Dreaming of tax rebates?

President Cyril Ramaphosa articulated his dream that companies should be able to operate with less red tape. Many business owners must hope that the South African Revenue Service (SARS) featured in his dreams. But while the government gets working on reducing the red tape, businesses should read these tips and warnings to keep any tax nightmares at bay.

South Africans clearly have an entrepreneurial spirit. Consider this: according to employment figures of Statistics South Africa, 10.15 million people were employed full-time or part-time in the formal, non-agricultural sector of the economy in the last quarter of 2018.

Compare this with the statistics of the South African Revenue Service for 2018 stipulating that 3.13 million companies were registered with SARS as taxpayers. Granted, less than a million of them submitted returns as going concerns, but the large number of registered companies shows the aspirations of people to start their own businesses.  For roughly every three employees in a traditional job in the formal sector, one person decided to run his or her own business in the formal sector.

“Many entrepreneurs start out without a firm grasp of the extent of the red tape President Ramaphosa referred to in his State of the Nation Address,” says  of VDT Attorneys.  “It is possible to learn as you go along, but getting the basics right from the start will save you much hardship in the future.”

There are many considerations when choosing the correct legal entity for your business; be it a sole proprietor, partnership, company or trust. Tax considerations are not always front of mind, but they should be.

Very broadly speaking, Mr de Wet says, these are the current tax categories for businesses:

Entity

Rebates

Income tax

Capital gains tax

Sole proprietor/
partnership

Owner(s) taxed as (an) individual(s) according to normal principles.

Primary (<65 years old):

R14 067

18-45%

Effective rate of 0% -18%

Companies and close corporations

Company gets taxed as a separate entity. Shareholders still liable for individual returns.

Nil

28%

22,4%

Trusts

Any trust other than a “special trust” set up exclusively to look after an individual.

Nil

45%

36%

Small business corporations

Depends on level of taxable income.

Nil

0-28%

0%-22,4%

Micro businesses

Depends on level of cash received.

Nil

0-3% of cash turnover

0%

“The first thing to note is that, apart from certain legal benefits, there are also clear tax advantages for individuals to rather run their business as a company, and more so for those individuals  who fall into the highest individual income tax brackets.”

“The second is that small enterprises get preferential tax treatment. This is in line with the government’s attempts to stimulate these smaller companies.”

“The third is that the income tax rate is not the only consideration. There is also the issue of rebates, capital gains tax and available measures to lawfully reduce tax liability,” says Mr de Wet.

The devil is indeed in the detail and someone with limited business tax proficiency would be best served by obtaining expert legal and tax advice.

Some common pitfalls in DIY tax decisions include:

  1. Forgetting about personal income tax

“Paying tax on behalf of your business doesn’t mean you are exempt from personal income tax,” Mr de Wet advises. If you or your family draw a salary or get benefits from your business, you will still be liable for personal income tax as if you worked for someone else.

  1. The cottage industry risk

Companies may deduct legitimate business expenses from their taxable income, thereby reducing their tax liability. This creates a huge temptation to incur certain “expenses” in the company’s name while it is actually a personal expense.

“It is not uncommon to hear around a braai how someone ‘scored’ by buying a car for their child going to university. The car is bought for the company – wink-wink, nudge-nudge – but used by the child. The family gets a tax bonanza: the business pays less tax due to the expense, it even writes off depreciation on the vehicle, and Ouboet can brag with a new car bought with supposedly non-taxable income. That is until you get caught.”

Mr de Wet says SARS knows how tempting these practices are, and consistently implements new measures to counteract them.

  1. I’m going to render my services as a small company to pay less tax

A “small business corporation” is defined in section 12E(4) of the Income Tax Act as a company or close corporation with only natural persons as shareholders and with a gross income of less than R20 million rand. However, personal service providers are specifically excluded. These service providers are also excluded from turnover tax for micro enterprises (turnover of less than R1 million per year).

“Personal service” is defined as any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science – pretty much every occupation where you can work for yourself without running an individual business.

“And rest assured, SARS will catch up quickly and add to that list if it realises that a new loophole was detected,” Mr de Wet cautions.

These service providers are also severely restricted in the number of allowed expense deductions, solely to close the loophole that an individual will rather form a company to reduce tax.

  1. Not utilising available tax breaks

It is not all doom and gloom for those people seeking ways to lawfully reduce their tax liability. The challenge is to know the different provisions of the Income Tax Act that is available to you. Mr de Wet lists some examples:

  • Certain expenses may be deducted regardless of the business entity used. Even sole proprietors may claim expenses for advertising costs, salaries, lease payments, utilities, travelling expenses, etc. Certain home expenses may also be deducted under specific circumstances.
  • Small businesses get certain tax advantages. “Apart from the progressive scale as opposed to a flat rate, they get additional benefits. This include a write-off of manufacturing assets at a rate of 100% while other taxpayers may only write off the expenses over a period of four or five years. They also have more beneficial rules for wear and tear allowances.”

In the end, Mr de Wet says, it will assist entrepreneurs greatly to get proper advice.

“The Income Tax Act and the schedules comprise 442 pages. Don’t beat yourself up for not knowing the nitty gritty details. That is what professional advisors are there for.”

PR de Wet is the head of the Commercial Law and Tax department at VDT Attorneys.  You can reach him at 012 – 452 1300 or prdw@vdt.co.za.

 © VDT Attorneys, July 2019

August 1, 2019
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