In their latest survey “Paying Taxes 2014” PwC and the World Bank rank South Africa highly overall for total tax rate, number of tax payments and tax compliance hours. While well ahead of Africa, and placed competitively worldwide, most South African entrepreneurs would consider they pay too much tax. And with the approaching National Health Service and significant infrastructure required to improve service delivery, there will be pressure on corporate and personal tax rates. Sin taxes and fuel levies are expected in some quarters to rise in 2014.
Structuring your affairs efficiently has become increasingly important, and it will be critical to monitor the direction of the recommendations of the Davis Commission into the SA tax system. Just as wealth creation cannot be achieved by saving on overheads of less than 5% of turnover, so entrepreneurs would be well advised to spend their time creating efficient structures rather than agonising over dubious tax deductions which cannot yield material tax savings.
While the tax system strives to tax businesses equitably, whether they trade in personal names, companies or trusts, there are advantages to be gained by utilising appropriate legal structures and vehicles. Although SARS would prefer businesses to be sole traders, the following are examples of a different approach:
- If net income is reinvested in a business, taxation can be deferred by trading in a company
- Companies taxed as Small Business Corporations can achieve an annual saving of R94 000 on taxable income of R550 000 under defined circumstances
- Very small enterprises with low costs and which are unlikely to grow substantially may be taxed at 2% on the first R750 000 of turnover
- Significant savings in capital gains tax and dividends tax can be achieved by holding growth assets directly in a trust
- On death estate duty savings will result if donations tax exemptions are utilised during one’s lifetime, and housing growth assets in trusts
- And there are significant tax breaks available to investors in new commercial property and residential units to let.
These are just a few reasons why time spent regularly on structuring your tax affairs will reward the entrepreneur handsomely. Professional advice can add great value.