As business South Africa shows signs of emerging from the Covid ashes and subsequent to Minister of Finance, Enoch Godongwana’s budget speech, a timely opportunity is presented to review, re-shape, reassess and re-think the way in which we do business. Regardless of your industry, by implementing a tax-efficient strategy you will be able to optimise the way in which your business is run with a view to improve your financial position.
“Business owners should be asking themselves what they can do to ease their tax burden or at least get their tax practitioner to dig deeper into the Income Tax Act and maximise the many tax breaks and incentives that SARS has made available,” advises Ruan van Jaarsveld, manager at specialist tax firm Hobbs Sinclair. Tax strategies should be looked at as a holistic, long-term vision for the company with fine-tuning along the way to accommodate new tax laws, incentives and policies he adds.
The first step is to conduct an in-depth overview and analysis of how your business is structured and how that affects your income taxes and payroll. In doing so you can then determine which expenses are deductable and structure your income and personal spending accordingly so that you pay the least amount of tax allowable by law. “For example, you may have expenses that you are paying for personally that could be paid from your business or investment activities,” explains van Jaarsveld.
Factors to consider in the planning of your tax strategy –
How is your company structured?
The tax requirements and considerations for businesses are dependent on the type of business entity: Sole proprietorship, Partnership or Private Company – each with its own pros and cons in terms of set-up and tax benefits.
Restructuring an existing business is also something that can be looked at as a tax-saving vehicle. Corporate restructuring can consist of a change in the following structures and aspects of a company:
- The ownership of the company or a group of companies
- The assets, liabilities, businesses, and functions within a group of companies
- Financial restructuring (replacing debt with equity and vice versa)
The South African government levies a series of direct taxes and indirect taxes on citizens and companies operating in South Africa. Direct taxes include tax varieties such as income tax, corporate tax, wealth tax, gift tax, expenditure tax, etc. Depending on factors such as turnover, payroll amounts, whether you are involved in imports and exports and such, you could also be liable to register for other indirect taxes, duties, levies and contributions such as VAT, fuel duty, PAYE, Customs, Excise, SDL and UIF contributions.
Determine which taxes you will need to pay and how much
By determining the business’s profit or loss a company or CC, for example, is required to pay 28% income tax on its taxable income for the tax year (this has dropped to 27% for years ending after 31 March 2023 – thanks Mr Finance Minister) and 20% secondary tax on the net amount of dividends declared. Whereas, a sole proprietor or each partner in the case of a partnership is subject to income tax on his or her taxable income levied at rates ranging from 18% to 45%.
Do you qualify for tax relief?
Turnover tax is a tax based on the turnover of a business of no more than R1million annually and is available to sole proprietors (individuals), partnerships, close corporations, companies and co-operatives. Turnover tax is an elective substitute for VAT, Provisional Tax, Income Tax, Capital Gains Tax and Secondary Tax on Companies. Qualifying businesses pay a single tax instead of five other taxes.
To prepare complete and accurate tax returns it is vital to keep records of all company activities. Along with your income and expenditure and books of account, you must maintain any and all information that may be required to support entries on your tax returns.
“By law a company is required to appoint an auditor or accounting officer but it is advisable to acquire the services of a tax specialist who can assist you in navigating and establishing an appropriate tax plan to suit your business needs and overall business strategy, along with any tax challenges facing your business,” advises van Jaarsveld. Furthermore, a specialist can advise on new policies or legislation, and the lesser-known tax incentives, he adds.
Businesses that have made it through or, in some fortunate cases, thrived due to the pandemic, should take some time to adopt a tax strategy as a tool for improving their financial position. But in general, companies should be consistently and consciously re-shaping their tax strategies particularly as they grow and take on more employees.
Involving senior executives, management, and the audit committee in the process, along with the finance and tax functions, will ensure that you have a comprehensive, well-considered, tax-efficient strategy in place for the long term.