Tax is often confusing to business owners because of the complex nature of the law itself. Some of the apparent complexities have arisen due to many tax anti-avoidance measures being incorporated into the Income Tax Act over the years.
Quite frankly, these anti-avoidance measures have actually simplified the interpretation of the law, rather than obscuring it, and by so doing have plugged up loopholes, creating a fair and equitable basis on which tax revenue is collected, and a solid base on which to determine legitimate tax savings.
1. Get your structure right
The way that a company is set up has significant implications for the amount of tax payable. Your business can save up to a maximum of R74 550 in tax annually if structured properly. The key is to structure the company so that it can take full advantage of the tax saving benefits of a ‘Small Business Corporation’.
Here is a brief outline:
- An annual turnover not exceeding R20 million.
- Not more than 20% of revenue derived from investment income or ‘personal services’.
- Shareholders or members are all natural persons.
- Members or shareholders do not own shares (other than listed shares) or members interest in any other company.
2. Don’t leave money on the table
Out-of-pocket expenses landed as the number one overlooked deduction that accountants have observed, followed by motor expenses. So save those receipts for coffee shop, lunch, parking and cell phone pay-as-you-go airtime and depreciate that iPhone and iPad — it all adds up.
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3. Travel allowance versus company car
Which is more tax efficient? Whether you receive a travel allowance or your company owns the motor vehicle you use for both private and business purposes, both are taxed.
To obtain a tax deduction on either a travel allowance or on the fringe benefit portion of the use of a company motor vehicle will require you to keep a log book.
The amount of a travel allowance can be calculated to optimise tax savings, whereas you would pay more tax on the use of a company vehicle. However, tax savings should not be the only consideration as you could have more cash in your pocket if you compare the tax savings to the cost of purchasing a vehicle and its related running costs.
4. Is it better to take a dividend or a bonus?
A dividend’s effective tax rate is 38,8% as you need to also factor in company tax of 28%. Therefore, a business owner will save tax by paying himself a bonus up to R4,3 million as opposed to paying a dividend. However, if your business qualifies as a ‘small business corporation’, you will receive even greater tax savings if you distribute a dividend up to R550 000, as opposed to paying a bonus.
A word of caution though, significant penalties can be imposed by SARS if directors pay low monthly salaries and boost their earnings by way of an annual bonus to reduce their monthly PAYE payments.
Related: Entrepreneurs And Tax: 101
5. Untaken employee leave
Your employee contracts should, at the minimum, comply with the Basic Conditions of Employment Act. As annual leave can be taken up to six months after the annual leave cycle, ensure that your business claims a deduction for outstanding leave pay at the end of the financial year.
6. Charge your company interest on your loan account
Charge your company interest on monies invested by you on loan account as it will effectively save company tax of 28% on the interest amount. However, the interest will be taxed in your individual hands, but the first R23 800 is tax free! This is worth doing if your personal income tax’s effective rate is less than 28%, which is an annual taxable income of R725 000 or less.
Related: Ways To Save More Tax
Meeting with your accountant to go over your specific tax situation will allow them to best advise you on what to do to keep your tax bill, and the stress over it, as low as legally possible.