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Reducing tax by using arbitrage

Monday, 11 May 2015   (3 Comments)
Posted by: Author: Ben Strauss
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Author: Ben Strauss (DLA Cliffe Dekker Hofmeyr)

With effect from 1 March 2015, the highest marginal income tax rate for individuals was increased from 40% to 41%. It appears likely that the rate may increase in future, which means individuals should try to minimise their personal income tax as far as possible.

The highest marginal rate takes effect on taxable income above the amount of R701,301.

There is an opportunity for owners of closely held companies and close corporations to reduce their personal taxes by using the arbitrage between the highest marginal rate, on the one hand, and the corporate income tax rate and the dividends tax rate, on the other hand.

Consider, for example, the case of Ms X who holds 100% of the shares in Company Y and who is employed by Company Y. For the 2015 tax year, Ms X wishes to realise a pre-tax income of R1,5 million.

Now, if Company Y pays Ms X a salary of R1,5 million, she will realise a net, after-tax income as follows:

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Michael G. White says...
Posted Thursday, 14 May 2015
Sorry should be an additional saving of about R80000.00
Michael G. White says...
Posted Thursday, 14 May 2015
If the owner's company met the criteria of a small business corporation the savings on the example given would be significantly greater given the preferential tax rate.Note that the dividend tax is greater because of the higher after company tax rate, but the tax savings is about R100 000.00 greater according to my calculations.
Wayne R. Morris says...
Posted Thursday, 14 May 2015
If the individual only takes a salary of R 550 101 and the balance through dividends additional savings may be made.

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