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Law of Business Entities (LBUE3704) Slides Unit 1 Sole Proprietorship
Law of Business Entities (LBUE3704) Slides Unit 1 Sole Proprietorship
• H o w e v e r, t h e o w n e r s h o u l d t a k e
reasonable steps to inform the public that
he is operating as a sole proprietorship.
Sole Proprietorship and Tax
obligations
• Assuming the sole proprietor is already
registered with SARS personally, then by default
the proprietorship will also be registered.
• There is no need for a sole proprietor to register
the business with SARS as the sole
proprietorship itself is not separately taxed on its
income.
Sole Proprietorship and Tax
obligations
• All of the income and expenses get added
to the sole proprietor's own personal
annual income tax return to be taxed
together with any other income he or she
may have earned eg salary.
Sole Proprietorship and Tax
obligations
• The sole proprietor should file an ITR12
form (the annual tax return for individuals).
• A sole trade must register as a VAT vendor
if he or she expects a turnover to exceed 1
million in a 12 month period.
Sole Proprietorship and Tax
obligations
• As soon as the turn over hits 1 million the
sole trade is required by the law to
become a VAT Vendor.
• VAT is an abbreviation for Value Added
Tax. It is an indirect tax on consumption of
goods and services in the economy.
Sole Proprietorship and Tax
obligations
• A sole proprietor may face a penalty of up to 20%
of the underestimated amount when:
(a) The total of the first and second provisional
payments is less thank 90% of the assessed
income tax as a person earning more than R1
million.
(b) The total of the first an second provisional
payments is less than 80% of the assessed tax
as a person earning more thank R1 million.
Sole Proprietorship and Tax
obligations
• NB, If the trade is a salaried employee and
is earning money from a side business as
sole proprietor, he must register for
provisional tax.
• Provisional tax is not a separate tax from
income tax.
Sole Proprietorship and Tax
obligations
• Provisional tax is a method of paying
income tax liability in advance to ensure
that the tax payer does not have a large
tax debit on the assessment.
• It allows the tax liability to be spread over
the relevant year of assessment.
Sole Proprietorship and Tax
obligations
• In XYZ CC v Commissioner of South
Africa Revenue Service (IT14157) [2019)
ZATC 6, the Tax court was called upon to
decide whether a sole proprietor was an
employee or an independent contractor for
purpose of taxation.
Sole Proprietorship and Tax
obligations
• The facts of the case are as following, The
South African Revenue Service (SARS)
selected XYZ CC for an audit over its tax
affairs. The focus of the audit was to verify
whether the Pay as you Earn (PAYE) and the
S k ills De ve lo p m e n t L e a v y ( S D L ) w e r e
deducted from employees and paid to SARS.
Sole Proprietorship and Tax
obligations
• The audit report showed that the appellant
employed two sole traders namely IOP and
VWX Construction. Based on the contract of
employment and IPS issued submitted by the
appellant. This means that the payments
received by the sole proprietorship were
“remunerations” subject to taxation as
contemplated by section 1.
Sole Proprietorship and Tax
obligations
• The appellants contended that payments made to
IOP and VWY were not remuneration but
payments. In other words, VWY was a separate
legal entity. At the same time the owner of VWY
was an employee of the appellant and also of
VWY. The court held that there was no evidence to
support the view that VWY was an independent
contractor.
Sole Proprietorship and Tax
obligations
• The court did not comment on the appellant
‘s submissions on the sole proprietorship as
a legal entity. The appellant was required to
show that VWY had more than three
employees, received other contracts of
service from other clients and that VWY had
an established place of business other than
the appellant’s premise.
Sole Proprietorship and Tax
obligations
• If the appellant had shown that VWY was a
sole proprietor acting as a subcontractor
employee tax obligations would not apply to
VWY.
• A sole proprietor must keep a ledge which
records business expenses and personal
expenses as separate accounts for tax
purposes.
Sole Proprietorship and Tax
obligations
• The general rule is that income generated for
purposes of advancing the objectives of the
business must be separate from personal
expenses.
• To prove a tax claim deduction, the trade
must provide a receipt or invoice for his
business expenses.
Sole Proprietorship and Tax
obligations
• A sole proprietor may claim tax deductions for
expenses incurred in generating income for
the business.
• Business expenses are, stationary, office
rental, inventory.
• Personal expenses are family
accommodation, vehicles, medical insurance
Sole Proprietorship
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