Its that time of the year, where many entrepreneurs explore ways to limit their income tax liability before tax year ending on 28 February as well as consider their financial situation and potentially make some changes. In light if this here are a few ideas to ponder on.
I am not necessarily a fan of a Retirement Annuity (RA), but it has its place for some people. You may claim up 27.50% of your taxable income as deduction. (Up to a maximum of R 350,000 per annum)
In most cases this will be all your contributions for the year.
Now, let’s grow wealth while saving income tax.
If your effective tax rate for the year is 25%, you will receive that portion of the total RA contributions back in a SARS tax refund. Thus, if you keep investing your SARS refund back into your RA, you effectively make an additional 25% growth on your RA per annum. Just another angle to look at your RA and growing wealth.
Attempting to save, may cost you more
I always tell my clients. I am not that accountant that will force you to purchase a new vehicle merely for tax purposes. If you need to purchase a new vehicle for business, wonderful! it will also save you in paying less tax, but don’t use saving tax as your only motivation. The reality is you need to spent R 100 to save R 25. (Based on an effective tax rate of 25%) Which still leaves you with 75% less in the bank. By not spending R 100, still equites to R 70 after tax money in the bank. Capital growth will never be achievable without an income tax effect.
When you need to purchase that new vehicle that will make a difference in your business, do that, but don’t become so obsessed about saving tax that you forget to grow wealth.
You can make travel claims in various forms. Some may receive a travel allowance as part of a salary structure. Others pay fringe benefit tax on a company car. Entrepreneurs use vehicles for business to generate income.
Whatever your situation, you need to keep a logbook. This is a non – negotiable.
SARS audits was very focused on this specific claim during the last few years. Below a list of the items SARS will require from you during an audit.
- Detailed travel logbook. SARS want to see each trip separate for every day. Business trips need to be specified to the person or company visited as well as the reason for it. The opening and closing oedometer reading must also be noted. Investing in a proper electronic logbook might be your best ROI for travel claim purposes.
- Purchase finance agreement of your vehicle or the invoice and proof of payment and RC1 (registration document) if it was a cash transaction.
- If you used a vehicle in someone else’s name, attach an affidavit by that person confirming the use of the vehicle by yourself.
The above may sound like a mountain, but it’s merely a habit to get used to. A habit that will save you many taxes annually.
The most powerful tax hack
Employment Tax Incentives (ETI) is probably the most effective tax hack for small business owners.
One of the very first discussions with a monthly accounting client, is about Employment Tax Incentives (ETI).
ETI is a fantastic tax hack for most small business owners if they employ people under the following requirements:
• Monthly salary between R2,000 and R6,500
• Ages between 18 and 29
• Valid South African ID
Utilize Tax Free Savings accounts (TFSA)
TFSA offers tax benefits to investors, because no tax is payable on dividends, interest or capital gains under this investment scheme,
This investment requires after tax money to be invested, with no deduction on the amounts paid into the scheme.
Currently you may invest R 36,000 per year, with a total lifetime limit of R 500,000.
Capital gains tax consideration
Individuals receives an annual capital gain tax exemption of R 40,000. If you are considering the sale of a business, attempt to structure the transaction of the period of two income tax periods. By doing this you utilize the capital gain tax exemption over two years, for one transaction.
In selling share or property during this period, consider the date to be 1 March, in place of a date before 28 February. By doing this while postpone capital gain exposure and cash flow to a later stage. This tactic allows you to generate additional income with the capital on hand before provisional tax need to be declared.
Pro Bono work to charities
If you do pro bono work to a PBO approved charity, you will most likely be able to obtain an annual Section 18A certificate for your services. Compile a spreadsheet of all pro bono services delivered, with your market related fee, between 1 March and 28 February. The PBO may issue a Section 18A certificate to you for this amount. You will be able to deduct 10% of your taxable income to all donations to PBO’s.
A few things to note in regard to this:
- Not all PBO’s may issue Sections 18A certificates. It must be separately approved by the SARS Tax exemption unit. Confirm this status with the charity you are working with.
- The Section 18A certificate must include the PBO’s reference number, date of receipt of the donation, name and address of the donor as well as the amount or nature of the donation.
Net losses from part time businesses
Many part time entrepreneurs (employees that also have a side business) tend to want to ignore their secondary income for tax purposes. Mostly because they think its irrelevant or are scared about the potential consequences of submit additional income in their income tax return.
Firstly, its compulsory to declare any additional income from any business source. My experience is that most of these businesses do have a net loss in the first year to three. This is mainly because the business is constantly evolving and growing, costing input capital.
The first few years of running at losses will benefit your extremely well. The loss is being deducted from your salary (as employee) and thus your income tax liability smaller. This means that you will receive income tax back from the overpayment of PAYE from your employer.
Massive benefit to a startup business.
In certain circumstances the losses can be ring fenced by SARS, and need to be discussed with your tax consultant.
Financial health assessment
Whenever we with a new monthly accounting client, my team do a financial health assessment with SARS and CIPC.
Some of the most important aspects I look at is listed below: