This article was originally published on LinkedIn by Tamryn, and specifically references the 2019 tax year, but the principles remain the same. You can read the original here if you’d like to.
Tax Season is approaching and the filing period for 2019 Income Tax returns will be upon us shortly. To make matters more confusing, the first provisional return for 2020 will also be due fairly soon.
It is at this time of year that I become very aware of two things:
1. People are terrified of taxes and the taxman
2. Very few people understand how it all works
I believe that point number two is largely responsible for point number one, so here is a quick explanation of income tax and the requirements that are coming upon you very soon.
Let’s start with the concept of a tax year. A tax year does not coincide with our normal calendar year, thus sowing great confusion among everyone! An individual’s tax year begins in March (not January!) and ends in February, not December. Since a tax year therefore actually spans two calendar years, the taxman has chosen to name it according to when it ends. The 2019 tax year, therefore, began in March 2018 and ended in February 2019. This means that whenever SARS refers to 2019, they are referring to the period between March 2018 and February 2019 – not the calendar year you are currently experiencing! It is very important to remember this when you are searching for supporting documents, because if you try include paperwork from before March 2018 or after February 2019, SARS will not allow it and you run the danger of an audit.
With that in mind, let’s take a look at Income Tax itself.
We’ll start with what it is: Income Tax is very simply a tax on all the money that flows into your life, from virtually any avenue. There are “types” of tax that fall under the blanket umbrella of Income Tax – such as Dividends Withholding Tax or Donations Tax or Capital Gains Tax – but at the end of the day, the thing you have to remember is that if income enters your life, a piece of it must leave and go to SARS.
Now let’s take a look at what it is not: Income Tax is not Provisional Tax or PAYE. I think the largest amount of confusion comes in here!
Provisional Tax and PAYE (Pay As You Earn) are not actually types of tax. They are, in essence, ways for SARS to collect tax – Income Tax. Both deal with income earned from work, but in different ways:
PAYE is the most well-known of the collection types: this is the tax that gets deducted off your salary every month by your employer. You are literally, paying the tax over as you earn the income, hence, Pay As You Earn.
Provisional Tax is for the people who are not employed in the traditional sense of the word. The freelancers and sole proprietors who earn income from working, but don’t have an employer to deduct PAYE and pay SARS for them. Instead of paying tax monthly, you pay tax twice a year: first in August and once again in February.
Again, both of these are actually systems of collection, they are not taxes themselves. Which is why, no matter which one applies to you, you will still have to submit an additional Income Tax Return when tax season opens.
The Income Tax return is a summary of all the income you had enter your life during the tax year and a summary of all the expenses that happened in that year that you are allowed to claim. SARS then takes the info they have from your IRP5 or your provisional tax returns to add up how much tax you paid, and they compare that to the amount owing on your summarised Income Tax Return.
If your only source of income is a salary, and all your allowable deductions – such as medical aid or pension – go through your employer and reflect on your payslip, then your Income Tax return is super easy! All the info is uploaded automatically by SARS when they automatically populate your IRP5 info in efiling. Submission is as simple as verifying your personal details and clicking File. Your assessment should come to zero, and life should go on.
If you work for yourself, or have multiple sources of income (including rental income) then things are not so simple.
Depending on how accurate your provisional returns were, you may have to still pay in a bit on your tax return – or – if you were over-zealous in estimating your income, you might be due a refund.
Tax Law is long and boring and complex, but if you run your own business or trade as a contractor then you really should either take the time to familiarise yourself with the basics or else get yourself a Tax Practitioner to help you. Knowing what you can and can’t claim can make a big difference to your tax planning and the amount of money you get to keep, so it is very worth spending some time and energy (and possibly money) on making sure you are doing things correctly!
When you sit down to submit your tax return this year, follow these steps to reduce your stress and improve your accuracy:
- Make sure you have accounted for all your income. Possible income sources are: invoices to clients, salary, interest, investment returns, the sale of an asset, drawings or dividends from a business, rental from a property you own. Even if the rental or business is making a loss – you need to declare the income and expenses relating to it on your return!
- Have your tax certificates ready – this includes IRP5s and your certificates from your medical aid, your retirement annuity, pension fund etc. Don’t forget the certificates from your investments – even your bank will issue a tax certificate for you if you earned interest during the tax year.
- Make sure you have all your supporting slips for your expense claims. Chances are very low that you will actually need to physically submit them to SARS, but having them on hand means that your expense capture is more accurate, and gives you the peace of mind that if SARS does ask for them, you have them.
- SARS works on the accrual system, not the payment system. Very simply, this means that all income and expenses that you claim must be accounted for according to the transaction date, not the date it was paid. If you invoiced a client in February 2019 but they only paid in March, you still have to include that income on your 2019 tax return. The same applies to expenses: You might have paid an expense in March 2018, but if the actual bill for that expense is dated February 2018 then it should have been claimed in the 2018 tax year, not the current one.
- Download the SARS guide. There are actually a lot of very helpful and easy to understand guides on the sars.gov.za website, one of them is on how to complete your tax return. If you are doing it yourself and feel nervous, get the guide!
- Be well rested when tackling your return. Fatigue can cause mistakes. You can always request corrections and you can send SARS an explanation as to why you filled in an amount wrong, but its so much better to just get it right the first time.
- Keep calm. The taxman is not as scary as he seems and tax law protects the taxpayer too! Just be careful and honest and you will have nothing to fear.
If at any point in the process you begin to feel out of your depth, call in a professional. A tax practitioner can go a long way to making you breathe easy again! A good practitioner will be more than happy to explain their calculations to you so that you can attempt them yourself next year.