How to manage your tax liability without going to jail
29 May 2014
Posted by: Author: Erich Bell
Author: Erich Bell (SAIT Technical)
No one is keen on paying taxes. This is even more so when you disagree with
the spending thereof by government, or if your business has cash flow problems.
As a result, various persons liable to
pay taxes just don’t declare their income and consequently evade taxes. This however constitutes a criminal offence.
South Africa’s population remains
uninformed about how to manage the tax liability. It is evident that evaders would normally
choose not to determine if they may qualify to ‘avoid’ tax the legal way. If you are one of them or if you own a small
business and would simply like to pay less tax, then this article may be for
The Small Business Corporation tax regime
A company, close corporation or
co-operative qualifying as a ‘small business corporation’ (‘SBC’) can legally
pay much less tax than a business that is not a SBC. At the end of the day, the goal of a business
is to ensure that there is money in the bank and that it is maintaining a
healthy net profit after tax.
In a recent study* it was found
that 32% of small businesses in South Africa do not make use of the small
business tax concessions they are eligible for. The main reason is that the legislation is too
complex to understand.
Lucky for you, there are numerous
SAIT tax professionals in South Africa that do understand the legislation and
that would most definitely be able to assist you in ensuring that you make use
of these concessions. This article will
only investigate the possible tax savings for companies qualifying for and
electing to use the SBC regime.
Allowances on manufacturing machinery and plant
Capital allowances on assets are
available to taxpayers as a deduction from the taxpayer’s income to arrive at
the amount which should be subject to tax. The available allowance on plant and machinery
- 40% of the cost of the asset in the year when it
is first brought into use. For
subsequent years the allowance is calculated at 20%.
- Second-hand plant and machinery used for
manufacturing purposes is claimable at 20% over a 5 year period.
However, lawmakers love small
businesses! If your business qualifies
as a SBC, it would be entitled to deduct the full cost (note this is not a spelling error) of manufacturing plant
and machinery owned by it in the tax year in which it is brought into use.
A simple calculation to show you
the tax effect is provided below.
Assume you have a private company
earning income of R 1 000 000 a year which manufactures gloves. It bought a new machine of R 500 000 to
manufacture the gloves.
Under the normal income tax
allowance section above the company would pay tax on R 800 000 [R
1 000 000 – (R 500 000 x 40%)].
If the company constitutes a SBC
it will pay tax on R 500 000 [R 1000 000 – R 500 000].
Assuming both companies pay tax
at 28 per cent, the tax saving would amount to R84 000 - without taking into
account the lower tax rates available to SBCs. Now that it money in the bank!
Allowances on non-manufacturing assets
For non-manufacturing assets the
capital allowance is calculated on the value of the asset. The number of years that you can claim the
capital allowance is determined by the remaining useful life of the asset. As indicated by SARS the periods over which
the value of the assets must be written off varies between 1 and 25 years.
SBCs have two options to choose
from for non-manufacturing assets. They
can either elect an allowance that may be claimed over three years (50 per cent
in the first year, 30 per cent in the second year and 20 per cent in the third
year) or the normal allowance determined
by the remaining useful life of the asset.
Therefore, should the normal
allowance available allow for the asset to be written off in one year, the SBC
may choose that option rather than choosing the three year write-off period as
per the SBC allowance available in this regard.
Small independent items
The exception to the rule for
non-manufacturing assets is when you buy small independent items (they do not
form part of a set) with a cost price of less than R 7 000. These items
may be written off in full in the year in which they are brought into use. This deduction is available for both the SBC
and normal companies.
Tax rates applicable to SBCs
In addition to the beneficial
allowances available to SBCs, they are also taxed in accordance with the tax
tables below and not the flat rate of 28% that is currently applicable to
companies. If the SBC’s financial year
end is between 1 April 2014 and 31 March 2015, the company will only start
paying tax when their income subject to tax exceeds R 70 700.
That is right! The SBC has an automatic tax saving of R19 796
(28% x 70 700). SBCs will only
start paying tax at 28% when their income subject to tax exceeds R550 000.
Please see the tax table below for the tax rates applicable to SBCs:
Taxable income (R)
Rates of Tax (R)
0 - 70 700
0% of taxable income
70 701 - 365 000
7% of taxable income above 70 700
365 001 - 550 000
20 601 + 21% of taxable income
above 365 000
550 001 and above
59 451 + 28% of the amount above
Savings from the SBC regime
By taking our example above about
the company manufacturing gloves and taking into account the tax rates relevant
to non-SBC companies and SBC companies, the tax payable would be equal to the
800 000 x 28% = 224 000
20 601 + [21% x (500 000 –
365 000)] = 48 951
From the above it becomes
apparent that the SBC company saved a total of R 175 049 (R224 000 –
48 951) in taxes just by having a smart owner/shareholder who engaged a
tax professional to assist it in electing the SBC rules.
Therefore, if you do not like
money or if you like to pay more taxes than your fair share, then it is
strongly advised that you consult a SAIT registered tax practitioner to make
sure that this regime is not applied to you.
* conducted by Sharon Smulders,
Madeleine Stiglingh, Riel Franzsen and Lizelle Fletcher