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How to avoid paying tax as a small business in South Africa

Taxes? There’s no running away from it! Oh no wait, not only will it catch up with you but the new law says you are liable to jail time! But of course, there are legal ways to reduce taxes. Read on…

Firstly, let’s understand the difference; when you conceal (hide) income or information from tax authorities, it is called Tax Evasion and it’s illegal. Legally reducing your taxable income is called Tax Avoidance.

All business owners have asked themselves this question at some point, “ how can I reduce my taxes?”, if not having to pay tax at all. Look, not registering your business is not a way to run away from paying tax, you are running your business as a sole proprietor and still have to pay taxes, if not more. We’ve covered this before, refer to this blog: https://accasesolutions.co.za/2021/03/16/can-sars-tax-you-even-if-your-business-is-not-registered/

Deliberately understating sales or overstating expenses is also tax evasion so that’s not a strategy. Tax evasion is considered a punishable criminal offence and can have the consequence of penalties. A good tax avoidance strategy is if you use different ways to pay lower rates when it comes to taxes without breaking the law. 

Two (2) guaranteed strategies to legally avoid paying tax: 

1️⃣ Hire young job seekers

When you hire youth (18-35), you get ETI(employment tax incentives) for the first 24 months of the person’s employment (subject to terms).

These incentives you can apply towards PAYE that the company has to pay. For example if your total PAYE payable for the month is R3500 (for every employee in the company), but due to that one young person you hired, say you get ETI worth R1000 every month (this figure differs based on terms, as mentioned above. Then the company will only pay PAYE of 2500 instead of 3500).

2️⃣ Donate to a SARS registered charity 

According to SARS, donation does not have to take the form of money – it can include a physical asset or something that has a deemed value. Donations tax is calculated at a flat rate of 20% on the value of the donation up to R30 million, and at a rate of 25% on donations over and above R30 million. However, Sars makes provision for a donations tax threshold of R100 000 below which no donations tax is payable. Meaning you can make multiple donations throughout the year on a tax-free basis as long as the cumulative total does not exceed the R100 000 threshold.

Although passing your personal expenses through business has very limited personal advantage (since there’s not much you can buy), but you can’t buy what doesn’t make sense to your business. But you may also take advantage of this. For instance; if you are in a type of business where you use your phone to create content, you can buy the latest iPhone 12 and register it through your business. It makes sense because you do make use of a cellphone to deliver your service at best. 

Some key components to remember when planning and avoiding TAX:

❇️Timing 

❇️Gross income

❇️Income or capital 

❇️Deductions 

Important things to know about tax in South Africa

Understanding the South African taxation system

To put it in simple terms, tax is a compulsory contribution to state revenue, you must pay South African taxes if you work in South Africa or own a South African business. South Africa uses a residence-based taxation system, non-residents are taxed on South African-sourced income.

Tax money does not only pay for public goods and services, it is also key in the social contract between citizens and the economy. Paying taxes fosters economic growth and development. This is the government’s sources of funding for social programs and public investments.

Understanding taxes: types, filing for returns, refunds from SARS:

There are many different type of taxes. Just to mention a few, some include:

  1. Pay As You Earn (PAYE)
  2. Personal Income Tax
  3. Provisional Tax
  4. Capital Gains Tax
  5. Value Added Tax

Ordinary taxpayers are those who earn a salary from an employer. Your employer should deduct Pay As You Earn (PAYE) from your salary monthly and pay that to SARS on your behalf.

Here’s an example of how your Net Income will look like after taxes

Why SARS issues refunds:

If for instance you take an unpaid leave at work, the payroll administrator has to adjust your tax therein. If the adjustment is not made, it means that your company deducted more tax as it was based on a wrong annual income. In this case, SARS is liable to give you a refund.

The whole point of filing for tax returns is for SARS too determine all your tax, and if you have paid, they conclude on the right amount. If you have overpaid them, they will definitely give you your money back. Understand that, you only get a refund IF you have overpaid because you filed for returns.

Income Tax VS Provisional tax.

Provisional taxpayers have multiple sources of income such as a salary and commission or are business owners or self-employed including freelancers and contract workers. This means that you need to pay taxes even from other activities like renting out a room in your home (e.g. Airbnb), you will have to declare those to SARS when you do your tax return.


SARS has what we call Provisional tax payment which is paid in advance, every six months. This means you pay provisional tax twice a year before your year ends. Just after the year ends, you compare what you have paid already to what you should have paid, and if underpaid there’s a third provisional payment/top-up due 6 months after year-end.

You could be asking, what happens when you pay SARS more than you should have?

…well, that’s okay because SARS will give you a refund after you’ve submitted your year end returns which is due 12 months after your year ends.

On Value Added Tax (VAT)
VAT in South Africa is levied on the consumption of goods and services, the rate is currently 15%. When you bill someone, you charge them VAT and that portion is not your money – you have to pay it to SARS. Businesses must register for VAT in South Africa if their annual turnover exceeds R1 million within a 12-month period. Taxpayers can, however, register on a voluntary basis if their annual supplies exceed R50 000.

When you buy from VAT vendors, you pay the VAT (which belongs to SARS), you’re supposed to get it back on your side because you paid VAT vendors. If for instance you sell items whose VAT element is R1000, and the material is R2000 worth of taxes, it means you paid more VAT than you have charged your customer. You can therefore claim excess herein, and SARS becomes liable to giving you a refund. SARS may request some verifications before paying the refund as the onus to prove such details is on the taxpayer.

A read from Expatica explains that tourists and diplomats visiting South Africa can claim a refund of the VAT they paid on goods purchased in the country. To qualify, you’ll need to be a non-resident foreign passport-holder or a South African passport-holder who is now a permanent resident of another country. You can reclaim VAT when leaving the country by declaring the goods in question to a customs official.

We will, for now close it here. Do reach out to us to learn more about taxes, filing for returns, and compliance.

Can SARS tax you even if your business is not registered?

Can SARS tax you even if your business is not registered?

The answer is YES. If you are running a business that is not registered, you are basically a sole proprietor.


What Is Sole Proprietorship?


A sole proprietorship is defined as a business that is owned and operated by a natural person (individual).

This is considered the simplest form of doing business. It simply means the entity is not legal (registered) and has no existence separate from the owner who is called the proprietor. Although a sole proprietorship can operate under the name of its owner or give a business’ fictitious name, the name does not create a legal entity separate from the sole proprietor owner.


Pros and Cons of Sole Proprietorship


Sole proprietorship obviously has some pros and cons. Here are 3 pros and cons:

Pros:
1️⃣Simple to establish, operate or even discontinue the business.
2️⃣Owner is free to make decisions.
3️⃣Owner receives all the profits.


Cons:
1️⃣The owner is legally liable for all the debts of the business. 
2️⃣​Limited ability to raise capital, which limits the expansion of a business when new capital is required.
3️⃣The owner alone has limited skills, they may need to hire employees with sought-after skills.



What Is Most Tax Efficient?
Sole Proprietorship vs LTD (PTY)

It all boils down to expected earnings from your business.

Individuals are taxed on a sliding scale, which means that the rate of tax you pay increases as your earnings increase. This applies to any individual earning more than R87,300 per tax year.

In a company, profits are taxed at a rate of 28%, irrespective of the value. Plus, dividends tax is levied at 20% on profits retained in the company and distributed as a dividend in the future.

In A Nutshell…

As an individual earns more, you move into the higher tax bracket. The difference in tax between a company and a sole proprietor decreases. At a lower level of taxable income, it’s more tax-efficient to operate as a sole proprietor and enjoy the benefits available to individuals. At higher income brackets, it’s likely that company registration would be more beneficial.

This should help you make a better decision if you were stuck between registering your business and operating it individually. For business registrations and taxes, please do get in touch with us 📲