South Africa : How small businesses in South Africa can reduce their tax burden
- 02 August 2021 / News / 169 / Fares RAHAHLIA
Small business remaining tax compliant by meeting their tax obligations is essential for business growth and funding opportunities. The South African Revenue Service has over the years made it easier to do so.
“Initially, at the beginning of the Covid lockdown, SARS allowed affected businesses to deter a percentage of their VAT and PAYE returns. This now has been stopped and there are no further tax incentives available,” says Ken Brown, director at SME. Tax, an online accounting and business management practice.
He said that instead of looking for once-off incentives, most business owners would be better off if they focused on ensuring they qualify for the existing Small Business Corporation (SBC) incentive.
Besides the tax breaks, there are also generous depreciation allowances that can be used as a tool to reduce their tax burden and keep their business afloat during these turbulent times.
“Professionals like your accountant and tax consultant can make sure you make the most of the tax incentives at your disposal by ensuring all your management accounts are in order long before tax season comes around,” Brown said.
He said that the main purpose of an accountant using management accounts is to guide your decision-making. Management accounts also help you understand sales cycles and sales streams like what products and service sales the most, what customers look for, and when they look for it.
This also allows us to evaluate the cost of sales, what alternative we can use.
Brown says to ascertain whether your business qualifies for small business tax ask yourself these questions:
- Is your business turnover less than R20 million per year?
- Are the shareholders in your business all-natural persons?
- Do you only own your own business?
- Does less than 20% of your turnover come from “investment” income?
- Is less than 20% of your income from rendering a “personal” service?
If you have answered YES to all the above questions, your business could be making massive Income Tax savings.
Brown said that there remains a question of whether the Small Business Corporation Income Tax Savings are worth it?
The table below gives some insight: Taxable Profit Small Business Tax STD Business Tax Tax Saving
Besides the Income Tax savings, there are other ways you can gain from being a small business corporation. SBC’s are allowed to depreciate their productive assets at a faster rate than other businesses.
“Depreciation, although not a physical cash cost, is captured as an expense on your income statement thereby reducing your profit and as you see from the table above, smaller profits equal less tax,” said Brown.
Shareholders of SBC’s who pay the maximum rate, that is 45% of their income, have the opportunity to gain a tax benefit by using a mixture of salary and dividends.
And with the tax-filing season in full swing, many taxpayers will be weighing the tax impact of the travel restrictions imposed during the hard lockdown in South Africa.
The good news is some temporary relief has been provided by the South African Revenue Service (SARS) for the 2020 and 2021 years of assessment.
“Covid-19 has cut a swathe of destruction through the economy and the health sector, affecting life and livelihoods. Among the consequences, the severe lockdown Level 5 impacted the travel arrangements of many individuals. Fortunately, there has been some relaxation in this regard to cater for these undesired outcomes,” said Megan Landers, manager: International Tax at specialist tax and transaction advisers, AJM Tax.
“To accommodate the fact many people were not able to travel, the 183-day exemption requirement has been reduced to 117 days, although the 60 consecutive day requirement remains intact. This is still for a given 12-month period,” she said.
These changes relate to section 10(1)(o)(ii) of the Income Tax Act, which provides a tax exemption for residents who render services outside South Africa for more than 183 full days in a given 12-month period, of which 60 of those days need be continuous.
Landers pointed out that South African tax residents are taxed on their worldwide income, which inherently includes income procured abroad.
“But provided the above two requirements are met, the first R1.25 million of foreign employment income is now exempt from tax liability, based on recent tax amendments. Any income earned above the threshold will then be taxed based on the normal income tax tables and rules.”
Landers said the monetary limit applies from 1 March 2020, and before that time, the entire portion of income for services rendered abroad was exempt.
“The relaxation is not permanent in nature and merely finds application for the 12-month period commencing on or after 29 February 2020 and ending on or before 28 February 2021 – therefore implying that only the 2021 year of assessment returns can be based on the aforementioned. Fortunately, the fiscus realises the need for positive intervention.”
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