Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
145. Why Your Company Needs Its Own Identity: Tax Wisdom from the Trenches
Drawing the line between personal and business finances isn't just good practice—it's essential for tax compliance and business survival. Sue from Anthurico Accountants joins us to tackle one of the most common pitfalls entrepreneurs face: treating their business as an extension of themselves.
"When you register a company, you get a registration number. You have an ID number. They're two individual people," Sue explains, setting the foundation for our conversation. This distinction isn't merely philosophical—it has real tax implications when business owners use company accounts for personal expenses like groceries, bond payments, or school fees. These seemingly innocent transactions create loan accounts that SARS eventually flags, leading to unexpected tax liabilities and penalties.
We unpack the mechanics of loan accounts, VAT registration requirements, and the often-misunderstood question of whether dividends or salaries provide more tax efficiency. Sue delivers a masterclass in practical business finance, offering a simple test for any expense: "Could I justify that it's in the production of income?" This golden rule can save business owners from costly mistakes and tax complications.
The conversation takes a deeper dive into VAT registration thresholds, the importance of setting aside VAT collections, and the potential consequences of non-compliance. With SARS becoming "stickier and stickier" about enforcement, proper accounting guidance has never been more important. As Sue aptly puts it, "No tennis player is really good unless they have a coach"—the same applies to business finances.
Whether you're starting your entrepreneurial journey or already managing an established company, this episode provides essential knowledge to keep your business finances clean, compliant, and clearly separated from your personal affairs. Your future self (and your accountant) will thank you.
Please subscribe to our podcast or have a look at our website
www.growthfp.co.za
Hello everybody, welcome to Know your Money. I'm Bronwyn Wehner.
Speaker 2:And I'm Craig Finch, and we are from Growth Financial Planning. We hope you enjoy our podcast.
Speaker 1:Hello everybody. We have Sue from Anthorico Accountants here with us today just to unpack a little bit about owning a business and knowing that that is separate from you. So thank you so much for being here, Sue, my pleasure we have had a conversation about. One of the things that you struggle with is that you find that people see their business as an extension of who they are. Do you want to maybe unpack that a little bit for us and explain how that is not good.
Speaker 3:Okay, I think the biggest people need to understand is you know, when you register a company you get like an ID number, basically the registration number. You have an ID number, the registration number, you have an ID number. So it's two individual people, so it's like you and Craig. You're separate, you're not joined at the hip, and that's what people don't understand. So what they normally do is the money's in the bank account. So they don't want to take a salary because then they're going to pay, sales taxes are receivable. So they put the travel or whatever they groceries, groceries, their bond account, whatever through the company account.
Speaker 3:Um, at the end of the day, and then when we get the bank statements and we start going through them, we've got to split this. And then all of a sudden there's a loan account that's in debitor. That means you owe the money back to the company. And then they say but why? How did that happen? But all these things are not business related. All expenses have to be always tell yourself is if I spend something, could I justify that it's in the production of income?
Speaker 2:That's always the biggest question and the answer is like well, maybe or no, then don't put it through the business so if you drove from your home to a client and you spend money on that petrol, that is in production of income, for example it is, but sales also deems from home to work is private, yeah, so if you drive from home to the client's home address or their business address. That's business travel. That's deemed as a production of income.
Speaker 3:Yes.
Speaker 2:If you took a client for a coffee and a toast or sandwich or a lunch or whatever. That's a discussion over lunch in the production of income, Correct?
Speaker 4:In your experience, business owners, what are the biggest red flags for claiming expenses?
Speaker 3:Yes, groceries bond account. Entertainment travel school fees.
Speaker 2:So if you do do that let's say the business owner did put that through then this loan account you've just mentioned is the other way around. So does that mean that they've taken money out the business without paying tax on it, correct? And they're trying to get a tax deduction for that and sales goes no, no, no, no, no. You didn't loan the business money, you actually took the money out, so therefore you should pay tax on what you took out. Is that correct?
Speaker 3:Yep. So when we do the company tax return, that debit will be listed as other loans. And then they ask for the financial statements and the financial statements you will see it says direct as loan. So then the sales will issue a dividend against that.
Speaker 2:And you pay tax on that.
Speaker 3:And they've got to pay tax on it.
Speaker 2:So the other loan account says that the business needs money to whatever expand. Like Warren needs to put another studio in here. He takes money out of his own account and his partner. They put money into this business and then they can draw that money out one day, correct?
Speaker 3:Yes, I think I would say, is draw up an agreement between you and the company so that there is justification why the money came in. Because if sales does audit the income, they could say that they're going to add up all the income and that could be 400,000 you put in personally to meet expenses. So as long as you've got documentation to prove that that money went into the company belongs to you, then there won't be any issue as such.
Speaker 2:So then Warren builds his studio and the business does well, and two years later he can draw the money out.
Speaker 3:Yes.
Speaker 2:And he won't pay tax on that no. Okay, so that's him, or a business owner, loaning the company money legitimately for a reason the company using that money and then paying the loan back?
Speaker 4:Does the company have to pay interest on the loan?
Speaker 3:It depends on the length of the loan and the agreement. So I mean, if the company is like scraping odd ends and you're trying to keep it alive, you know to add that interest on, you're just making the company in a worse situation than if Because, ultimately, sars wants your company to succeed, right? Yeah.
Speaker 4:There's no financial interest for your company going under for them.
Speaker 3:Exactly.
Speaker 2:So there's two types of loan accounts in summary right the one that you've lent money and the one that you've taken money out and you should be paying tax on that.
Speaker 1:Yeah, and then that one where you take it out when the tax season ends, that's when that dividends would have to be paid.
Speaker 3:No, when you do the tax returns, they pick it up Legally. What should happen is that should be converted to a salary, or you convert that to a dividend. So the company pays the dividend and then that dividend gets set off against that loan you've taken. The problem is that if there's more than one person in the company as an owner and then all the she-holds are supposed to get a dividend so one person's taken 400 and the other one's taken nothing Then when you draw the dividend it may not be enough to cover that loan account.
Speaker 4:How often can companies pay dividends? Sorry, how often in a financial year can companies pay dividends?
Speaker 3:Normally once a year because you need to declare to SARS, get approval before you make the payment.
Speaker 4:So you have to get approval from SARS.
Speaker 1:But you can pay bonuses you can pay bonuses. Right Bonuses and dividends are two different things.
Speaker 4:Are dividends a more tax effective way of getting money out?
Speaker 3:Not really, because at the end of the day you're going to pay 27% tax because maybe the dividends is after tax, so you're going to pay 27% on your profit and then 20% after it, so you've got 20 plus the 27. So you're, at the end of the day, paying 47.
Speaker 4:I only ask because a friend of mine. He owns a company in the UK and it's much more efficient for him to do it with dividends there.
Speaker 1:We've had this debate with hundreds of people and the one lady from Mazzar's said if what you are earning is over 1.8 million, which is the bottom of the tax table, that's at the 45%. Anything over that a dividends is generally better, but by like 2%.
Speaker 4:So you pay your salary up to the 1.8 and then you take a dividend.
Speaker 1:But again, like what Sue's saying, is if there's more than one shareholder within a business, you have to pay dividends per shareholding. So, say you, you know there's someone owns 80 and the other person owns 20 and there's 100,000 to go out, only 20 would go to that one shareholder Understood, yeah understood, but you could get bigger bonus. Yes.
Speaker 4:And how are bonuses taxed? Just part of your personal income?
Speaker 3:Yes, Straight, like normal. Whatever you take as a salary gets calculated.
Speaker 4:That's pretty much whatever you've earned during the year, and then so most people complain when they get their bonus.
Speaker 3:The tax is double.
Speaker 1:Because your tax table goes higher, you go into a higher tax bracket generally.
Speaker 4:Sorry, no go. No, I'm just curious because we're not at the size where we're VAT registered yet. How does that change everything for a business and doing tax returns and collecting money and et cetera?
Speaker 2:You collect VAT on the behalf of SARS and don't get paid for it.
Speaker 4:in summary, so do you get reimbursed for the VAT you collected, or how does it work?
Speaker 3:No, 90% of the time you end up paying sales because, bearing in mind the general rule is you sell for 100 rand and your cost is 80 rand, so your profit is 20. So if you take the 80 and minus 100 on, the VAT you're going to always pay in, your salaries is your biggest cost. There's no VAT claimable on that. So you'll find 99% of the time you will pay in. The only time you'd find you're claiming money. For example, I have a construction company. So what they do is they develop the townhouses for that whole period of two years or whatever. In that time they are claiming for their buildings and their cement, their bricks, whatever. So they will claim for the first two years. The year after, when they've sold those units, they paid a massive amount in. But if you take the massive amount that they're paying in, it's less than what they've claimed over the two-year period. But a general person probably like yourself and Craig and us, even we always end up paying in.
Speaker 1:So basically, when that money comes in let's say it's 115,000 rand, just for ease of numbers that 15,000 rand you need to keep aside to pay in for VAT every single time. So often some companies kind of start using that as if it's their own money again.
Speaker 4:Yeah, and then they have the VAT bill and they can't pay it, and that's where the problem is.
Speaker 1:So it's very much about staying in your lane.
Speaker 3:No, it depends. If your turnover is above 35 million, that's every month. If it's less than that, it's every second month.
Speaker 4:And what's the lower limit before you have to become VAT registered?
Speaker 3:You've got to have a million rand turnover or 50,000 rand over three months and you can apply if you want, because there are some people like when they do import and exports they have to have a tax number Right okay, so that would be the only reason at that level you would want to do it right.
Speaker 1:Yes, and what I'm, you don't do it.
Speaker 4:You would avoid it right.
Speaker 3:Yeah, it's not the best solution because, as Bronwyn said, now people use that money to survive. They don't put the money aside and then when they have to come and pay tax, they don't have the money.
Speaker 4:And at what point do you have to become VAT registered After?
Speaker 1:a million turnover if you don't, there's penalties, right well?
Speaker 3:I've also heard that I had a case where a guy came to see me and he said his accountant, the first year he had 1.1 million, and then he had 3 million, and then he had 1 million and then he had 5 million. On the 5 million the sales automatically registered them, but backwards for two years, sure. So they wanted 360,000 Rand that they had calculated from his tax returns.
Speaker 4:A back tax of that.
Speaker 3:Yes, oh.
Speaker 1:Yeah, and I mean just back to the topic, which is that your business and you are separate. I think the reason why we're trying to bring it up is exactly for those things. Like you know, if you see that money in there, our brains kind of wire like, oh cool, I've made 100,000 Rand, but that is not all your profits, because there is taxes that you have to pay on it. And I think the important thing is just not treating your business as an extension of you.
Speaker 1:And speaking to an accountant to get the right amount out and knowing what expenses you can put through, Because if you don't have that, clearly you're going to have the shock at the end oh, I owe money. What do you mean? I owe money. I didn't know I was loaning it the ideal is.
Speaker 3:I mean I always tell people to keep a separate bank account for your VAT. So at the end of the month have a look what your income is minus your VAT, put in that account and then see what expenses you have to pay.
Speaker 2:You get a tiny bit of VAT back as well. So if you go and buy a box of paper and it's 20 rand VAT, you get that back.
Speaker 4:So on your purchases. You get your VAT back.
Speaker 3:Yes, so it'll be paper telephone rental.
Speaker 1:And for you, for all the equipment and stuff. You'd get the VAT on that if they were VAT registered.
Speaker 4:So we weren't, obviously we weren't turning over a million rand. We're still not, but yeah, so we lost out on a whole load of that. Can we back? No, no.
Speaker 2:I think the bottom line, yeah, is just make sure that you're always clean with SARS. Get a hold of Sue. Rather, make sure that things are going properly. Let them do the management accounts every month so you know where you stand and keep everything above board, and there won't be problems with SARS, right?
Speaker 3:No.
Speaker 1:Absolutely. Thank you so much.
Speaker 3:They're all getting stickier and stickier. So, proof is on the owner to prove exactly what you're saying. So, yeah, that's the biggest thing is on you to prove.
Speaker 2:And you need a support person like you to help us with that.
Speaker 1:No tennis player is really good, unless they have a coach Exactly. Same goes for business people. Thank you so much. Thanks, Sue Brilliant.
Speaker 2:Thank you for listening. If you have enjoyed this podcast and would like to subscribe, please visit our website wwwgrowthfpcoza. The information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.