Paying tax is kind of like brushing your teeth:
- You’ve got to do it (read: pay it) before you leave in the morning (before you expand the business or do anything else)
- It’s an inconvenience that slows down your day (or company growth)
- It creeps up just as you’re settling down for the night (read: month end)
- But if you don’t do it, no one really wants to get too close (do business with you or be employed by your company) and you eventually find yourself in a spot of bother. (think dentist bills … and/or investigation by SARS for tax evasion!)
There are very few of us who haven’t cursed the tax man at one point or another. He eats into your cash flow, carves away at your savings and generally makes doing business more expensive. But he’s here to stay, so it’s worthwhile learning a few tricks around minimizing your tax requirements and maximizing your cash flow while still complying with the law.
Structure your company right.
The way in which your company is structured can mean the difference of thousands of rands to your tax bill each month. Many small businesses falsely believe that they will be liable for the least amount of tax if they trade in their individual capacity. An Mweb entrepreneur article makes this point: “Whilst many small businesses still trade as sole traders or partnerships, the majority would actually pay less tax if they converted to a company.” The key, it advises, is to structure the company or close corporation so that it can take full advantage of the tax saving benefits of a “Small Business Corporation”. As a guideline, if your business fits the following criteria, you might consider structuring it as a Small Business Corporation.
- If your annual turnover is less than R20-million
- If not more than 20% of your revenue is derived from investment income or “personal services”
- If your shareholders (or members) are all natural persons and do not own shares or interest in any other company or CC
Claim back for maximum expenses.
Give your cash flow a boost by making sure you claim back for all the expenses that are due to you. If you’re a sole proprietor working from home, you can legally claim for a range of things, such as part of your mortgage bond interest, telephone bill, and entertainment and motor vehicle costs. However, you need to be able to prove to SARS that your business generates a small income and that it has prospects for making a profit in the future.
Spread the income amongst family members.
An easy way of increasing cash flow (and decreasing tax payments) in a family-owned business is by splitting the income between partners or husband and wife. If your partner is a legitimate employee of the company, you can share the load by splitting your income evenly. Standard Bank gives this example: Mr X draws a salary of R250 000 from his CC, and pays income tax of R45 504,00, leaving an after-tax income of R204 496.
If he employs his wife and splits the income equally between the two of them, the total tax bill is R25 488 (R12 744 each). This leaves the family with an after tax income of R224 512 – a saving of R20 016.” Note that both spouses or partners need to have functioning jobs at the company in order to make use of this option.
Driving your cash flow up and your tax payments down takes an in-depth understanding of tax and corporation law, as well as a working knowledge of what money flows in and out of the business on a monthly basis. If you’re looking for a specialist to come in to advise you on these matters, contact The Finance Team. Our associates are qualified, experienced finance professionals who can provide you with in-depth advice as and when you need it.
Image credit – financetipss.com