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Making the Local Business Section Lekker

25 July 2017   (0 Comments)
Posted by: Author: Charne van der Walt
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Author: Charne van der Walt (info@lemons.co.za)

A guide on how to complete the Local Business, Trade and Professional Income section of the ITR12. Although this guide is aimed at tax practitioners, taxpayers will also benefit from knowing what they should expect of their practitioners.

Who is the section applicable to?

 

The Local Business, Trade and Professional Income section of the ITR12 is applicable to sole proprietors, partners in a partnership, and those who earn any professional, freelance or business income that accrues to their own account.

What you need in your Local Business section starter pack

 

Before you can get started with this section, there are four important aspects that you should consider:

 

1. If you are a practitioner, make sure that you are completely comfortable with completing this section on behalf of your clients. If not, do not offer the completion of this section as part of your tax services, until you have gained the necessary knowledge and experience. If you are a taxpayer, it is best to consult a tax practitioner (unless you are an expert) due to the complexities of this section. To successfully complete this section, you should be able to:

  • Set up and/or read financial statements
  • Handle a SARS verification or audit with confidence
  • Competently submit an objection within the prescribed time period (objections are necessary if any income or expense declarations have not been allowed by SARS according to your interpretation of the information)

2. You should have a software or manual administrative system in place to track:

 

When returns were submitted

  • Whether there is a verification on the return
  • Whether such verification was successful and, if not, why not?

 

3. You need a detailed understanding of what information forms part of the Local Business section and what does not. This is important whether you are preparing the information yourself or are processing the information received from a client.

 

4. Tax practitioners should carefully attend to SARS verifications or audits. Doing so will minimise corrections and objections.

 

Understand the information involved

 

Unique identifier

The Local Business section starts out with a short description of the business as well as a “unique identifier”, which you can get from the previous year’s assessment. If it is the first tax year of a new business, leave the unique identifier blank and SARS will either allocate a number or keep it blank on the assessment. If a number is allocated, continue to use this number for every tax year that follows. Each individual trade or separate business must be completed separately with its own unique identifier. If a taxpayer conducts more than eight trades, then add the totals of the similar trades together.

 

What to do with turnover earned for which IRP5s were issued

In some cases, clients earn turnover income which is listed on an IRP5. For example, the taxpayer might be a sole proprietor who is on the payroll of one or more of his or her clients, and tax was deducted from the invoice which the taxpayer issued to his or her client.

 

In such cases, the IRP5 income must not be included in the "Turnover/Sales" part, but must instead be added in the next entry, which is labelled as Income reflected on an IRP5/IT3(a) regarded to be Trading Income. This will result in the following:

  • The relevant IRP5s will show on the assessment as employment income, but will also be deducted again in the same section, resulting in a nil taxable amount.
  • The relevant IRP5s will be included in the calculation of the profit or loss of the local business section.
  • This is necessary to do because, if the business owner earns most of his or her income via IRP5s, the Local Business section may result in a trade loss which can be, in some circumstances, ring-fenced by SARS.

Always request hard copy IRP5s from your clients, even if they appear automatically on eFiling. This will enable you to check that all the IRP5s are reflected and are correct on eFiling. It also serves as supporting documents when a verification is requested.

 

Make sure that all applicable income is declared

Unless income is free (such as inheritances) or received as a tax-free donation, it must be declared as business income if earned in cash or in the taxpayer’s bank account for the relevant tax year. In certain cases, refundable deposits for work to be done in the next tax year can be excluded from the income and declared in the next tax year’s return.

 

Taxpayers often forget about income that they receive which they do not consider taxable. To avoid this, request the clients’ bank statements, especially where your practice is not responsible for booking the statements or where you only receive excel summaries from clients.

 

Important issues regarding deductible expenses

There are a number of important points that you should consider when claiming expenses as deductions against business turnover or sales:

  • Certain expenses are used for both personal and business purposes, for example, cell phone expenses. This is called dual-purpose expenditure. The correct percentage or portion must be claimed. This percentage should be indicated to SARS when there is a verification. It is essential that taxpayers keep supporting documentation for these expenses. For example, where the taxpayer claims travel expenses for a trip overseas, the relevant records should include the itinerary and proof of appointments. SARS wants claims to be reasonable and the taxpayer or tax practitioner must prove that the claims are exactly that.
  • Make sure that you know under what circumstances expenses are deemed as capital expenses, such as the acquisition of land and buildings (including transfer costs), goodwill, expenses to eliminate competition and even some legal expenses.
  • All vehicle-related expenses must include a logbook that indicates both private and business kilometres. The pro rata business portion will be applied to expenses such as vehicle fuel, repairs, licence fees, parking and toll gates. Logbooks that only contain the business kilometres are easily questioned during SARS verifications.
  • Short-term insurance expenses taken out in the taxpayer’s name, and not in the company’s name, must be split accordingly. For example, you can claim part of the premium that you pay to insure the contents of your home as a business expense at the home office ratio, the vehicle premium according to the business kilometres ratio found in the logbook and the business all risk equipment (for example, laptops) at the business use percentage (if not 100%).
  • It must be clear that the expense is related to the generation of the sales or turnover and is a valid claim. For example, if the taxpayer wants to claim clothing as a business expense, it will be difficult to persuade SARS that a wedding photographer needs a new suit for a client’s wedding. However, if the taxpayer is an estate agent in need of a pair of rubber boots for walking around farmland when doing valuations, it will be easier to convince SARS that it is a valid claim.
  • Taxpayers must prove that they have paid the expense themselves in the relevant tax year. Keep both the invoice or cash register slip as well as the proof of payment.

Get the home office expense claims right

  • If the taxpayer works from home, only claim the pro rata space of a dedicated office which may not be used for any other purpose, calculated as a percentage of the total square meterage of the dwelling (including the garages). This percentage can be applied to home-related expenses, such as rent, electricity, cleaning and security.
  • Ask the client to send you photographs of the dedicated area to make sure it will pass a claim.
  • Where clients work from a home they own, the same percentage is applied to the bond’s interest (only on the part of the property that the taxpayer owns). Make sure that your client knows that such a claim may have capital gains tax implications when the property is sold and when the full primary residence exclusion is not available.

What to do in the case of partnerships

  • If you are completing the return for a partner in a business partnership, use the partnership’s full set of income and expenses and indicate what percentage the partner, for whom you are submitting the ITR12, has in the business at the end of the section.
  • It is better for one tax practitioner to do the returns of all the partners. This will ensure faster verification processes and a higher success rate relating to objections.

General tips to keep in mind

  • When the Local Business section is completed, the return will prompt you to complete a balance sheet. Unfortunately, many returns are submitted where this is blank or poorly completed.
  • Do not use the Local Business section for rental income. Since the 2016 return, it has its own section on the tax return.
  • Use the electronic process for submitting ITR12s on eFiling and avoid manual returns. The eFiling process is quicker and some fields will be automatically calculated. This reduces human calculation errors.
  • Use the correct source codes. It helps SARS know the occupation or trade where the income originates from which, in turn, determines or influences what type of expenses the taxpayer will have against such income. (A list of source codes is available from the SARS website: sars.gov.za/TaxTypes/PIT/Tax-Season/Pages/Find-a-Source-Code.aspx).
  • This article does not focus on whether a loss of each trade must or will be ring-fenced excluded) from the taxpayer’s taxable income. If there are losses, please make sure that you understand the rules pertaining to ring-fencing.

What to do when SARS asks questions: Verifications and/or audits

 

It is important that verifications or audits requested by SARS are handled quickly and thoroughly.

 

Handle verifications quickly

 

To handle verifications quickly, it is essential that you have all the relevant supporting documents available before you load the return. This offers the following four benefits:

 

1. There is no unnecessary delay in submitting the documents. If you are a tax practitioner, this results in having given your client great service.

 

2. You maintain a good record of compliance in general with SARS when you send in documents at the first request for verification.

 

3. You act responsibly as a tax practitioner, which benefits the public’s view of the tax services industry.

 

4. You have an opportunity to make sure that the information that the taxpayer sent you is correct by studying the supporting documents, before submitting the tax return. This minimises corrections, audits and objections.

 

Handle verifications thoroughly

 

Here is a list of the supporting documents you should have available for verifications or audits:

 

  • Proof of the income declared by means of IRP5s, invoices issued by the taxpayer and bank statements to show what was received.
  • Bank or credit card statements can also be used to show expenses. On the statements, mark the expenses that were claimed and make notes where necessary. The easier you make it for the SARS official to see what was paid for and claimed, the quicker the verification will be finalised.
  • Set up a cover letter with any other details that may be of importance to SARS in terms of the interpretation of the supporting documents. Include the taxpayer’s name, tax reference, case number, the tax practitioner’s registration number (the SARS number as well as that of the approved recognised control body) and contact details. If possible, number the supporting documents and give an overview or index of them in the cover letter.
  • Attach any other proof of payments, such as debit or credit card proof of purchase (i.e., the actual card slip showing the transaction total). An invoice with a “paid” stamp is not sufficient proof of purchase. The taxpayer must prove that he or she paid for the expense and that someone else did not. Try to avoid cash purchases as it can be difficult to prove.
  • Apart from sending in financial statements, also send in detailed, supporting calculations that include:
  • How the trade profit or loss was calculated
  • How the depreciation was calculated on each asset (if not clear from the asset register) and attach proof of purchase of the asset, even if it was not purchased in the current tax year
  • How the home office and other pro rata expenses were calculated
  • What the purpose of the legal expenses claimed (if any) was
  • The totals of all the expenses, detailing what was claimed and what was not claimed
  • Provide details on any other expenses that seem above average or out of proportion for the type of business, profession or trade. For example, excessive entertainment, accounting fees, repairs or telephone expenses.
  • There are quite a few expenses that need to be totalled under “Other” expenses. In case of an audit, be very specific of what this amount consists of. It can, for example, include advertising costs, marketing fees, printing costs, stationery, courier and postage, equipment, computer and small assets below R7 000 in value, staff welfare and beverages, and security costs.
  • If the business owner is registered as an employer with SARS, also include a copy of the salary and wages register, IRP5 certificates of the employees (or a few of them, if there are too many), the PAYE number and copies of any learnership agreements that the taxpayer has entered into with learners.

At the end of the day, this section, like the entire tax return, must be completed with competence, care and attention to detail. It is only then that a tax practitioner would have served his or her client well.

 

Please click here to complete the quiz.

 

This article first appeared on the July/August 2017 edition on Tax Talk. 

 


 

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