How to pay less tax as a business in South Africa.
As a business owner in SouthAfrica, it is possible to pay less tax. But you must have a competent bookkeeper, accountant or tax practitioner who can help you organising your business finances.
It is written in the Income Tax Act of 1962 that taxpayers are allowed to pay less or no tax but it must done legally. There are many businesses that make millions of rands but they've found a way to structure their books in a way that reduces their tax bill. That is called tax avoidance.
Tax evasion is when you just don't pay taxes; and you're doing everything in your power to dodge the tax bullet. Nobody wants to pay taxes but there's no running away from it. It's a pain but it becomes a very bitter pill when you have to pay taxes on money that you've chawed and now have nothing to show for it. And to top it off, the taxman is knocking on your door.
How do you pay less business taxes?
For your business to pay less tax, you have to put your books in order.
First, you have to understand the business money is not your money. It belongs to the business. In the eyes of the South African Revenue Service, you are a natural person, and your business is a legal person. Some very clever people with a lack of imagination and a deep desire to complicate things have come up with these terms. What it means, is that when you have a registered company, in the eyes of the law, you are two separate entities.
That is why you pay taxes for the businesses and tax as a person separately. SARS gives specific guidelines on how you can reduce your tax bill. It is called allowable deductions. There are also special deductions and non-allowable deductions. As a business owner, you must understand which expenses are tax-deductible to reduce your taxable income.
There are times that the interpretation of the business and the SARS' interpretation are not the same, especially where the company has a more complex structure.
For local small to medium businesses whose operations are less complex it can be a little more straight forward to identify allowable deductions.
Always get professional help with your business taxes. You don't want to pay too little tax and be punished with interest and penalties; or pay too much and live with anger and regret. Your friends or other business owners don't count as professional advice, unless they are bookkeepers, accountants or tax practitioners.
How does SARS decide what are allowable deductions?
SARS has a general deduction formula they use to determine if it was a genuine business expense:
- You must own a business where you are offering a service, selling products, or manufacture goods or equipment.
- You must get an income from the business.
- The amount you claim must be for an expense or if you've suffered a loss in the running of the business.
- The expenses must have been paid, or the loss must have happened in the year that you are filing your tax returns. In other words, if you file taxes for 2024, it must have happened between the beginning of your financial year in 2023 and the financial year end in 2024.
- The expenses or the loss must have come from spending money in or on the business.
- The expenses or losses must not be of a capital nature. In normal common English, it means the regular expenses that are necessary to keep your business running day-to-day.
What are allowable deductions?
Vehicle expenses if you use it for business purposes. Travel expenses include:
- Petrol
- Maintenance
- Licence fees
- Insurance
- Wear and tear
- Lease payments
- Parking expenses
- Finance charges like interest.
Other expenses that are tax deductible:
- Advertising
- Recurrent expenses (e.g audit fees, trading licences, security expenses)
- Rent
- Electricity
- Municipal rates and taxes
- Salaries and wages
- Stationery and printing (white board markers, paper, pens, pencils, etc.)
- Electronic equipment (laptops, printers, projectors, telephones)
- Office furniture (Desks, chairs, filing cabinets, bookshelves)
- Office equipment: (calculators, white boards, shredders, staplers, punches, etc.)
These are just some of the expenses that can be claimed as deductions, that will reduce your tax burden. SARS has a list of other business expenses that can be deducted to cut your tax bill. This is just a very small part of how you can pay less business tax.
Taxes work as follows: SARS taxes you on your net profits. It is what is left after you've deducted the expenses from the gross profit. Your gross profit might be R50 million but after all the expenses have been deducted, the net profit might be R750 000. The company will pay taxes only on the R750 000
This is why keeping records is crucial for your business. These deductions are the records of the money you've spent in the business, and you need every scrap of paper that will proof when and how these expenses were made. SARS doesn't know what you spend your money on ; they rely on you to show them proof.
This is a very simplified explanation of a very complex matter. If you don't have a bookkeeper who can prepare your books for taxes, you're probably one of those business owners who could've paid way less taxes, but aren't. Instead, your business is being hit with a massive tax bill that's leaving you shocked, depressed and speechless.
It's very frustrating to see how many business owners pay too much tax simply because they don't have a bookkeeping system, or they don't know how to manage the finances of their companies.
Are you feeling overwhelmed by your business finances? A qualified bookkeeper or accountant can help. We can provide the answers you need to reduce stress, increase profits, and build a thriving business.
If you're facing similar challenges in managing your finances, I'd be happy to assist you. As an accountant, I can provide tailored solutions to your specific needs. Please feel free to contact me for a consultation at profitsandbooks@gmail.com or +2764 049 03038
Disclaimer
The information provided in this blog post is for informational and educational purposes only. It is not intended
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