En­tre­pre­neur:

How to be tax-savvy when your hobby be­comes prof­itable

Finweek English Edition - - CONTENTS - ed­i­to­rial@fin­week.co.za Madeleine Schu­bert is strate­gic di­rec­tor at Citadel Fidu­ciary (Pty) Ltd.

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.

Plan up­front

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.

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