THE LINK BETWEEN CGT AND INCOME TAX

A4_bThe name “Capital Gains Tax” (CGT) can create the impression that CGT stands on its own as a seperate tax from the rest of the taxes but this is not the case. CGT forms part of the Income Tax system and capital gains and capital losses must be declared in the annual Income Tax return of a taxpayer.

If a taxpayer is not registered for Income Tax

If a natural person is not registered for Income Tax and his/her taxable income consists only of a taxable capital gain or a deductible capital loss, the amount of which is more than R30 000, the person will have to register as a taxpayer with SARS. In addition, the new taxpayer will have to submit an Income Tax return for that tax year.

If a taxpayer is already registered for Income Tax, they don’t have to register for CGT seperately as CGT forms part of Income Tax.

Tax treatment of capital gains in three steps

The first step is to calculate the capital gain according to the provisions of the CGT Act. A discussion of the formulas to calculate the amount of capital gains and capital losses fall outside the scope of this article.

The second step is to reduce the capital gain with any exclusions which might be applicable. Please contact your tax advisor to find out if you qualify for any CGT exclusions.

Step three will be to include the taxable amount of the capital gain in the taxable income of the taxpayer. There are different inclusion rates for the following categories of taxpayers:

  • For natural persons, deceased or insolvent estates, and special trusts the taxable inclusion rate is 33,3%. In other words, 33,3% of the capital gain will be added to the taxable income of the taxpayer and the taxpayer will have to pay more income tax.
  • Companies, close corporations and trusts (excluding special trusts) have a taxable inclusion rate of 66,6%. This means that 66,6% of the capital gain will be added to the taxable income and taxed at the normal income tax rate of the taxpayer.

As a taxable capital gain will be added to the taxable income of a taxpayer, it will have an effect on certain deductions in the income tax calculation while other deductions will not be affected.

The following tax deductions for individual taxpayers will not be affected by the inclusion of a taxable capital gain in the taxable income of the taxpayer:

  • Pension fund contributions
  • Retirement annuity fund contributions

Tax deductions that will be affected by the inclusion of a taxable capital gain in an income tax calculation are the following:

  • Medical expenses (only applicable to individual taxpayers)

If a taxpayer’s medical deduction is subject to the 7,5% of taxable income-limitation, the deductible amount for medical expenses will become smaller if a taxable capital gain is included in the taxable income.

  • Section 18(A) donations

A taxpayer can include the taxable capital gain in taxable income before calculating the 10%-limit for the tax deduction of Section 18(A) donations. The allowable tax deduction of these donations will then increase by 10% of the amount of the taxable capital gain.

Tax treatment of capital losses

Capital losses may not be deducted from taxable income but must be set off against current or future capital gains. If there is insufficient capital gains to offset the full capital loss in the current tax year, the unclaimed balance of the capital loss is carried forward to the next tax year(s) until it has been fully offset against future capital gains.

As a capital gain/loss can have a material effect on a taxpayer’s liability for Income Tax, it is crucial to calculate these amounts accurately and take advantage of all the exclusions that might be applicable to the taxpayer. For further assistance regarding any aspect of capital gains/losses, please contact your tax advisor.

This article is a general information sheet and should not be used or relied upon 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 financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE) 

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EMPLOYER INTERIM RECONCILIATION

A3_bIn the past SARS required the Employer Reconciliation to be done every twelve months. A few years ago SARS introduced the Employer Interim Reconciliation in addition to the annual Employer Reconciliation.

The Employer Interim Reconciliation have the same requirements as the Employer Reconciliation, with two exceptions:

  1. The Interim Reconciliation is completed for six months only, and
  2. The tax certificates generated during the Interim Reconciliation are only submitted to SARS and not distributed among employees, except in certain circumstances as set out in the table below.

The major benefit of performing the Employer Interim Reconciliation is that it decreases the pressure on employers with their Employer Reconciliation at the end of the tax year, as only six months have to be reconciled for each reconciliation.

The table below shows the major differences between the Employer Interim Reconciliation and the Employer Reconciliation, followed by some tips on how you can prepare for the next Employer Interim Reconciliation.

Requirement Employer Interim Reconciliation Employer Reconciliation
Periods included for 2015/2016 tax year 1 March 2015 – 31 August 2015 (6 months) 1 March 2015 – 29 February 2016 (12 months)
Submission deadline for 2015/2016 tax year 30 October 2015 To be announced by SARS (normally 3 months after the end of the tax year i.e. 31 May 2016)
Failure to submit or late submission Penalty of 10% of total amount of Employees’ Tax per month that employer fails to submit a complete reconciliation Penalty of 10% of total amount of Employees’ Tax per month that employer fails to submit a complete reconciliation
Failure to indicate taxable fringe benefits on employees’ tax certificates Penalty equal to 10% of the cash equivalent of the taxable fringe benefit Penalty equal to 10% of the cash equivalent of the taxable fringe benefit

Give IRP5/IT3(a) certificates to employees

No, except if the employee stops working for the employer e.g. if the employee resigns or retires, or if the employer closes down its business between 1 March 2015 and 31 August 2015 Yes, but only after an acceptable Employer Reconciliation has been submitted to SARS
Deadline for giving IRP(5)/IT3(a) certificates to employees Not applicable, except if the employee stops working for the employer during the period from 1 March 2015 to 31 August 2015 To be announced by SARS but after submission deadline for Employer Reconciliation and usually before opening of tax season for individuals

Tip 1: Start preparing now

Get a jumpstart on the reconciliation process by starting to confirm employees’ personal details. Draw up a confirmation form of personal details needed to complete employees’ IRP5/IT3(a) tax certificates. These forms should be completed and signed by each employee and kept in the Employer Interim Reconciliation file as part of the working papers. The details that must be confirmed with employees are the following:

  1. First two names and surname
  2. Date of birth
  3. South African ID number or Passport number and name of country which issued the passport
  4. Income Tax reference number

Contact details:

  1. Postal address
  2. Residential address (including postal code)
  3. Cellphone number
  4. Home telephone number
  5. Work telephone number
  6. Fax number
  7. E-mail address

Banking details:

  1. Bank account number
  2. Bank account name
  3. Type of account e.g. savings or cheque
  4. Branch name
  5. Branch number
  6. Indication of whether it is their own bank account, a joint bank account or a third party bank account

Tip 2: Use the latest version of easyFile

Make sure that you use the latest version of easyFile when doing the Employer Interim Reconciliation as well as the Employer Reconciliation, as reconciliations and tax certificates done on previous versions of easyFile software will be rejected by SARS. Check the SARS website for updates and the most current version of easyFile software.

Employer reconciliations don’t necessarily need to be a nightmare. Some timely preparation will go far to make the reconciliation process smoother and less stressful.

If the above article raised any questions in your mind please do not hesitate to contact our office. We look forward to the opportunity to assist you.

This article is a general information sheet and should not be used or relied upon 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 financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE) 

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TAX TERMS USED IN THE MEDIA: DO YOU KNOW WHAT THEY MEAN?

A2_bReading material on the topic of tax does not make for light, relaxing reading. A reader can easily feel lost if he/she does not keep up to date with the meaning of the new terms and phrases which are introduced constantly by SARS. This article aims to explain the meaning of a few tax terms/phrases that readers might come across in tax-related reading material.

Tax term 1: “Admin penalty”

“Admin penalty” is the shortened version of “Administrative Non-Compliance Penalty”. An admin penalty must be paid by a taxpayer to SARS if the taxpayer does not comply with their responsibilities set out under South African Tax Law. Currently admin penalties are only levied by SARS when a taxpayer submits their tax return late or do not submit a tax return at all.

SARS will charge an admin penalty every month that a tax return remains outstanding. The first thing a taxpayer must do in this case is to submit the outstanding tax return(s) so that SARS will stop charging the admin penalty.

Admin penalties can be a fixed amount as well as based on a percentage and is determined by the amount of a taxpayer’s taxable income.

Tax term 2: “Verification” versus “Audit”

Both these processes aim to ensure that each taxpayer pay their fair share of taxes.

The verification process starts when SARS informs a taxpayer in writing that his/her tax return was selected for verification and requests the submission of supporting documents and/or a correction of the tax return. If the taxpayer does not respond to this letter within 21 business days, SARS will send a second letter.

The audit process will start if the taxpayer does not respond to the second letter either. A SARS auditor will call the taxpayer and request that the taxpayer submit the relevant documents after at least 5 business days.

If the taxpayer does not respond to the auditor’s request, SARS will assess the tax return based on the information in their possession.

Tax term 3: “Deferred arrangement”

If a taxpayer is unable to pay his/her tax debt to SARS, SARS may allow the taxpayer to pay the tax debt later or to pay if off in instalments. SARS will charge the taxpayer interest on the outstanding balance of the tax debt.

The taxpayer must apply for a deferred arrangement and SARS may approve or decline the application.

If a taxpayer does not keep to the deferred arrangement as agreed with SARS, the arrangement is automatically cancelled and the outstanding tax is due as per normal terms.

Tax term 4: “Small business corporation” (SBC)

A taxpayer who qualifies as a SBC may pay turnover tax at reduced tax rates based on taxable turnover if the taxpayer chooses to be subject to turnover tax. Turnover tax replaces, amongst others, the following taxes: income tax, provisional tax, VAT, capital gains tax and dividends tax.

The following are some of the requirements that must be met in order to qualify as a SBC:

  • Taxable turnover must be R1 000 000 or less for the year of assessment.
  • The taxpayer must be an individual, partnership, close corporation, private company or a co-operative.

    For close corporations, private companies and co-operatives the following additional requirements must also be met:

  • All the shareholders or members must be natural persons for the duration of the year of assessment.
  • None of the shareholders/members may hold any shares or membership, or have any interest in the equity of any other close corporation, private company or co-operative.

The above terms/phrases are only a few of the many that are used in the media. Staying up to date with tax lingo requires a concerted effort from the reader’s side as new terms are introduced and current terms changed or improved by law constantly.

If you would like more detailed information on the meaning of the above or any other tax terms, please contact your tax practitioner.

This article is a general information sheet and should not be used or relied upon 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 financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE) 

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HOW TO DETERMINE THE SELLING PRICE WHEN BUYING OR SELLING A SMALL BUSINESS

A1_bIt is difficult to determine the selling price of a small business as such a valuation is very subjective. If you are buying a small business, you want to pay as little as possible, and if you are the seller, you want to sell your business for as much as you can get. Ultimately the buyer and the seller must meet each other somewhere in the middle regarding the value and price of the small business.

The seller of a small business is often emotionally attached to their business. However, emotions can’t be taken into account in the valuation process of the business.

There are a number of valuation methods which can be used to value a small business. It is a good idea to use more than one or even all the methods below to ensure as accurate a valuation as possible.

The value of a small business can be calculated using the following methods:

Rule of thumb

The rule of thumb is a quick calculation and is a good place to start to get an idea of the worth of a small business. However, it can’t be the only valuation method used as it gives only a very broad indication of the value of a business.

The selling price is calculated as the annual positive cash flow of the small business multiplied by 4.

Liquidation value

The liquidation value gives an indication of what a small business is worth should the owner be forced to close the doors and sell all the assets in less than 12 months.

To determine the liquidation value, the total liabilities are deducted from the total assets of the business.

Future value

The future value formula determines the current value of a small business taking into account current income and an estimated growth percentage for the future, and is calculated for a certain time period e.g. for the next three years.

The current value of income generated by a small business is multiplied by the estimated growth percentage. The estimated growth percentage is very subjective and based on a number of variable assumptions. Generally the future value method is not considered to give an accurate reflection of the value of a small business.

Income multiple

The value of a small business is calculated on the basis of owner benefits multiplied by an income multiple and determines the amount of money a buyer can reasonably expect to make from a small business in the near future.

The income multiple for a small business usually falls somewhere between 1 and 3 depending on the type of trade and the business’s track record. The higher the owner benefits (see below for calculation), the closer to 3 the multiple will be. If the success of a small business is strongly linked to the owner, e.g. a one-man business or a consulting practice, the income multiple will be closer to 1 as the clients/customers can easily follow the seller and cease to be clients of the business.

The owner benefits are calculated as follows:

Profit before tax expense R xxx
Plus: Owner’s salary including fringe benefits and other perks R xxx
Plus: Interest R xxx
Plus: Depreciation R xxx
Less: Allocation for capital expenditure (R xxx)
Owner benefits R xxx

Professional valuation

Hiring a professional to do a valuation for a small business is expensive and if they don’t have a good feel for the industry in which the small business operates, you might be able to do as accurate, or more accurate, a valuation if you do the valuation yourself, without the additional costs.

In addition to the value of a business, you will also want to calculate the expected return on investment for the purchase price you pay.

Keep in mind that valuations are not a scientific process but based on many subjective assumptions. It is therefore best to use as many different valuation methods as you can to get a feeling for what a small business is reasonably worth.

This article is a general information sheet and should not be used or relied upon 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 financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE) 

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