Chapter 3 - Business Entities Flashcards
The trade shall not be considered independent
If it has to be performed mainly at the premises of the person from who payment is received and is subject to his/her supervision either as to the way in which the work is performed or to the number of hours that are worked
Supervision and control are only factors indicating employment if
The person is supervised or controlled mainly at the premises of the employer
The control as to the manner of work usually means
A close managing of the employee’s time
Where a person has three or more full time employees who are not connected to him
He is deemed to carry on an independent trade
What test is used by SARS to determine the extent to which a person is under an employer’s control?
The Dominant Impression test grid
Does the control have to come directly from the employer?
No , an employer can hire a consultant for the specific purpose of providing supervision or control.
The reference to being engaged on a full time basis in rendering the service to means
That the employee must spend all his/her time on that part of the business of the company of rendering the services.
Why is it important to distinguish between an employee and a independent contractor?
Because it doesn’t only affect the payer’s responsibilities to deduct employee’s tax , but the payee may also be stopped from deducting most of his operating expenses from his income if he is a common law employee
The various taxpayers are
- Sole traders
- Partnerships
- Companies
- Trusts
- Farmers
Sole trader
Is not a separate legal entity and is therefore not a separate taxpayer.
Once a sole trader’s taxable income has been determined
His/her tax liability is calculated using the tax table ( used for individuals) and thereafter the REBATES are deducted
Sole traders pay tax on their profits
In terms of the provisional tax collection method
A partnership is not a separate legal entity therefore
Not a separate taxpayer
The partnership is not assessed as a taxpayer
But the individual partners are
The partners in a partnership pay tax on the partnership profits according to
The provisional tax collection method
Companies include
- Small business corporations
2. Close corporations
Definition of company
- South African companies
- SA public entities-universities
- Foreign companies
- Co-operatives
- SA charities
- Foreign collective investment schemes
- A collective investment scheme
- Close corporations
A company’s year of assessment is the same as its
Financial year
Unlike individuals and trusts , a company’s year end
Need not end on the last day of February
New tax rates announced in the budget speech take affect immediately for companies with year ends falling
Within a period from 1 April of that year to 31 March the next year.
The amendments to the Act are generally only effective for year ends
From 1Jan to 31 December of the following year, unless provided otherwise in the Act
All companies which are not PUBLIC Companies
Will be regarded as PRIVATE COMPANIES. A CC is regarded as a Private company
The profits of the company are distributed to shareholders by means of a
Dividend
Specified date
This is the last day of the year of assessment of the company
Equity shares are
- Shares in a company
- excluding any share that doesn’t carry the right to participate beyond a specified amount in a distribution
A member’s interest in a close corporation is
An “equity share”
Preference shares issued will only be equity shared if
- They participate in profits to a unlimited extent
2. They participate in the distribution on liquidation.
Companies automatically classified as public companies
- PBO
- Co-op
- Insurance
- Any public utility company
- Gold and diamond mining
- Non resident ships and aircraft companies
Dividends tax is levied at a rate of
15% of the amount of ‘any dividend paid by any company other than a HQ company ‘
Dividends tax is a withholding tax that is
Withheld by the company before paying the net amount ( dividend declared- dividends tax ) over to the shareholder
Because the def of a company and the def of share includes a member’s interest in a CC . Any distribution of profits by a CC
Will be subject to dividends tax
A SBC IS DEFINED AS
- Any CC , Co-op or private company
- All shareholders are Natural persons ( for the entire year of assessment)
- The GI does not exceed R20 mil
- None of the SH or Members at any time during the YOA holds any shares/any interest in the equity of any other company
Permitted shareholding for SBC shareholders are
- A listed company
- Any portfolio of a collective investment scheme
- <5% social/consumer co-op
- <5% primary savings co-op
- Venture capital company
- Friendly society
- Any company
- hasn’t ever owned assets >R5000 - Any company liquidate, windup and deregister
Investment income of a SBC CAN NOT EXCEED
20% x ( revenue receipts &accrual + capital gains)
Investment income is defined as
- Dividends, royalties, rental from immovable properties, annuities etc
- Proceeds derived from investment/ trading in financial instruments, marketable securities or immovable property
Personal service is defined as
Any service in the field of accounting, actuarial science, architecture, auctioneering , auditing ,etc
SBC also qualifies for
- 100% allowance- manufacturing plant and machinery
- Normal wear and tear allowance
- 50:30:20 write off (i.e. Over 3 years ) in respect of other assets
There are 2 mayor benefits of being a SBC
- The tax rate of a SBC is considerably lower than that of a normal company.
- The immediate write off(100%) of all plants and machinery used in manufacturing in the year of assessment in which it is brought into use for the first time .
- Accelerated write off allowance (50:30:20)
Close Corporations
- body corporate
- close corporations act
- separate legal entity
- 1-10 members
- membership restricted to Natural persons and trusts
A CC can be classed as a
- SBC
- EMPLOYMENT COMPANY
For tax purposes, a micro business
Is a special type of enterprise.
MB can be companies or sole traders
Turnover tax
Available only to all entities that qualify as MB
Substitute for income tax, capital gains, VAT , dividends tax
TURNOVER TAX FOR MB
Why was turnover tax introduced?
Mainly to reduce the tax compliance burden of small businesses
Benefit for being micro business
The profits are not subject to NORMAL TAX.
- -This means that it is not necessary to record trading stock at the year end .
- not necessary to keep records of expenses
- taxed on receipt basis , not accruals.
Section 48 C of the income tax act , regarding MB includes the following provisions
- If a amount is received and included in a reg MB’s taxable turnover, it can not b taxed again.
- If an amount accrues to a reg MB , +would’ve been included. But the. Business is no longer reg only 10% will be included
- When deregistered - trading stock on that date is included as opening stock at the beginning of that year of assessment, since it didn’t receive the deduction upon purchase
Can trusts qualify as MB?
No they can not
Main requirement for MB
The qualifying turnover for the YOA must not exceed R1 mil
Qualifying turnover for MB is defined as
1 total receipts
2. From carrying on business activities
3. Excl. any # of a capital nature
4. Excl. any # exempt from tax
- small business funding
- # received/ accrued from
GOV grantsIf , for example a capital receipt pushes the person’s receipts over 1 million
It does not affect his registration as a MB
The turnover limit for qualifying turnover is proportionately reduced
If the person carries on business for less than 12 mnths in the year.
This is done by taking into account the number of full months that business was NOT carried on.
Once the entity qualified as a MB , the next step is
To calculate the taxable turnover
Exclusions for taxable turnover for MB
- For NP - investment income
- Small business funding
- Government grants
- Amount previously subjected to the normal provisions of the income tax act
- Refunds
Investment income includes
- Rental on immovable property. Rental on movable is not included.
- Dividends and interest
- Proceeds from the disposal of financial instruments
- Royalties, annuities and similar income
A micro business pays tax called
Turnover tax on its taxable turnover.
Other taxpayer’s tax is calculated on
Taxable income
Micro businesses do not pay according to the provisional tax collection method. They are however
Subject to interim payments, and pay tax twice a year
Why are trusts established?
As a vehicle for tax and estate planning purposes
What a trust does with assets or profits depends on what is found in the
Trust deed
The trust deed is a
Legal doc that is drawn up by the original donor to the trust and it contains the set of rules that governs the trust.
Trusts have also been used to limit a taxpayer’s tax liability but for this reason
Certain provisions in the Act have been created to ensure that tax avoidance does not occur.
A trust is a separate legal entity and
Is therefore a separate taxpayer
The profit earned by a trust
Can either be held in the trust OR
be distributed to the beneficiaries of the trust.
A trust is taxed at a flat rate of
41%
The Income distributed by a trust to a beneficiary ( if the beneficiary is an individual)
Will be taxed as taxable income of the beneficiary using the tax tables
Farmers
Special provisions relating to the calculation of taxable income and tax payable.
Because of the importance of farming
Special tax provisions apply to apply
Salaried taxpayers make provision for their annual tax liability by
Paying employees tax on their salary on a monthly basis
Does employees tax differ from income tax ?
No , it is merely a method used by SARS to collect the tax that is due to them
In case of employee tax who is responsible for deducting, collecting and paying over the tax
The employer is responsible
Provisional tax is not another tax but rather
A method of collecting taxes
