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Make sure your budgets contain these two vital elements or you could spend more than you have

by , 17 September 2014
Tax is always one of the last things businesses are aware of. And it's the last thing on the mind of energetic entrepreneurs. At least, that is the impression I'm given by some businesses.

Tax should be one of the first items you consider when you plan your business' future.

I recently reviewed a budget for a client of mine. It showed how profits were going to be ploughed back into the business to capitalise and expand. As you know, cash flow is always tight during growth periods, and businesses can seldom afford any unexpected additional cash outflows.

As I worked my way through the budget, I noticed the business was projecting a turnover in excess of R1 million. And yet, there was no indication of Vat being taken into account in the cash flows. As I neared the end of the budget year, there was something else missing.

Read on to find out what was missing from the budget.

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The one thing missing off the budget
Wait for it… Income tax. Nice profits, no tax.
Once the budgets were reworked to account for Vat in the pricing as well as income tax, the business realised expansion would take roughly 12 months longer than planned. Had they proceeded with the capital purchases they were gearing up to undertake, they would've run out of funds in 18 months.
Budgeting is an essential tool for business, both when they are developed and developing. They can also be the bane to any astute financial director when reality deviates significantly therefrom – and particularly for reasons that could have been so easily predicted.
Tax is a predictable outflow in the future, at least in the short to medium terms, and should always be accounted for in all budgets and projections.
Often I hear entrepreneurs use the excuse that they're too focused on growing the business to worry about taxes. SARS won't accept that. It's been used before to try beguile one's way out of a situation where penalties and interest exceed the original tax. Imagine paying companies tax at a rate of 100%. This can happen: 28% income tax rate + 56% penalty (200% penalty on tax) + interest. This gets you very close (if not over) 100% of your profits. You'd essentially be in business purely for SARS.
Tax compliance is a huge risk – never consider 'Well, I'm not a tax expert and I just didn't know' as a defence. It won't work. Just last month we've even seen that SARS itself isn't allowed to use this excuse.
In August, the Supreme Court of Appeal admonished SARS on this very point (The Commissioner for the South African Revenue Service v Pretoria East Motors (Pty) Ltd). SARS had raised additional assessments against a taxpayer, but they had done so without a fundamental understanding of the taxpayer's accounting processes. The SARS auditor in charge sounded as if she used the excuse, 'Well, I don't know, I just assumed my understanding was right', as she raised the additional assessments on information which she didn't understand, or simply ignored.
If SARS can't use the excuse of 'I didn't know man', it's unlikely you'll be allowed to do so.
Being informed isn't only to avoid falling foul of the law and experiencing the pain of paying penalties and interest. It's also to save you money – who knows how much money has been thrown into SARS's coffers simply as a result of the 'I didn't know' excuse? How many taxpayers haven't used a tax deduction they didn't know they could take advantage of? An absolute fortune, I imagine.
Being informed of the taxes that impact on your business – even if it's just a simple awareness thereof – could save you thousands, possibly millions over the long-term. I'd say forgone tax deductions are just as bad for your business as having to pay penalties and interest.
Even though the Practical Tax Loose Leaf is designed to help business attend to their own taxes, if you're only interested in having a general awareness of tax, then the Practical Tax Loose Leaf is still a tool you can use to build this awareness. Being able to spot when a transaction or situation leads to a tax consequence you may not know about could save you from falling foul of tax law.
Approach a tax practitioner and take further advice on the matter. You could just be throwing away millions in tax deductions by not doing so.
And if you do find yourself on the wrong side of SARS? Have a look at the updated dispute resolution chapter with the September print. If you don't have a copy yet, order one today. SARS published the new rules in July, and we've given you all the time periods found in the rules so you don't miss any deadlines during the dispute resolution process (and so that you can hold them to the deadlinesand get them to move things along instead of dragging them out for months and months).
We spend thousands every single year on medical aid, doctor visits and medication. You need to stay healthy to run your business after all. So then why forget about the health of your business? Ignoring what can be considered a benign disease every taxpayer suffers from (yes, that's tax), could result in it developing into a terminal illness.
At least once a year, take your business to the doctor – get in touch with your preferred tax practitioner or auditor and ask them to perform a tax health check on your business – for both current and future tax. Prevention is, after all, better than cure.
Two simple takeaways from this:
1)      Have a general awareness of the taxes affecting your business if you're not a tax expert.

2)      Take your business for a tax check-up at least once a year to look at how tax will affect your business both now and in the near future.
Until next time
David van Niekerk
Editor-in-Chief: The Practical Tax Loose Leaf

PS. Here is an amazingly simple way to manage your financials, with the Master Budget Series


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