DEDUCTIBLE EXPENSES YOU DESERVE
Hey, self-starter! SARS recognises that you’re doing a good thing for our economy, so they allow you to reduce your taxable income (which means you end up paying less tax) by deducting legitimate business expenses.
Basically, you can claim deductions for any expenses incurred in the production of income. The key to claiming these costs is good records management, which means keeping proof of all your business expenses, keeping a travel logbook, and filing all slips and invoices. If this sounds like a pain, it’s because it is. Seriously, just pay a professional to do it for you.
- Home-office expenses
If you work from home, don’t forget that you can claim home-office expenses. But keep in mind that you can only claim for the portion of the house that you work in. Literally, you have to measure the floor space of your office area and use whatever percentage it comprises of the total floor space.
You can’t include the bathroom, kitchen, ‘board’/dining room, etc., as part of your office space, even though you are likely to use them while working. Still, it’s advantageous to claim back a percentage of things like your levies, rates, water bill, electricity bill and other expenses you incur while doing business at home.
- Stay organised and file everything
You heard it from me: SARS treats sole props who work from home like they should be treating all the high-net-worth individuals who go out of their way to avoid paying their dues.
Little low-profile me is audited almost every year, so I’ve got better at ensuring that I’m prepared for the persecution.
• I keep a logbook of all my mileage to help me track (and demonstrate) my travel expenses. I keep as organised as possible throughout the year by digitally filing my receipts and invoices monthly (okay, not always monthly, but it’s worth it to try).
• I download my bank statements monthly to track my income and categorise expenses into personal and business.
• I have a spreadsheet with each expense category and other deductibles, with formulas to calculate my monthly taxable income.
• I get my bookkeeper to compile all my returns. Find a system or software that works for you and consider outsourcing most (if not all) of the process to a professional. Yes, it costs a bit of money, but if you’re spending too much time on your financial and tax admin, you’re not spending enough time focusing on what you do best.
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COULD YOU QUALIFY FOR TURNOVER TAX?
I learnt about turnover tax a few months ago and started frothing at the mouth at the thought of ditching the entire previous section of ever-dreary expense filing. Unfortunately, it turns out I had to forget about it and swallow my froth back down, but your business may well qualify, so read on.
- What is turnover tax?
Turnover tax is a simplified (!) tax system in which tax is calculated against the turnover of the business instead of a percentage of the profit. Remember Grade 8 accounting? Nope, me neither.
QUICK GLOSSARY FOR NORMAL PEOPLE
Turnover = Total amount paid into your bank account as a result of your business activities
Profit = Income less expenses
The main benefit of turnover tax is that you don’t have to be quite as anal about keeping detailed records of your expenses, as your tax is calculated based on your turnover only. The only time turnover tax may not be beneficial to you is when you have high tax-deductible business expenses situations, however, the tax rates for turnover tax will end up lower than paying standard income tax rates, not to mention the blessing of less record-keeping.
- Who is eligible for turnover tax?
Sole props, partnerships or companies with an annual qualifying turnover of less than R1 million a year may be eligible for turnover tax. ‘Yes! That’s me,’ you might say. But surely there’s a catch?
- Here are the turnover tax eligibility criteria:
? The entity hasn’t sold business assets during the last two years with sales proceeds of R1.5 million or more.
? The entity is not a public benefit organisation or a recreational club.
? The entity is not a labour broker.
? The entity hasn’t previously registered for turnover tax.
? The entity trades as a sole proprietor, partnership, close corporation, co-operative or company with all partners or shareholders registered as individuals throughout the year of assessment.
So far, so good, but here’s the handbrake:
Your income from ‘professional services’ must not exceed 20% of your total receipts during the year of assessment. In other words, 80% of your income must be derived from sources other than professional services, which means a service in the fields of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial-service broking, health, information technology, journalism, law, management, real-estate broking, research, sport surveying, translation, valuationor veterinary science.
Turnover tax (or micro business tax relief) is aimed mostly at small retail businesses (like tuck shops) and was brought in by SARS to extract taxes from these micro businesses without the taxpayers having to keep a record of their expenses.
An entity that provides a service and produces earnings of just under R1 million is not seen as a small business and hence does not qualify for turnover tax.
The plot thickens, however, because no exception applies for businesses rendering professional services that employ three or more full-time employees. As you can see, there are a lot of ifs and probably a lot of grey areas when it comes to qualifying for turnover tax, but feel free to shoot your shot if you think you may qualify.
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- How to register for turnover tax
If you qualify for turnover tax (I’m jealous), you must submit a TT01 form to SARS. The bad news: You’re not able to apply for turnover tax via eFiling, so you’ll have to make an appointment with SARS.
The good news: Once you’ve registered as a turnover taxpayer, you’ll save a lot of accounting administration and perhaps pay less tax too.
Meh news: You’ll still need to submit two provisional returns – one in August, one in February – based on your estimated turnover for the year, as well as a final annual tax return (using your actual turnover).
You will also need to do some record-keeping:
• All amounts received.
• Dividends declared.
• A list of all assets with a cost price of R10 000 or more.
• A list of all liabilities exceeding R10 000.
That’s all I know, folks, but at least you know more than I did for the last six years. If you think turnover tax could work for you, chat with your tax consultant and do a bit of digging based on your unique business circumstances.
VAT stands for value added tax, which is another way the government gains tax revenue by adding an extra 15% to eligible goods and services consumed in the economy.
You’ll see it on almost everything, from this book to your Barista Blend almond milk. In most cases, we don’t pay much attention to VAT because it’s already included in the overall price of the goods we buy.
But I’m sure that, like me, you have had the experience of approving a quote for something, having the work done, and then finding an extra 15% surprise on the service provider’s final invoice that you didn’t budget for.
- Do freelancers need to register for VAT?
As always, frustratingly, it depends. Rather than it being based on the structure of the business, VAT registration is based on your business’s income. Small business VAT is mandatory for businesses earning more than R1 million annually. You may also elect to register for VAT voluntarily if your business makes over R50 000 annually.
- How does VAT work?
(A quick summary, because it’s all a bit boring)
• Register via eFiling or make an appointment with SARS (please choose eFiling for the sake of your sanity).
• Charge VAT of 15% on all eligible goods and services.
• Submit VAT returns (and pay what is due) every two months.
- Should you become VAT registered?
If your business makes less than R1 million per annum, isn’t very cash intensive (in other words, you don’t handle large volumes of small cash transactions) and you don’t have regular suppliers charging you VAT that you can claim back, there is no real need to register for VAT.
If you’re not VAT registered but notice that you’re coming close to hitting the R1-million mark, you might want to delay some of your invoicing for the new financial year if you want to avoid doing more accounting than is necessary.
This is an edited book extract from Freelance Like a Boss: How to Escape The 9–5 And Take Control of Your Life (published by Penguin Random House). The recommended retail price is R240. Freelance Like a Boss is available in all good bookstore.
