Archive for year: 2021

“Digital is the main reason just over half of the companies on the Fortune 500 have disappeared since the year 2000” (CEO of Accenture, Pierre Nanterme)

With the increased buzz around 4IR (the Fourth Industrial Revolution) in the last year particularly, due to lockdowns and “isolated industrialization”, it’s befitting to zoom-in the lens on how SMMEs (Small, Medium and Micro Enterprises) can better embrace and utilise the new operational technologies migration to their advantage.

Words like Big Data, Internet of Things, Block Chain, Machine Learning, etc tie into 4IR and are some of the buzzwords heard with which we are becoming familiar. Since the lockdowns, companies are being forced to embrace, adapt and adopt these changes more than ever.  But just how far along is the implementation of these technology advancements and how much do they impact SMMEs today? Most importantly, how can your business benefit from these advancements?

The South African Context   

 President Cyril Ramaphosa has already announced that the government set up what is called “The Presidential Commission on the Fourth Industrial Revolution”. It is a 31-member commission spearheaded by communication minister Stella Ndabeni-Abrahams. It states that it wants SMMEs to benefit from digital migration, as much as financially possible.

Within the preambles and descriptions of the mandate of the commission itself, the state announced that the project was meant to “make recommendations on interventions to enable entrepreneurship and SMMEs to take advantage of the 4IR.”

Adapt or Die   

Stevens Maleka, currently responsible for Strategic Planning & Monitoring at the Department of Communications and Digital Technologies, points out that the nation is at a point where companies have to either swim or sink, because industries have already picked the 4IR direction. He states that there are business opportunities in the transition, as much as there are cost implications – the secret to effectiveness lies somewhere in the median.

“It is important to note that the scale of investment in the 4IR should have a significant return in the form of economic development and this could lead to the increased investment   in   high   growth   technologies/companies, increased   expenditure   in technologies e.g. tablets, smart watches, and increase   in   exports   of technological services and products to other African countries” he said.

4IR presents business opportunities for SMMEs on the “supply side”

The South African government, through the Presidency’s National Planning Commission, acknowledges that “Although the South African telecommunications market continues to be one of the most developed and advanced on the African continent, there are still gaps on the supply side (encompassing both infrastructural and regulatory issues) that constrain the creation of the affordable backbone and services required to develop a digital economy. To deal with supply-side gaps, ICASA must create a fair, competitive environment for multiple players in the market by publishing the findings of its market review and applying the necessary pro-competitive remedies, in particular with regard to entities enjoying significant market power.”

This in itself presents appealing opportunities for SMMEs as the South African government leans more towards tendering in the public service space.

Impact of 4IR on SMME Staff Complements

4IR has been identified as a potential reason for workforces being drastically reduced. However the pinch is only measured by the size of the business and the nature of the actual enterprise – thus far.

The Small Enterprise Development Agency (SEDA) seems somewhat ambivalent when it comes to the technological impact of the functional switch on workforce within our context, due to the size and gender spread thereof.

It states that “In Sub-Saharan Africa, it is reported that most youth-owned SMMEs have no employees (57.3%), while hardly any (1.5%) have more than six employees and none have more than 20 employees. Interestingly, there is also a gender difference within SMMEs owned by youth. In rural areas, SMMEs owned by youth have slightly lower labour productivity compared to the older age categories; and most youth-run businesses have no employees while hardly any have more than six employees.”

Each SMME’s individual case depends on the factors tabled above, and a blanket approach is not always applicable.

Ask your accountant for tailored advice on how your business can benefit from these developments.

“The more that energy costs, the less economic activity there can be” (Robert Zubrin)

It has been 13 long years since we first experienced load shedding in 2007. Since then, businesses have lost thousands of hours of productivity and significant amounts of money to these “rolling blackouts”.

The situation is not going to improve – more load shedding is predicted, by Eskom itself, for the next five years together with even higher electricity tariffs. Given the impact of load shedding and the high cost of electricity, business owners are well-advised to understand and assess the risks faced in terms of electricity supply and to implement strategies to mitigate this risk.

Impact on companies

In addition to its devastating impact on the economic environment in which companies operate, all businesses that use electricity for machinery, technology and light, experience a loss of production during power outages – even those with backup batteries or generators.

Smaller and medium sized businesses that cannot afford alternative energy solutions are disproportionately disadvantaged. Unable to provide any service, they lose customers too.

Companies also suffer physical damages from load shedding, for example, to computers and other electronic equipment, perishables damaged in refrigerators and raw materials wasted as production cycles are interrupted, and the inability to deliver to clients as load shedding affects traffic flow.

During load shedding, companies are also exposed to a greater security risk, as well as a theft and burglary risk, as security systems and processes are compromised, which, in addition, could affect their insurance cover.

Six ways to mitigate your electricity risk 

1. Stay abreast. Task a team member to stay up-to-date with, for example, a load shedding notification app. This will ensure better planning, so the time when there is power can be maximised. It will also enable staff to minimise damage to equipment by switching off correctly before load shedding commences and to reduce stress by ensuring data is backed up.
2. What is measured is managed. A professional energy audit for your business will allow you to understand your energy needs and usage patterns. This is the first step to finding the right alternative that may simplify and optimise power usage, lower costs and improve business performance.
3. Consider alternative energy solutions, ranging from simple uninterruptible power source (UPS) units and back-up solutions to small or large battery-based and generator solutions, to a variety of solar PV (photovoltaic) solutions. While the initial cost of converting to solar power or purchasing a generator may seem high, the consequential costs of Eskom’s uncertain supply and fast-rising tariffs are also mounting. The cost of solar power equipment, for example, has decreased significantly, making it possible to generate power at a cost lower than the national grid. (This may well be a viable solution particularly if your business operates mainly during daylight/sunlight hours).
4. Explore financing options for funding. The impact of the initial capital outlay for alternative energy solutions can be reduced with the right finance. The alternative energy solutions division at FNB Business for example says it has seen a significant increase in demand for funding for renewable energy solutions, with solar PV being the most popular, and are projecting a significant increase in alternative energy funded solutions by the end of the year.
5. Find out what incentives your company might benefit from. For example, Eskom is planning to test a “critical peak pricing” pilot tariff with qualifying large customers.
6. Another example is Section 12B of the Income Tax Act, which provides for a capital allowance for movable assets used in the production of renewable energy and incentivises the development of smaller solar PV energy projects with an accelerated capital allowance of 100% in the first year for solar PV energy of less than 1MW.

   The companies tax rate in South-Africa is 28%. With this incentive, the value of a new solar power system may be deducted as a depreciation expense from the company’s profits. This means that the company’s income tax liability will be decreased by the same value as the value of the installed solar system. This reduction can also be carried over to the next financial year as a deferred tax asset. This is a direct saving of 28% on the purchase price from day one on the solar system!

“The point to remember is that what the government gives it must first take away” John S. Coleman

If it weren’t for the PAYE system, which forces employees to pay taxes as they earn their money, each of us would be liable for a lump sum payment of between 18% and 45% of our total monthly earnings at the end of each tax year. Pay As You Earn (PAYE) requires that employers deduct money from their employees’ earnings as they earn it, and pay this money over to SARS on the employees’ behalf.

The Basics

To calculate PAYE an employer should multiply an employee’s taxable earnings (which include any fringe benefits such as Disability Benefit Contributions etc.) by 52 weeks, 26 weeks or 12 months (depending on how often they get paid) to get an annual amount. This annual sum is then cross-referenced against the SARS tax tables to calculate annual tax. This is then divided again by the same work period to get the monthly PAYE tax which is then withheld, displayed on your IRP5 and paid over to SARS.

Example

1. Regular monthly income = R10,000.
2. Annual equivalent = R10,000 x 12 = R120,000.
3. Tax calculated on R120,000 as per tax tables = R5,886.
4. PAYE payable on regular monthly income = R5,886/12 = R490.50 p.m.

In cases where an employer pays certain things like medical aid, pension fund, income protection and/or retirement annuity fund contributions on an employee’s behalf, the employer must deduct these costs from the employee’s earnings and take these deductions/credits into account when calculating PAYE and making payment to SARS.  This is where problems begin to creep into the system.

Four Common Problems

1. Travel Costs

   Travel costs are a common area of concern for SARS as they can be miscalculated extremely easily. To determine the portion of the travel allowance that should be included in the calculation of an employee’s taxable income, so as to determine the PAYE, the employer is required to implement an 80/20 rule. Either 80% of their mileage is for business purposes, and the remaining 20% of the allowance is subject to tax. Or, only 20% of their travel is business related, and the remaining 80% of the allowance must be taxed. To determine the percentage to be included in taxable income, accurate logbooks must be provided by employees so that the appropriate 80/20 rule can be strictly adhered to.
   Choosing the wrong rate here can expose an employee to substantially more tax than they should be paying.

2. Disability Benefit Contributions

   Prior to 1 March 2015 Disability Benefit Contributions could be deducted tax free from an employee’s salary thereby reducing their PAYE contribution. Tax was then charged on the pay-out that the employee received in the event of a disability. This changed in March of that year, however, and now the Disability Benefit Contributions are no longer tax deductible and must be counted as being part of the employee’s fringe benefits. The final Disability pay-outs are, fortunately, tax free.

3. Retirement payments

   Retirement payments give rise to another common error in the calculation of PAYE, mainly due to the fact that people are unaware that the system changed, and they are still implementing the old system. As of 1 March 2016, SARS now considers all company contributions to an employee’s retirement and risk benefits as a fringe benefit which should be taxed.

   There are, however, instances in which a pension fund contribution may be tax deductible. This depends primarily on whether the pension fund is “approved” or “unapproved”. Whether a retirement benefit is “approved” or “unapproved” is determined by the way its associated fund is administered as well as the rules of the fund. The broker who administers the fund will be able to tell you whether it is approved or unapproved and it will then be easier to work out just how to treat those deductions for PAYE.

4. Partial tax year

   Because PAYE taxes are calculated on a projected annual earning, those employees who work only part of a year are liable to benefit from a rebate. Effectively a person earning R30 000 a month would pay monthly PAYE based on an annual earning of R360 000 a year. If they only work for six months of that tax year they should then have only been charged for an annual tax earning of R180 000 and will be deserving of a rebate for the six months where they paid too much.

Speak to your accountant for detailed advice. 

• 7 April – Monthly Pay-As-You-Earn (PAYE) submissions and payments
• 23 April – Value-Added Tax (VAT) manual submissions and payments
• 29 April – Excise Duty payments
• 30 April – Value-Added Tax (VAT) electronic submissions and payments
• 30 April – Corporate Income Tax (CIT) Provisional payments where applicable.

“Is there a phrase in the English language more fraught with menace than a tax audit?” (Erica Jong, American novelist)

A number of recent tax developments strongly indicate that taxpayers will face even more intense scrutiny from SARS in this new tax year. Most recently, an additional R3 billion was allocated to SARS in the 2021 Budget Speech “to improve technology, data and machine learning capability and upskill SARS officials to improve the efficiency and effectiveness of SARS”. This will include expanding specialised audit and investigation skills and establishing another specialised audit unit for investigations into the tax affairs of high net worth individuals with highly complex financial structures, which will likely lead to in-depth lifestyle audits.

Two ways in which SARS enforces compliance are through verifications and audits, both of which can now be expected to increase.

Being selected for a verification or audit entails significant risk to a taxpayer, whether individual or corporate. In addition to the time, cost and effort to collate the information, documents and clarifications required, a verification or audit can lead to the levying of understatement penalties varying from 0 – 200% where an understatement occurred, and even harsher penalties are reserved for ‘obstructive’ taxpayers or culpable repeat offenders.

What is SARS verification?

A verification involves the comparison of the information declared on the return to the taxpayer’s financial and accounting records and other supporting documents.

The purpose of a verification is to ensure that a declaration or return fairly and accurately represents a taxpayer’s tax position.

What is the SARS verification process?  

1. SARS sends notification via an official letter.
2. SARS’ letter will require you to either submit the requested supporting documents via eFiling or at a SARS branch or submit a Request For Correction (RFC) within 21 business days.
3. If you do not respond within 21 business days, a second letter will be issued. If you still do not respond within 21 business days, a SARS official will telephonically request the relevant material within 5 business days. If you have still not complied, SARS may raise an assessment based on information readily available or obtained from a third party.
4. A letter requesting further relevant material could be issued if the relevant material initially supplied was not sufficient to finalise the verification.
5. SARS will conclude the verification within 21 business days from the date all required relevant material is received.
6. If the tax position declared is found to be incorrect given the relevant tax legislation, an assessment will be raised.
7. Where no further risk(s) were identified, and no finding was made, a Notification of the finalisation of the verification is sent by SARS.  Where SARS made a finding, a notice of assessment (i.e. an additional or reduced assessment) will be issued.
8. Where further risk(s) are identified, your return/declaration is then referred for an audit and you will receive a Referral for Audit Letter.
9. You can dispute the assessment by lodging an objection within 30 days.

If you were subject to a verification and the verification process has been completed, your tax affairs could still be referred for audit as part of the SARS compliance process.

What is a SARS audit?

A SARS audit goes further than a verification to examine the financial and accounting records and/or supporting documents of the taxpayer to determine whether the taxpayer’s tax position has been correctly declared to SARS. Where the taxpayer made no declaration or did not file a return, the audit is an investigation into the taxpayer’s compliance with the provisions of the relevant tax legislation.

By its nature, an audit is more intrusive than a verification and the scope could be extensive.

What is the SARS audit process?  

1. A formal Notification of Audit is issued to the taxpayer by a specific auditor, indicating the initial scope of the audit.
2. Relevant material or supporting documents requested in the Notification or in a further Notification will differ depending on the tax type and scope of the audit and must be submitted to SARS within 21 business days.
3. Requested relevant material can be uploaded via eFiling, or can be collected or delivered. Arrangements can also be made for an Electronic Forensic Specialist to download the material from your computer systems or for a field audit. The SARS Auditor will issue an Authorisation Letter for a field audit.
4. SARS can request additional or further relevant material throughout the audit. If not submitted, SARS will raise an assessment based on information readily available or obtained from a third party.
5. Progress reports of the stage of the audit should be issued at intervals of 90 calendar days from the date of the Notification of Audit.
6. While SARS undertakes to conclude an audit within 90 business days after all required relevant material is received, an audit could take anything from 30 business days to 12 months, or longer, depending on the complexity, the volumes of transactions and the taxpayer’s co-operation.
7. Where potential adjustments are identified, SARS will issue an Audit Findings Letter indicating the grounds for the proposed assessments. Taxpayers will be given a deadline for response, indicating agreement or disagreement and providing evidence.
8. If SARS believes revised assessment is still required; or where the taxpayer did not respond, the imposition of understatement penalties is considered, whereafter a revised assessment will be raised.
9. If the tax position is found to be incorrect, SARS will provide a Finalisation of Audit Letter detailing the grounds for the assessment (including the amounts) or provide a Finalisation of Audit Letter to conclude the audit where no findings were made.
10. Taxpayers can dispute the assessment by lodging an objection.

Note that if, in your original submitted return, you anticipated that a refund might be due, the refund will not be paid out while the verification is in progress or during the execution of the audit process.

What to do – and what not to do

• Stay prepared – Any taxpayer can be selected by SARS, once a declaration or return has been submitted for verification or audit “for the purpose of proper administration of tax”, including on a risk basis. Taxpayers may also be selected for audit on a random or cyclical basis. Even tax-compliant companies and individuals are regularly audited despite getting clean audits every year.
• Keep correct and accurate records – Speak to a professional to ensure compliance with legislative requirements regarding the type of information that should be retained, bearing in mind that SARS can also obtain relevant material from any third party, and – if relevant material is not supplied by the taxpayer – can raise an assessment based on information readily available or obtained from a third party.
• Act immediately – When you receive notification of verification or audit, immediately contact your accountant. Then, as soon as possible, but certainly within the 21 days granted, make contact with SARS.
• Work with the SARS auditor to ensure your personal or business and commercial realities are understood and that misunderstandings or flaws in the analysis of the auditor are eliminated. As SARS notes: “Taxpayers found to be obstructive could face higher penalties…”.
• Call in expert assistance early – The knowledge and assistance of a trusted tax advisor can ensure that verification and audit findings do not progress unnecessarily. The importance of involving a qualified and capable advisor at the earliest stage of the process – rather than when an objection has been rejected or even later in the process – cannot be overstated.
• The law places obligations on SARS in terms of procedural compliance and provides protection for taxpayer’s rights. Failure by SARS to comply with these obligations may render assessments unlawful and could create grounds for objection in a tax dispute. A tax specialist will be able to advise.
• Also consider tax risk insurance designed to protect against the risks associated with an audit from SARS. If a taxpayer is selected for a SARS tax audit, the insurer will appoint and pay for a team of tax professionals to defend the audit.
• At all times, taxpayers can approach the Voluntary Disclosure Unit to make a voluntary disclosure. Be certain to obtain expert guidance and to understand all the implications before doing so.

Taxpayers with complicated declarations or returns should ask their accountant to assist them in preparing for the likelihood of verifications and audits, and successfully completing a verification or audit when selected. Similarly, where penalties and interest have already been imposed, taxpayers may need expert assistance to successfully complete the process of objecting, particularly if the objection is submitted after the prescribed due date.