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.
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.
Tax Refunds – What You Need To Know
You are able to object/dispute any SARS decision not to release the refund on efiling or through your tax practitioner.
Most taxpayers are not aware of the requirements for a tax refund to be facilitated and SARS very often will delay paying out the refund. In this article, we will look at the requirements taxpayers need to be aware of and the Tax Ombud’s report on the investigation into alleged delayed payment of refunds as a systemic and emerging issue in terms of section 16 (1) (b) of The Tax Administration Act No. 28 of 2011 (TAA).
What you need to know as a taxpayer:
- The tax refund must be claimed within 5 years from date of submission of the return.
- SARS has the right to withhold the refund as per section 190 (2) of TAA: “SARS need not authorise a refund as referred to in subsection (1) until such time that a verification, inspection or audit of the refund in accordance with Chapter 5 has been finalised.”
- Authorisation of payment of refund done once SARS is satisfied with the acceptable security provided by the taxpayer in terms of section 190 (3) of TAA: “SARS must authorise the payment of a refund before the finalisation of the verification, inspection or audit if security in a form acceptable to a senior SARS official is provided by the taxpayer.”
- As a taxpayer, you need to ensure that you verify your banking details with SARS and that there are no outstanding returns in order for your refund not to be delayed.
- Any decision not to refund by SARS is subject to an objection and appeal by the taxpayer in terms of section 190 (6) of TAA.
- Refunds less than R100 are not refunded but carried forward to the next tax period.
- To view the status of your refund you can use the Refund Dashboard on efiling under the ‘Returns History’ tab for the tax period in question or contact the SARS call centre.
- Interest starts accruing from 21 business days from the date on which the refund became due, i.e. verification/audit outcome finalised.
Related: Tax Basics For Business Owners
Tax Ombud’s Report
The Tax Ombud’s report identified various mechanisms used by SARS to defer or delay the payment of refunds due:
- SARS failing to link submitted supporting documents at a SARS branch to the main file.
- The use of special stoppers on taxpayers’ accounts and the delay in lifting the stoppers, e.g. being required to verify banking details in person at a SARS branch. Even after the verification is done, there is still a lengthy delay in paying the refund.
- Using the filing of new returns as an excuse to block refunds. The system blocks already verified refunds the moment a subsequent return is submitted by the taxpayer.
- Withholding of refunds for one period while an audit/verification is in progress on another period. This is contrary to section 190 of the TAA.
- The use of historic returns suddenly reflecting as outstanding but these have never been shown as outstanding on the Tax Clearance Certificate or the Statement of Account.
- The raising of assessments and passing of journals to absorb credits on taxpayers’ accounts, i.e. overpayments. In doing so, SARS creates fictious tax liabilities instead of making a decision on the refund.
- Requesting further information during the audit to delay finalisation, thus delaying the time frame from when the interest accrues.
- No turnaround time for assessments successfully disputed.
- Obstacles regarding diesel refunds.
- Raising of assessments prematurely before the 21 days to submit the supporting documents
- Refunds for periods that have been verified automatically set-off against bad debts on other periods not withstanding a request for suspension or where there is the suspension of payment. SARS may not instate any collection steps from date of submission of request for suspension of payment until 10 days after decision to not grant the request has been communicated to the taxpayer in terms of section 164 (6).
You are able to object/dispute any SARS decision not to release the refund on efiling or through your tax practitioner.
Reimagine The Use Of Technology
The phenomenon of ‘big data’ is rapidly catching up with the world of tax.
Invest And Save 100% Of Your Tax Payable To SARS With The 12J Fund
Section 12J funds were created in response to the South African Government offering tax incentives for private investors to support funds that support SME growth in South Africa. Three experts unpack the benefits of investing in 12J funds — particularly for high net worth individuals.
What is a 12J Fund?
Clive Butkow: In 2009, the South African Government implemented a tax incentive for investors in enterprises through a Venture Capital Company (VCC) regime known as Section 12J.
These funds were set up to help early stage companies raise venture capital to stimulate economic growth and job creation. Section 12J was based on the Venture Capital Trusts (VCT) in the UK, which enable high net worth Individuals to save tax and rather invest in a VCT, which will then invest in start-ups. Individuals, trusts and companies can all invest in a Section 12J company and receive the respective tax deduction.
Neill Hobbs: The South African Revenue Services (SARS) has written Section 12J into the Tax Act, which offers taxpayers a 100% reduction in their taxable income in the year of investment for the amount they invest by way of a subscription for shares in a Section 12J VCC. The VCC then invests into small and medium-sized enterprises (SMEs) with the added intention of creating jobs and securing employment. The VCC must be approved by both SARS and the Financial Services Board.
Why is it tax deductible?
Gidon Novick: The legislation provides for a tax deduction providing the fund complies with the requirements of the Act. The intent of the incentive is to stimulate certain critical areas of the South African economy (such as tourism and hospitality) through SME growth in the sector.
Neill: Section 12J advocates investment into SMEs and junior mining exploration to act as a catalyst for a positive shift in the economy. We know that SMEs are a significant source of employment in the economy and provide a plethora of job opportunities and income security for households. This ultimately creates a positive iterative loop in the economy.
How do the tax deductions work?
Clive: The total amount invested can be deducted from the tax- payers’ taxable income. This results in a taxpayer (who is paying tax at the marginal rate of 45%), saving 45% of their investment by reducing their taxable income. For example, a taxpayer who has a taxable income of R1 million and would normally pay R450 000 to SARS will rather pay the R1 million to the Section 12J company and pay zero tax.
The caveat is that the taxpayer needs to hold their shares for five years in the relevant Section 12J fund, or SARS will recoup their tax saving. The tax is deductible to incentivise taxpayers to rather invest in a Section 12J company and promote the growth of the South African economy than pay tax on their taxable income.
This seems like a double benefit to investors? Is that correct and why?
Clive: There’s definitely a double benefit, as the taxpayer receives a once off deduction from SARS in the year they invest in the Section 12J company, as well as an added benefit based on the performance of the Section 12J company. Some companies are set up to invest their capital in higher risk ventures with others in lower risk ventures. The returns to investors range from 15% to 38% based on the nature of the fund and their investment strategy.
Gidon: The benefit to investors would be in the form of their tax deduction but importantly also their investment returns. Investors need to fully understand the nature of the investments the fund is making, the risks involved and their ability to cash out after the five-year minimum term, in other words, the liquidity of the investment.
Neill: Individual investors will get an immediate tax saving, up to 45% of the amount invested, in addition to any dividends and long-term capital growth. A Section 12J VCC provides self-interest value to the taxpayer in the tax saving and growth in investment, but in a broader sense, marries business value with societal value through the boost in the SME space.
What questions should investors who are interested in investing in a 12J fund be asking?
Clive: The most important question is of the experience and reputation within the management team. Money follows management in the venture capital asset class. The management team needs to have experience in the investment strategy of their Section 12J fund. At Kalon Venture Partners we only invest in disruptive digital technologies where the CEO and the board have significant experience in buying, building and selling technology companies. The CEO was the ex-COO of Accenture South Africa and prior to that led Accenture’s technology business. Another important consideration is how the Section 12J company creates liquidity for their investors as it’s important for the investor to understand how and when the Section 12J company will pay dividends of the profits and surpluses on the sale of assets. Lastly, investors must understand the governance and investment disciplines, systems and processes when making investments.
Gidon: What is the risk/return profile of the underlying investments? Who are the fund managers and what is their track record? What are the assets that underpin the investments? How will this fund make an impact on the South African economy and job creation? How will I get my money out after five years?
Neill: Confirm SARS and FSB approval. What is the VCC’s investment strategy? The VCC’s industry focus? What is the fund’s launch date? Track record? Capital raised? Targeted return? Number of investments made in qualifying companies? Annual financial statements published? Basis for valuing the underlying investment and the VCC’s dividend policy and history? Fee structure? Minimum investment?
What are the pros and cons of a 12J fund versus more traditional investment portfolios?
Neill: The benefit for a deduction in respect of a retirement annuity contribution is limited to
R350 000 in a year, whereas the contribution and benefit of an investment into a Section 12J VCC is not capped and can be 100% of taxable income.
Many SMEs require capital and management support. With the support from the VCC team, stakeholder integration and interaction takes place on the factory floor, rather than just in the boardroom. The investor management team walks the walk with the SME.
A VCC investment should be viewed as a long-term investment. The proceeds on the sale of the VCC shares will be subject to full tax recoupment if the shares in the VCC are sold within five years from the date of investment.
If the shares are held for a period exceeding five years, the sales proceeds from the sale of the shares will only be subject to capital gains tax, albeit from a zero base.
Clive: A major pro for investors is the upfront tax advantage where there is no limit to the investment that you can make, unlike an RA, which is limited to a percentage of taxable income and capped. A second pro is the fact that investors can now diversify their portfolio with 12J investments and not only invest in the traditional capital markets.
What is the amount you can invest into a 12J fund?
Neill: CIPC requires that if a VCC does not have a prospectus, then the minimum amount that can be invested is R1 million. The intention with this is to make sure that any general person from the public, who might not understand the investment they are investing into, does not invest more than is appropriate for them.
Clive: Our recommendation at Kalon Venture Partners is that an investor should not invest more than 7,5% to 10% of their net wealth into a Section 12J due to the higher risk profile of a venture capital investment.
Is there a ‘right’ time to invest in a 12J fund with regards to tax exemptions?
Clive: There is no right time to invest, however with the current rand strength we see this as a vital time to diversify one’s portfolio. The most effective time to raise capital is at the tax year end on 28 February. An alternate time of the year that capital is raised is during the provisional tax season in August or September each year.
Gidon: An investor should only consider a 12J if they have the taxable income and don’t need access to the funds they have invested for at least five years. Investments must be made before the tax year-end (ie 28 February) to qualify for the deduction in that year.
Neill: Section 12J is particularly attractive to high income earners. It’s also attractive to those taxpayers who have made a capital gain, which will be subject to capital gains tax. For example, an individual who realises a capital gain of R5 million in the 2018 tax year, will only have to invest the inclusion amount of 40% (R2 million) into a VCC to avoid capital gains tax completely in the 2018 tax year.
A VCC investment is the only recognised manner in which a corporate employee, who is subject to PAYE on their salary, can receive a refund of PAYE deducted by the employer. Although there is no provision for a directive for the reduction of the PAYE amount, an employee who earns R2 million per annum, and makes a R2 million VCC investment, could receive a full refund of PAYE on the submission of their annual tax return.
The sunset clause is currently 30 June 2021. This means that funds invested before that date must remain in for the five-year period, but any funds invested into a 12J fund after that date will not enjoy the current tax benefits. This date could be re-assessed and extended.
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