Tax Tips for SMEs

The current income tax rate for South African Companies is 28%, but is that the effective rate that your business will pay?

Tax benefits for Small Businesses

Your business could save a up to 17% on the first R550,000 of taxable income if you qualify as a Small Business Corporation (SBC). A qualifying SBC pays tax based on a sliding scale of income earned and at a reduced rate of tax (applicable to the first R550,000 of taxable income, and 28% thereafter).

This could save your business around a hundred thousand Rand if your taxable income is R550,000 per year or more.

Unfortunately, the exclusion of personal service providers means that many SMEs do not qualify as SBCs. But for those businesses that do qualify, the potential net tax savings is one you should investigate.

Nobody wants to pay penalties or interest for late tax submissions.

Need to be reminded of the SARS tax return deadlines relevant to your business?

Get your free SME Tax Compliance Calendar (you can import the calendar to an existing or new calendar in IOS, Android, Google Calendar and Outlook).

The Tax Deductibility of Business Expenses in South Africa

The profitability of your business is fundamentally important to its long-term growth and viability. However, the calculation of accounting profit of your business and its taxable income is not entirely the same thing.

As a universal metrics, profit represents the difference between all income and expenses.

In a world with less complicated and confusing tax law and regulations, all of your business expenses would be tax deductible, and the annual profit of your business would be the same for accounting and tax purposes, but unfortunately it’s not.

Taxable Income is calculated by reducing your business income with deductible expenses and capital allowances. The actual amount your business pays to SARS may be more than 28% of accounting profit given the Income Tax Act provisions, but it may also be less …

SARS allows businesses to deduct legitimate business expenses to the extent that the money was actually spent in the production of Income.

In other words, as a sole proprietor or a company in South Africa, every cost that relates directly to operating your business may be tax-deductible.

To determine your taxable profit, it is important to have further understanding of the timing and extent to which business expenses are tax deductible, and therefore the amount of tax that will be paid to SARS.

For example, reimbursements given to employees for relevant expenses during the Covid-19 Lockdown, are deductible by the employer. The employee acts on behalf of a the employer and is impartial to the transaction, making the business expense deductible by the business itself (the principle of agent vs. principal applies here).

There are many tax-deductible expenses that may apply to your businesses, with some of the most common ones listed below.

1. Deductible Expenses - in the ordinary course of Business:

· Administration Costs

· Interest Expense

· Legal Fees

· Cost of Goods Sold

· Repairs and Maintenance

· Rental Expense

· Payroll & Employees (Salaries, Pension and Provident Fund Contributions, PAYE, SDL & UIF)

· Insurance

· Life insurance of employees and directors (where the business is the beneficiary)

· Transport Costs

· Business Travel

· Reimbursements to staff

· Telephone Costs

· Courier Costs

· Bank Charges

· Utilities

· Data and Connectivity Costs

· Fuel Cost

· Accounting Fees

· Audit Fees

· Marketing, Advertising, and Promotions

2. Capital Expenses (typically these deductions are delayed over more than one year)

· Allowance on Plant and Machinery

· Allowance on Computers and Office Equipment

· Depreciation of business Vehicles

· Leasehold improvements

Frequently asked questions:

When is a Company Income Tax return due?

All companies must file annual income tax returns with SARS within 12 months after the financial year end of the company. For example, if your company has a 31 July year end, the annual income tax return will need to be filed on or before 31 July of the following year.

When is a Sole Proprietors Income Tax return due?

A sole proprietorship is a business that is owned and operated by an individual.

The business has no legal identity that exists separately to the owner who is the individual proprietor. A Sole Proprietor must file an annual income tax return as the individual who controls the business.

When is an Individual’s Income Tax return due?

The current annual Individual Income tax filing season runs from September to mid-November (for non-provisional taxpayers), with provisional taxpayers having until the end of January to file via SARS eFiling.

What is provisional tax?

Provisional tax allows a Company’s tax liability to be spread over the relevant year of assessment.

It is not a separate form of taxation but refers to the timing of payment in respect of a Company’s Taxes. This ensures that the taxpayer does not have to deal with a large and unforeseen tax debt on assessment, and the tax man can essentially improve its own cashflow to fund the fiscus by collecting tax before it is due.

When is a Company’s provisional tax due?

The filing and payment by companies of provisional tax is due 6 months after year end (1st period), at financial year end (2nd period) and six months after financial year end (3rd period).

Be reminded to submit your SARS business tax returns on time.

Get your free SME Tax Compliance Calendar (you can import the calendar to an existing or a new calendar in IOS, Android, Google Calendar and Outlook).

Chartered Accountants