How to be tax-savvy when your hobby becomes profitable
if you are considering creating a business from your pastime, there are several things that you should take into account from a tax perspective, especially if you’d like to turn this into a profitable business.
You need to identify the precise point at which your hobby becomes a business, which can be difficult. From a tax perspective, it is important to determine exactly when your intention was to transform your activities into a scheme for profitmaking, as this is when you will become liable for income tax on the activity.
Early on, you need to consider your venture’s legal nature, the various taxes that it will be liable to pay, as well as the impact that the business will have on your personal estate now and in the future. Failure to plan appropriately upfront may result in increased future tax costs or could expose your estate to various risks (such as insolvency and audits).
Trading through the correct vehicle for your business from the start is important as subsequent re-organisation of your personal business interests may result in a substantial tax cost. Although there are re-organisation options available that provide for tax-free rollovers, they are limited.
Ensure your interests are protected
As part of your personal fiduciary plan, you might set up two trusts, one for your business interests and the other for personal investments. By transferring your business interests to your business trust at an early stage, your personal tax expense will be relatively low and all future growth of your business will arise in the trust. The direct benefit is that such business interests are not exposed to estate duty on your death, trust assets are protected against insolvency, personal assets are protected from trust creditors and you’ll also be protected in the event of divorce.
Crucial to consider is that once your business is sold or donated to your business trust, it is no longer yours. You may be one of the trustees and/or one of the beneficiaries but, if it is a discretionary trust, the assets belong to the trust. If you fail to acknowledge this and act accordingly, you expose yourself to various risks. One way to manage this is to ensure your trust deed is carefully drafted and your trustee meetings are diligently held and minuted.
Comply with tax and labour regulations
From an income tax perspective you become liable for the payment of income tax the moment your hobby becomes a profitmaking scheme. At this stage you should include all your sales in your, your company or trust’s income tax return and similarly claim all your business expenditure against it. Depending on the legal nature of your business and who owns it, there may be tax-friendly allowances and special rates available to you, especially in the early stages.
You need to assess when you are liable to register as a value-added tax (VAT) vendor or when you may voluntarily elect to do so. Currently, you are legally required to register as a VAT vendor if your taxable revenue is likely to exceed R1m in a 12-month period. You can, however, elect to register voluntarily if you believe that your taxable turnover will exceed R50 000 in a 12-month period.
Once you employ staff, you need to ensure that you are registered for Unemployment Insurance Fund (UIF) contributions, employees’ tax and skills development levies (although there is an exemption if your payroll is below R500 000 p.a.).
Create a legacy plan
Do seek the advice of a professional who can assist you with all aspects of turning your hobby into a profitable business and advise how to integrate it into a personal legacy plan for your family and their descendants.
Failure to plan appropriately upfront may result in increased future tax costs or could expose your estate to various risks.
Currently, you are legally required to register as a VAT vendor if your taxable revenue R1m is likely to exceed in a 12-month period.