This article was first published in the third-quarter 2014 edition of Personal Finance magazine.
In an unforgiving tax environment, with changes to tax legislation lurking around every corner, it may be tempting to appoint a tax consultant to look after your tax affairs – if you haven’t already done so. If you do put this important responsibility into the hands of a professional, what can you expect for the not-insubstantial fee?
Some might think that regular, large tax refunds are the sign of a good consultant. In my opinion, however, large refunds could be an indication that too much tax was paid during the year – certainly not the indicator of an efficient tax process.
Instead, look for the following characteristics of excellent service.
Clarity and good communication
Are you entirely clear about your tax obligations to the South African Revenue Service (SARS)? Does your consultant spell out what you have to do and by when? You should be advised clearly of the following:
* The categories of taxes for which you are liable – for example, income tax, capital gains tax (CGT), dividends tax, donations tax, VAT;
* Whether you are also liable to register for advance payments, such as provisional tax;
* The registration requirements;
* The due dates for payment of taxes; and
* The amount of tax payable in a given tax year.
You should feel able to ask your tax adviser these questions and get answers you understand. Your tax adviser should give you sufficient notice of what you need to pay and when.
Minimisation of tax payable
Obviously, your adviser should make sure you are taking advantage of every possible tax deduction, allowance and exemption. He or she can do this only if you are open about your sources of income and economic activities.
If you work from home, you may be able to deduct the expenses of maintaining an office at your home, and, if you are self-employed, any other expenses incurred in the process of generating income, such as business travel, should be considered. Your adviser should tell you what documents you need to keep in order to support these deductions and the format of the records required – for example, travel log books. If you earn remuneration for work done outside South Africa, you should be made aware of the circumstances under which this income could be exempt.
A proactive adviser will prompt you to make full use of the available deductions, by, for example, suggesting you consider making voluntary top-ups to your retirement annuity (RA), or take advantage of the exemption on interest income. He or she should alert you to special exemptions where appropriate, such as the one that ended on December 31, 2012, which allowed you to transfer residences out of companies and trusts without paying any tax.
Do be aware that no one can be an expert in all fields of tax. A good adviser will know when you should consult another expert who may specialise in a particular area.
Cash-flow considerations
Ideally, you want to have a rough idea of the amount of tax you will be expected to pay and by when, so you avoid unpleasant surprises on deadline. A phone call the day before you are expected to pay a large sum is not the mark of a good adviser.
You should pay the correct amount of tax – not too much and not too little – by the due date. This is particularly important for provisional taxpayers, who are expected to make advance payments of income tax every six months, on August 31 and February 28 each year.
As a starting point, it is important that you are correctly categorised as a provisional taxpayer by your adviser. If you fall into the net, but have not registered as a provisional taxpayer, you could be liable for penalties for non-registration and late payment. If you do not fall into the net, paying tax in advance is not an efficient use of your cash.
The advance payments are estimates of your expected tax for the year. SARS allows some leeway in making the estimates, but if your actual tax for the year, as calculated on submission of the tax return, differs from the estimates too much, penalties of up to 20 percent may be levied.
In many cases, your estimates will be based on the taxable income as calculated in your last assessed tax return (called the “basic amount”). If your earnings for the tax year are expected to be much lower, however, you are allowed to submit an estimate lower than this basic amount.
It is more efficient to pay less provisional tax upfront than to base your provisional tax on an inflated estimate and receive a refund several months later. This action does carry a risk, however. If your actual earnings turn out to be higher than you expected and the provisional tax you paid was too little, you can expect to pay penalties and interest. Your tax adviser should outline the different options available to you and the concomitant risks.
If your earnings escalate significantly each year, your adviser should take this into account when preparing your provisional tax returns, so that you do not pay penalties for underestimation.
You should also be aware that if the due date for payment falls on a weekend or public holiday, you will be expected to make the relevant payments the day before. If you fail to do this, penalties and interest may apply.
There is not much leeway when it comes to the calculation of the PAYE tax deduction from your salary. However, consideration should be given to minimising the deduction if possible, because this is good for your cash flow. Some things to look at are whether your employer takes your pension, provident and RA fund contributions into account. If you provide your employer with proof of payment of RA contributions, for example, they may reduce your PAYE deduction. Similarly, donations to registered public benefit organisations may reduce your tax.
Appointing a tax adviser
When you appoint a tax practitioner for the first time, you should expect a consultation that gives your practitioner a full understanding of your tax situation, so that all aspects of your taxes are taken into account. Thereafter, most practitioners will request at least an annual update of your income and expenses, assets and liabilities, usually in the form of a checklist.
Switching advisers
This is an area where much can go wrong. If you are switching advisers, it is important that all parties (you, the previous practitioner and the new practitioner) are clear as to who is doing what.
Many practitioners prefer not to have to deal with tax returns that were submitted by someone else, but queries and penalties might arise in respect of a previously submitted return. Who then will be responsible for responding to the query – the previous adviser or the new one? Make sure that the division of responsibilities is clear and in writing. I know of occasions when penalties from previous returns have gone unattended and have escalated.
Ideally, the outgoing tax practitioner should provide you with your status at the point of exit from his or her practice – for example, all returns submitted to that date, the status of your payments, any queries, objections or appeals that are in progress, outstanding penalties and interest, and so on. However, if you part ways less than amicably, or you are changing because of poor service, this may not be practical. You should then insist that the new adviser does an “audit” of your status right at the start, so that you can then decide on the way forward.
Registered tax practitioners
Your adviser should be registered with SARS as a tax practitioner and have a unique tax practitioner number to prove it. Since July 2013, tax practitioners have also been required to be registered with one of 11 controlling bodies that require their members to meet certain standards of education and have established codes of conduct and disciplinary procedures if their members do not comply.
The recognised controlling bodies are:
* A Law Society;
* The Chartered Institute of Management Accountants;
* Chartered Secretaries Southern Africa;
* The General Council of the Bar of South Africa;
* The Independent Regulatory Board for Auditors;
* The Institute of Accounting and Commerce;
* The South African Institute of Chartered Accountants;
* The South African Institute of Professional Accountants;
* The South African Institute of Tax Practitioners;
* The Association of Chartered Certified Accountants; and
* The Association of Accounting Technicians Southern Africa.
How you can help
You should keep your adviser informed of changes in your personal circumstances – for example, new investments, disinvestments (because these could give rise to CGT and affect your provisional tax) and inheritances. In addition, you should advise him or her of any changes in your address, bank details, and so on. An adviser cannot be expected to provide a good service without all the background information about your assets, income and activities.
Fees
You should expect to pay for good service. Tax compliance is onerous and tax practitioners take on a lot of responsibility. Ideally, you should agree on fees upfront according to a menu of services, starting off with basic compliance, such as preparation and submission of tax returns and provisional tax, as well as basic responses to queries from SARS and regular reviews of your SARS statement of account. Additional fees would be reasonable if you have trusts and companies to tax in your own right, if you earn income from a variety of different sources and/or if you require advice about the structuring of your tax.
Fees should be structured as a fixed standard fee for specific services or they should be based on a stated hourly rate. If the latter, you should feel comfortable asking for an estimate of the time required, so you have some idea what the fee will be.
Be wary of contingency fees – in other words, fees that vary according to the tax outcome, for example, the size of a tax refund. Compliance services, such as the submission of tax returns, should not be charged on a contingency basis.
Finally
However trustworthy and conscientious your tax consultant is, don’t absolve yourself of all responsibility for complying with the law. In the end, it is your tax liability and only yours, and SARS helps by providing information and support, from publicity around the start of the tax season and various due dates, to a helpful call centre. (Bear in mind, though, that you may have to wait for a response during busy periods, so don’t leave things to the last minute). Note the due dates and any changes in tax legislation, read articles and listen to programmes about tax, instead of switching off, and be aware that even a dedicated tax adviser is only human and can make mistakes.
And keep good records ... If you have the relevant information easily available, you will be in a better position to respond to any queries from the taxman – or the next communiqué from your consultant.
* Kari Lagler is an independent tax consultant.