Capital reconcilliation: The best way way for you to see how your company funds were spent during a tax year
Capital reconcilliationrepresents a statement of all your assets and liabilities, and where they are allocated or used. This applies to every legalentity i.e. personal, trust and company.
Note that if you prepare financial statements for your sole proprietor business, you've done your sole proprietor businesses capital reconciliation and this should been enough to submit to SARS as part of your personal income tax return.
However, what happens if you haven't shown every asset and every liability on the sole proprietor balance sheet (for example, your private home, which doesn't have anything to do with the business)? As an individual, you must also declare ALL your personal assets and liabilities, and not just those relating to your sole proprietorship.
As part of your juristic business' (Pty, ccs and trust) income tax return you have to declare all the business assets and liabilities, and this information is already available when you prepared financial statements for these entities.
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Companies and close corporations will simply take the amounts from their balance sheet.
This is applicable to you if you have:
1) A sole proprietorship business; and
2) A directorship or hold shares/membership in a company/close corporation.
Note that in case you're one of the two above, you must declare your assets and liabilities on your personal income tax return. You should also know that there are also some other instances where SARS may request this as well
Here's what to do if SARS asks you for your assets and liabilities
You must calculate your capital employed to operate/fund your lifestyle to ensure it's updated and reconciled every year to the previous year. This ensures:
1. You understand where your personal money and funds came from and you declare all income on your personal income tax return; and
2. You submit the correct information to SARS so you don't trigger an audit.
Caution: If you forget, or don't declare the income earned from assets owned, you'll be taxed and SARS will add penalties and interest if it finds out about it. Capital is net wealth that's available for you to use. It can be in the form of assets, money, investments. Make sure you include all wealth you accumulate as well as the corresponding liabilities you incur to get this money.
The basic calculation (that's applied in all accounting methods worldwide) for capital is:
Assets – Liabilities.
That means you can have negative capital, or a negative net worth or net wealth.
Looking at the calculation above, it's clear your net asset value is the same thing as capital and net wealth. The terms are interchangeable.
Here are the four reasons to perform your capital reconciliation now
1. If SARS selects you for an audit, you must be able to explain where the money came from to fund your lifestyle and business. If you can't explain the increase in capital, SARS can include the additional capital as income and tax you on this increase as well as penalise you on not declaring income you receive.
2. SARS might find things you didn't even know you should've declared i.e. donations you receive. This might lead to unnecessary penalties and interest and additional tax you didn't budget for.
3. SARS will flag you as a risky taxpayer and investigate your tax returns every year. If you object to an assessment, SARS might also flag you for a lifestyle audit due to inconsistencies.
4. When you prepare your capital reconciliation, and can clearly see all your assets and liabilities there in front of you, you form a better idea of what's going on in your business, and personal financial life, where your capital is, where it came from, and where it's going.
Capital reconciliation isn't an exact calculation. SARS takes the information it has and reconciles it to what you disclose and it calculates the difference. If there's a big unexplained difference, it will investigate and audit you.