old boat. Starting off in the wrong entity and then having to change mid-stream will mean a lot of unnecessary expense, hassle and risk. Rather plan long term – ask yourself where you want your business to be in 5 or 10 years, how big it will be, what your exit plan will be and so on.We set out below some brief thoughts on the various alternatives available to you, but upfront professional advice, specific to your particular needs and circumstances, is a real no-brainer here.

    So, what are your choices?

…and four business vehicles to choose from

You have four main options –

  1. A sole proprietorship (“sole trader”).  You are the business, trading for your own personal profit and loss, perhaps under a trading name such as “Syd Smith trading as ‘Syds Plumbing’”.
  2. A partnership of 2 to 20 individuals or entities, pooling resources to carry on a trade, business or profession for a share of the profits.
  3. A private company (“Pty Ltd”) with any number of shareholders. Controlled and administered by directors.
  4. A trust (number of trustees and beneficiaries not restricted). There are various types of trust, with trustees controlling and managing trust assets and/or trading for the benefit of beneficiaries.

Note that you might be advised to combine one or more of these entities in a corporate structure, and that there are other specialised types of entity available to, for example, non-profit organisations (charities etc), professionals (lawyers, accountants, doctors etc) and the like.

The pros and the cons of each

Have a look at the illustrative table below for a summary of the advantages and disadvantages of each of these options.

Don’t forget the tax and estate planning implications!

Each of your choices carries with it a mixed bag of positives and negatives when it comes to both tax and estate planning implications. For an overview, have a look at SARS’ “Starting a business and tax” webpage, with a link to its “Tax Guide for Small Businesses” PDF.

That Guide is 102 pages long, and unless you are comfortable with the complexities involved, professional advice specific to your circumstances is again essential.

In a nutshell –

  • Estate planning: You may be advised to use companies and trusts for tax-efficient and practical transfer of wealth to future generations, as well as for asset protection from creditors both before and after you die. Both companies and trusts are “perpetual” in the sense that they survive changes in directors/trustees (resignation, removal, retirement, insolvency, death etc), with potential multi-generational savings in estate duty and avoidance of the cost and delays inherent in deceased estate administration.
  • Tax efficiency: Sole traders and partners are taxed at individual rates; trusts other than special trusts at a flat rate of 45%; companies at a flat rate of 27% (27% for years of assessment ending on 31 March 2023 and later, previously 28%) with 20% dividends tax when you take profits out. There are a host of other factors to take into account here, including aspects such as Capital Gains Tax inclusion rates, exclusions, exemptions, small business breaks and the “trust conduit principle” all being highly relevant to the ultimate question – will you be better off being taxed as an individual or will some form of corporate and/or trust structure be more tax efficient for you?

Take that professional advice!

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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“Double Jeopardy” for Tax Evasion – Penalties plus Prosecution

Written by Nicole Ross Attorneys on . Posted in Criminal Law / Crime, Tax.

“Administrative penalties and criminal proceedings do not serve the same purpose. The [one] is aimed at strengthening internal controls of the administrative authority and to promote compliance while the other is aimed at correcting a behaviour that caused harm to the society.” (Extract from judgment below)

SARS has announced major crackdowns on tax defaulters, and a recent High Court decision highlights the dangers of being caught out for “intentional tax evasion”.

R1.3m prejudice to SARS
  • A close corporation (CC) registered for both income tax and VAT (value added tax) rendered “nil” returns to SARS over a four-year period, indicating that no income had been generated and no expenses incurred.
  • After a tax audit, SARS determined (and the CC admitted) that the returns were false and that SARS had in consequence suffered prejudice of R819,607 on VAT and R493,600 on Income Tax.
  • SARS levied 10% late payment penalties and further imposed a 150% understatement penalty on both Income Tax and VAT. The 150% was imposed for “intentional tax evasion”.
  • Both the CC and the member were then also charged criminally for intentional tax evasion.
Both penalties and prosecution – is that “Double Jeopardy”?

They applied to the High Court for a declaration that the relevant sections of the Tax Administration Act are invalid, arguing that it is inconsistent with the constitution to “criminally punish the taxpayer twice for the same criminal offence of intentional tax evasion.”

Which raised the question of whether or not this was a case of “double jeopardy” – the legal rule that “no one may be punished for the same offence twice.” You cannot, in other words, be repeatedly prosecuted for the same offence.

But, held the Court, “nothing precludes civil administrative proceedings and criminal proceedings from the single act”. Double jeopardy does not apply in a case such as this where “calling the taxpayer to account for the wrongdoing before an administrative body as well as the criminal are two distinct processes”.

In other words, both the CC and the member, having been subjected already to hefty administrative penalties (that 150% understatement penalty must hurt particularly badly!) now face criminal prosecution as well. Criminal records, substantial fines and direct imprisonment are all on the table.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

© LawDotNews

Selling Property this Festive Season: The Tax Angle

Written by Nicole Ross Attorneys on . Posted in Property, Tax.

December and January have always been prime months for selling residential property in South Africa, and if you are a “Festive Season Seller”, here are two really important tips for you.

  1. Plan your finances
    Understand and plan for all the financial implications, not just the legal ones.Prepare a cash-flow forecast so that you know what you will receive and when, and what you will have to pay and when. Your forecast will tell you what funds you must have available at all stages of the sale and transfer process, and it will answer your bottom-line question – what will be left in your pocket at the end of it all?
  2. Don’t forget your CGT liability
    There are many expenses you should provide for (ask your lawyer to help you list them), but in this article we’ll only address one of them – the CGT (Capital Gains Tax) aspect.This is vital – if you made a “capital gain” on the sale (more on how to calculate that below) you could be liable to pay CGT. If so, it could well be a substantial liability, and not planning for it will leave you in a world of pain because if you can’t pay your tax bill SARS will be after you with a big stick (SARS has extensive powers when it comes to debt collection).

    There is a bit of good news:     The advantages of owning your own family home, and the value of property generally as an investment channel, will for most people outweigh the pain of having to pay tax when you eventually sell. Plus, as we shall see below, paying CGT on a property sale is not nearly as painful as it would be to pay income tax on it. Indeed, if the capital gain on your primary residence is R2m or less, your CGT bill is nil!
How does CGT on a property sale work?

This is a complex topic, so what follows is of necessity a summary of general principles only – there is no substitute for specific professional advice here!

  • What is Capital Gains Tax? CGT forms part of your income tax and is a tax on any “capital gain” you make on an asset, in this case a property. The capital gain is the difference between your base cost and the proceeds of your sale.
  • What is “base cost”? This is what your property cost you to acquire (including transfer costs, transfer duty and the like) when you bought it. Note that CGT only kicked in on 1 October 2001, so if you bought the property before then it is the property’s value at that date that you will use. Qualifying improvement costs (extensions, additions and the like but excluding maintenance or repair costs) are also added to your base cost, so keep a separate note and proof of these as you incur them over the years. Our example calculation below assumes a homeowner who bought a number of years ago for R4m inclusive of transfer costs and duty, then spent a total of R500k on improvements (perhaps adding an extra room and a swimming pool).
  • How do you calculate the “sale proceeds”? From the sale price you can deduct any costs of selling which are directly related to the sale, such as agent’s commission, advertising, legal costs and so on. In our example we assume net sale proceeds of R7m.
  • How do you calculate the “capital gain”? This is the difference between the base cost and the proceeds of the sale (R2.5m in our example, before the primary residence exclusion).
  • What can you deduct from the capital gain? If the property is in your personal name and is your “primary residence” (i.e., where you normally live) you can deduct a R2m exclusion from the capital gain. Note that if you used your house for business purposes or if you didn’t reside in it for the whole period of ownership, you need to take specific advice on how much (if any) of the exclusion is available to you. You can also deduct an “annual exclusion” of R40,000. In our example we assume the seller is entitled to both exclusions in full, resulting in a net capital gain of R460,000.
  • How are you taxed on the net capital gain? The example below will help clarify this. Your capital gain is added to your annual income tax liability at the “inclusion rate” applicable to you. Individuals and special trusts have an inclusion rate of 40%, whereas other trusts and companies have an inclusion rate of 80%. You will then pay tax on that amount at your marginal tax rate (18% – 45% depending on your taxable income). In our example we assume an individual taxpayer paying tax at the highest marginal rate of 45%, the resulting tax liability of R82,800 amounting to just under 1.2% of the net sale proceeds. Our seller’s profit on the sale net of tax would then be R2,417,200.
So how much CGT will you actually pay?

For an individual your calculation is: Capital Gains Tax = Capital Gain x 40% inclusion rate x your marginal tax rate.

Have a look at the example below which assumes an individual home seller entitled to the full R2m primary residence exclusion and paying tax at the highest marginal tax rate of 45%. Then use your own figures and make your own calculation.

 (Source: Adapted from SARS examples)

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

© LawDotNew

Tax Freedom Day 2022: The Day We Stopped Working for Government

Written by Nicole Ross Attorneys on . Posted in General Interest, Tax.

“Taxpayer: One who doesn’t have to pass a civil service exam to work for the government” (Anonymous)

“Tax Freedom Day” is the first day of the year on which we South Africans (we’re talking about the “average” taxpayer here) have finally earned enough to pay off SARS and to start working for ourselves.

This year the predicted date was 12 May 2022. That’s three days later than last year, and a whole calendar month later than in 1994 when we first started recording this.

That’s a depressing trend, but it’s a worldwide one and we certainly aren’t the worst-off country – Belgians for example only get to celebrate on 6 August! Certainly food for thought for anyone thinking of emigrating. Have a look at Wikipedia here for some country-by-country comparisons.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

© LawDotNews

Budget 2022: The Minister of Finance Wants to Hear from You!

Written by Nicole Ross Attorneys on . Posted in Economy, Tax.

Finance Minister Enoch Godongwana has invited the public to share suggestions on the 2022 Budget he is expected to deliver on Wednesday 23 February 2022.

The Ministry of Finance: “As usual, the budget allocation always aims to strike a balance between competing national spending priorities … suggestions must pertain to what should government be spending on, how to address a large budget deficit, new sources of tax revenues, and other budget-relevant information … Minister Godongwana looks forward to your contributions.”

Go to National Treasury’s “Budget Tips for the Minister of Finance” page and fill out the online form.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

© LawDotNews

What SARS Says About Crypto Assets and Tax

Written by Nicole Ross Attorneys on . Posted in Personal Finance, Tax.

“The future of money is digital currency” (Bill Gates)

If you are thinking of buying – or have bought – any “crypto asset” such as a cryptocurrency like Bitcoin, Ethereum, Polkadot, Solana (or any of the many other crypto currencies springing up all over the place), be aware of the tax implications.

As a start, read the new SARS webpage “Crypto Assets and Tax” here, first published on 27 August 2021 and providing guidance on (at date of writing – expect this webpage to evolve!) these questions –

  • What is it?
  • How did we get here?
  • Do I need to pay tax on crypto assets?
  • How will it work? (With an example of the ITR12 Income Tax Return for the 2020/21 tax year)
  • How is SARS tracing crypto asset transactions?

There are still grey areas here – and many pitfalls – so be sure to take specific professional advice!

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

© LawDotNews