So this morning, I went off to a SARS appointment for a client. And honestly, thank God I had an appointment – because the queues at this time of the year are amazing. Also, the SARS officers are well-tired of telling people that their proof of residence is no good, and that the certification dates on that certified copy are outside the 3 month window, and no sir, he really does have to come here himself and no, that’s not the right power of attorney form.
Naturally, the appointment concluded with:
- The proof of residence was no good (no lease agreements, no telephone accounts, no bank statements – it’s either municipal bills or form CRA01).
- Not enough certified IDs.
- And I’d gone to the consultants on the wrong side of the building (it doesn’t seem to matter where I go – I’m always on the wrong side).
Anyway, the reason I bring this up: I’ve been asked to write something about preparing your tax return. Which makes me want to say: this is something that you should learn how to do. Especially if you’re living and working in South Africa.
The Ease of E-filing, and what your accountant does
I understand that people are afraid of tax. And of SARS. You shouldn’t be.
If you are employed, and you have no real other sources of income, then here is what your tax-practitioning accountant does:
- Logs onto your e-filing account.
- Clicks “update IRP5 forms”.
- Scans through to see the IRP5 forms have automatically filled in stuff.
- Types in some personal details.
- If you’ve given him a medical aid certificate, he copies those into the form.
- Clicks “file return”.
- Forwards you an invoice.
Do you know what that is?
A cheek, is what it is.
And people will pay good money for it.
This is madness. If you’re employed, and your job is your only source of income, then for goodness sake – try it. It really is that simple. Not even an hour of your time. And if you’re stressed about it, I recommend a good merlot cab sav blend. Because this is the type of stress that can be alleviated FOR ALL TIME simply by taking a single hour of your Sunday afternoon to give it a go and realise that it’s really just forms and personal details.
Also, you’re allowed to make mistakes. SARS understands. It’ll let you fix them.
If your job is not your only source of income, then find an accountant.
Because here, it can get a bit complicated. But it’s probably worth it. Because…
Here is why you should try to have alternative sources of income
As an employee, you’re not allowed to claim very much in the way of expenses. Your PAYE gets deducted each month – and maybe at the end, you’ll get a small refund because of medical expenses.
But let’s say that you’ve also done some work on the side. For example, if you’ve done some freelance web designing from your home, you’ll be able to deduct some of the expenses that you’ve incurred on:
- Internet Provider Fees and Telkom bills
- Computer expenses (including depreciation on your software and hardware)
- Cellphone bills (for the calls made to clients)
- Possibly some office expenses
Of course, all the above are going to be split in the ratio of business use to private use – but still, there’s a deduction. And it could earn you a larger refund.
Why is this important?
It’s important because there is a difference (to you) between economic (sunk) cost and tax cost. That is:
- All of these expenses, you would have incurred anyway. In all likelihood, you were always going to pay for internet and own a lap top. Therefore, there is no economic cost to you when you taking up freelance web design. The costs are already sunk.
- Instead, what you’re doing is recovering some of those costs by using them to generate income.
- On the tax side of things, SARS doesn’t care whether you would or would not have otherwise incurred the expense – what’s important is that the expense actually incurred was used in the production of income.
- So if you take some of your internet cost, and use it to design websites for money, then that’s an expense actually incurred in the production of that income – therefore you can deduct it from your gross income.
- These deductions are effectively the incentive that SARS offers you to be entrepreneurial.
Just to be clear, a diagram:
PS: that cellphone bill is about the only item on that list which would have cost you a bit more. Unless you’re on a contract with a set number of minutes, and you used minutes that would otherwise have gone unused…
The net result is that your tax losses from your ‘secondary trade’ would go against your employment income and get you a larger refund. That is, until such time as your secondary trade becomes profitable. But if you hit that point, who cares about the tax -you’d have a profitable side-trade.
Now obviously, SARS doesn’t intend for you to be indefinitely loss-making – that’s not the point. If you’re going to be entrepreneurial, then it needs to pay off eventually. So there’s a section in the Income Tax Act (section 20A, for anyone that’s interested) that says if you’re loss-making from a particular “secondary trade” for longer than 3 years, then you can’t deduct the loss from your full gross income anymore.
However, that ring-fencing only applies to people that would otherwise be in the top income bracket – so if you’re in a lower income bracket (ie. you basically earn less than R673,100 each year), then the ring-fencing should not apply (as it stands – the regulations could always change).
The Sum Conclusion
If your finances are relatively simple, and you earn only your income, then the money that you spend on an accountant is a bit wasted.
But if you’ve decided to expand your budget by doing stuff on the side and such, then it’ll probably pay you to pay someone to help.
And in those moments, it’s always best to find someone that’s a bit reputable. Because if you go for cheap, then you’ll get an accountant that wants to do it quickly and with the least amount of hassle.
Question: do you know what happens when your tax return is done quickly and in a way that minimises the likelihood of hassle?
Answer: you pay in.