Sunet Nel Accountants receives a lot of questions regarding Accounting and Tax related queries. See below for some of our most common FAQ's.

What is the difference between VAT and TAX?
VAT is payable / receivable on a monthly, two monthly or six monthly bases, according to the business’ monthly turnover.  It is determined by subtracting your vat expenses from your vat income.  When you have a Capital expense you can claim the vat portion back as well.  And farmers can request an additional entry on their vat returns for their Diesel purchases. TAX is your Income tax.  It is payable / receivable once a year and all the provisional tax you paid throughout the year are subtracted from the assessment.  Income tax is calculated from your business’ Financial statements or if you are an individual we will need your IRP5’s or IT3’s from your work place, Annuity fund IT3(b), Medical Aid IT3(b) and any other additional medical expenses invoices as well as a logbook if you receive a travel Allowance.

What are Capital expenses?
When your purchase exceeds R1000.00 and it is bought to generate more income for your business it is a Capital expense.  E.g. When a Retail business buys a vehicle for deliveries, computers, fax machines, tractors, etc.

What is the current Diesel rebate on the VAT return and how is it calculated?
The current rebate on Diesel is 118 c/l. It is calculated with the total amount of liters bought throughout the VAT period, 80% of the amount of liters times 118 c/l will equal the amount receivable for the VAT return in cents.

What is the difference between an IRP5 and an IT3?
An IRP5 is received from your employer stating the total amount of your salary received throughout the year, including the amounts deducted for pension, medical aid, PAYE and other deductions that appeared on your pay slips – only PAYE payers. An IT3 is received from employers but is only issued to employees not paying PAYE.

Who is Cipro?
CIPRO: Companies and Intellectual Property Registration Office.  In other words, Cipro is the Registration office of all Companies and Close Corporations.  Every year companies and CC’s are liable for a registration fee to be able to trade as a company or cc.

What is the difference in tax when buying a vehicle on a lease or a hire purchase?
When buying a vehicle on a hire purchase the depreciation and interest can be claimed as an expense and be deducted from your yearly profit. When buying a vehicle on a lease only the installments are allowed as an expense and the depreciation and interest must be added back onto your yearly profit.

What is the difference between Income tax and Turnover tax?
Income tax is calculated from your business’ Financial statements using the profit amounts at year end and the 2 or 3 provisional tax payments can be deducted from the assessment.  However, if your Financial statements shows a loss, no income tax is payable and the assessed loss can be deducted from future profits. Turnover tax is calculated from your total amount of Income for the year of assessment whether the Financial statements shows a profit or a loss. Turnover tax is only for small businesses with a turnover of R1million or less and replaces income tax, provisional tax, capital gains tax and secondary tax on companies.  However, when changing from Income tax to Turnover tax, SARS will deregister your VAT number because your income is less that R1million and all the Capital purchases’ vat portion that was claimed the previous five years must be paid back to SARS.

Documentation needed for the registration of TAX, VAT and PAYE:
Proof of bank details (bank statements),
Business address (water and electricity account),
Copy of all the Members’ ID documents,
All the Members’ Income tax numbers and
The CK documents of the business.

Documentation needed for the registration of a Close Corporation:
5 possible names for your business
A deposit
The ID documents of all the potential members and
Percentage of membership for each member

When will the penalties system from SARS become effective?
The penalty system will come into effect on the 23 November 2009. That means non-compliant taxpayers will receive a letter from SARS (known as an ITP34 Penalty Assessment Notice) informing them of what is outstanding, the penalty amount that must be paid, the due date and the payment procedure.

What does a taxpayer do if they do not agree with SARS?
Provision is made for a Request for Remission of the penalty if the taxpayer wants to dispute the administrative penalty that was levied.  In such a case, the appropriate Request for Remission form (RFR) can be filled in by the taxpayer.  However, such an application will only be considered if the non-compliance has been remedied on or before the due date mentioned in the notice of the penalty (I.e. if the outstanding return/s have been submitted).

What happens if I have lost my old tax returns?
You urgently need to request a new income tax return via e-Filing or from your nearest SARS branch or call 0800 00SARS and one will be posted to you, or become our client and we will sort it out on your behalf.

Can the loss incurred out of a “hobby” be set off against my salary?
Ring fencing of assessed losses

In December 2003 amendments to the Income Tax Act, Section 20A, were introduced to “ring-fence” losses from any activity/ trade which SARS deemed to be more in the line of a hobby than a real business. Taxpayers in the higher tax brackets have been using these trades to reduce the tax paid on other business income or salaries.
As usual the legislation is complicated, badly structured and difficult to interpret. The flowchart below may assist in deciphering how it impacts upon you. The first thing to note is that it only applies from the tax year we are now in ie. February 2010, and it only applies to individual taxpayers whose total income from other sources is at the top marginal rate – currently R525 000.
“Full time” farmers are excluded from the list of “suspect” trades. In my opinion a person can only do one thing “full time” and this wording is likely to lead to debate, court cases and eventually a rewording of the act to a more clear definition. The intention is that you must be seen to be doing more than having a few horses or chickens in your back garden. Other “suspect” trades are sport; dealing in collectibles; renting of residential accommodation, vehicles, aircraft or boats, unless at least 80% of the accommodation, vehicle, aircraft or boat is used by non-relatives for at least half of the year; animal showing, farming or animal breeding unless it is “full time”; any form of performing or creative arts; any form of gambling or betting.
If you make a loss from a “suspect” trade you should apply to SARS for a directive some time during the current tax year. To this you should attach a business plan which demonstrates that it is a trade rather than a hobby and has a reasonable prospect of making a profit. If SARS are happy with this they will grant you a directive which allows you to claim the loss for at least 6 years. After that if you make a loss in 6 out of any 10 years (starting with 2005) that trade will then be “ring-fenced”, i.e. the loss may not be offset against any other income. This ring-fencing will be permanent.
Even if your trade is not on the suspect list, you will have a problem in 2007 if there is a loss for three out of five years starting with 2005. You will then need to apply for a directive, prove there is a reasonable prospect of making a profit and actually make a profit in at least one out of every six years starting in 2005. General opinion is that farming will not be included in this and, due to its nature, will have a longer time frame in which to make a profit.
The taxpayers most likely to suffer are those with holiday accommodation or part time farming operations on which they claim a loss. Opportunities for tax planning will still exist through the use of a CC or company for the other taxable income. Also, it is not specified how much profit must be made in one out of six, or three out of five years, so it might be possible to continue deferring the ring-fencing by showing a small profit in these periods.

Income Tax Act, 1962 (Act 58 of 1962)
Chapter II: The Taxes
Part I: Normal Tax
20A. Ring-fencing of assessed losses of certain trades

1. Subject to subsection (3), where the circumstances in subsection (2) apply during any year of assessment in respect of any trade carried on by a natural person, any assessed loss incurred during that year in carrying on that trade may not be set off against any income of that person derived during that year otherwise than from carrying on that trade, notwithstanding section 20(1)(b).
2. Subsection (1) applies where the sum of the taxable income of a person for a year of assessment determined without having regard to the other provisions of this section and any assessed loss and balance of assessed loss which were set off in terms of section 20 in determining that taxable income, equals or exceeds the amount at which the maximum marginal rate of tax chargeable in respect of the taxable income of individuals becomes applicable, and where—
   a) that person has, during the five year period ending on the last day of that year of assessment, incurred an assessed loss in at least three years of assessment in carrying on the trade contemplated in subsection (1) (before taking into account any balance of assessed loss carried forward); or
   b) the trade contemplated in subsection (1), in respect of which the assessed loss was incurred constitutes—
   i) any sport practiced by that person or any relative;
   ii) any dealing in collectibles by that person or any relative;
   iii) the rental of residential accommodation, unless at least 80 per cent of the residential accommodation is used by persons who are not relatives of that person for at least half of the year of assessment;
   iv) the rental of vehicles, aircraft or boats as defined in the Eighth Schedule, unless at least 80 per cent of the vehicles, aircraft or boats are used by persons who are not relatives of that person for at least half of the year of assessment;
   v) animal showing by that person or any relative;
   vi) farming or animal breeding, unless that person carries on farming, animal breeding or activities of a similar nature on a full-time basis;
   vii) any form of performing or creative arts practiced by that person or any relative; or
   viii) any form of gambling or betting practiced by that person or any relative.
3. The provisions of subsection (1) do not apply in respect of an assessed loss incurred by a person during any year of assessment from carrying on any trade contemplated in subsection (2)(a) or (b), where that trade constitutes a business in respect of which there is a reasonable prospect of deriving taxable income (other than taxable capital gain) within a reasonable period having special regard to—
   a) the proportion of the gross income derived from that trade in that year of assessment in relation to the amount of the allowable deductions incurred in carrying on that trade during that year;
   b) the level of activities carried on by that person or the amount of expenses incurred by that person in respect of advertising, promoting or selling in carrying on that trade;
   c) whether that trade is carried on in a commercial manner, taking into account—
   i) the number of full-time employees appointed for purposes of that trade (other than persons partly or wholly employed to provide services of a domestic or private nature);
   ii) the commercial setting of the premises where the trade is carried on;
   iii) the extent of the equipment used exclusively for purposes of carrying on that trade; and
   iv) the time that the person spends at the premises conducting that business;
   d) the number of years of assessment during which assessed losses were incurred in carrying on that trade in relation to the period from the date when that person commenced carrying on that trade and taking into account—
   i) any unexpected events giving rise to any of those assessed losses; and
   ii) the nature of the business involved;
   e) the business plans of that person and any changes thereto to ensure that taxable income is derived in future from carrying on that trade; and
   f) the extent to which any asset attributable to that trade is used, or is available for use, by that person or any relative of that person for recreational purposes or personal consumption.
4. Subsection (3) does not apply in respect of a trade contemplated in subsection (2)(b) (other than farming) carried on by a person during any year of assessment where that person has, during the ten year period ending on the last day of that year of the assessment, incurred an assessed loss in at least six years of assessment in carrying on that trade (before taking into account any balance of assessed loss carried forward).
5. Notwithstanding section 20(1)(a), any balance of assessed loss carried forward from the preceding year of assessment, which is attributable to an assessed loss in respect of which subsection (1) applied in that preceding year or any prior year of assessment, may not be set off against any income derived by that person otherwise than from carrying on the trade contemplated in subsection (1).
6. For the purposes of this section and section 20, the income derived from any trade referred to in subsections (1) or (5), includes any amount—
   a)  which is included in the income of that person in terms of section 8(4) in respect of an amount deducted in any year of assessment in carrying on that trade; or
   b)  derived from the disposal after cessation of that trade of any assets used in carrying on that trade.
7. Notwithstanding anything to the contrary contained in this Act, all farming activities carried on by a person shall be deemed to constitute a single trade carried on by that person for the purposes of this section.
8. Where the provisions of subsection (2) apply during any year of assessment in respect of any trade carried on by a person, that person must indicate the nature of the business in his or her return contemplated in section 66 for that year of assessment.
9. For the purposes of subsections (2)(a) and (4), any assessed loss incurred in any year of assessment ending on or before 29 February 2004 shall not be taken into account.
10. For the purposes of this section—
    a) ‘assessed loss’ means ‘assessed loss’ as defined in section 20(2); and
    b) ‘relative’ in relation to a person means a spouse, parent, child, stepchild, brother, sister, grandchild or grandparent of that person.

For further queries please do not hesitate to contact us and we will gladly be of assistance.