Learn more about taxation

2018-02-14 06:02

TAX is collected by government from persons for the benefit of the citizens of a country. In our country the South Africa Revenue service (SARS) collects taxes on behalf of the government.

SARS collects both direct and indirect taxes. Money received by the fiscus, mainly in the form of taxes is spent on social services and infrastructure development to benefit all South African, rich and poor. The money is spent on education, health, welfare, housing, building of roads, hospitals and so on.

WHO IS LIABLE FOR TAX?

Persons liable for tax include natural persons such as individuals and legal persons such as companies and close corporations. A person also includes trusts, deceased estates and insolvent estates. A partnership is a group of persons acting together by way of a partnership agreement.

For income tax purposes, a partnership is not a taxpayer but the partners are however taxed in their capacity as individual taxpayers.

FORMS OF TAXATION

The various forms of taxes include income tax; value added tax (VAT), capital gains tax, donations tax, dividend tax, estate duty, transfer duty, customs duty and securities transfer tax and so on. In South Africa individual taxpayers are taxed differently from corporate taxpayers. Taxation for individuals who are employed and receive a monthly salary is different to that of individuals who conduct a trade or business whether in their personal name or through a corporate entity such as a company or close corporation.

TAXATION OF INDIVIDUALS INCOME AS A SALARY

Individuals who are employed (not in business) who receive a salary together with certain fringe benefits is taxed on the salary and the value of such fringe benefits which represents the private use of the company car. The deduction permissible for such individual taxpayers is limited. The individual taxpayer may claim a deduction of payments made to a retirement payment such as a pension fund. The individual is also entitled to certain other deductions such as payments for medical and related expenses based on a certain formula. Tax is calculated on taxable income determined for individual taxpayer, after deducting normal tax rebates. In the case of individual taxpayers tax is levied at a tiered rate. The tiered rate of tax means the higher the level of income the higher the rate of tax applicable to such income on a tiered scale. In the tax year which ended 28 February 2017 if the individual taxpayer who is under the age of 65 and whose annual taxable income is less than R75 000 will pay no tax on such income. As the income increases above the tax threshold of R63 556 the rate of tax payable increases from a rate of 18% onwards.

TAXATION OF INCOME FROM TRADE OR BUSINESS

If a person is conducting a trade or is in a business then expenditure incurred by such a person may be claimed as a deduction against income received by such a person. Expenditure may be categorized as revenue expenditure and capital expenditure for tax purposes. Revenue, expenditure includes spending on the following: advertising, bank charges, cleaning, entertainment, salaries and wages, purchases of stock, motor vehicles expenses and so on. Capital expenditure includes spending on land and buildings, plant and machinery, motor vehicles and so on.

In the normal course of trade a taxpayer may claim all the revenue expenditure in the year in which such expenditure is incurred. Capital expenditure may be over a number of years for example wear and tear on plant and machinery may be claimed in instalments over four years or five years. Both revenue and capital expenditure is claimed as a deduction against income.

FORMS OF BUSINESS ENTERPRISES

A person may conduct a business or trade on the following basis: as a sole proprietor or sole practitioner in the case of a professional, a partnership, a company, a close corporation or even as a trust.

SOLE PROPRIETOR

In the case of a sole proprietor or sole practitioner the net profit, after deducting legitimate business expenses and allowances, is taxed at progressive rates of tax.

COMPANY OR CLOSE CORPORATION

A company or close corporation is taxed at a flat rate of 28% of taxable income after taking into account all the income received by such company and deducting business expenses and allowances for tax purposes.

MICRO AND SMALL BUSINESS CORPORATION

Micro business generally experience difficulties in maintaining financial and accounting records and the costs associated with keeping such records. The government introduced a turnover tax to stimulate the growth of micro business by reducing administration costs and responsibilities placed on tax compliance. In order for a micro business to qualify for turnover tax, its turnover (sales) must not exceed R1m in any one tax year.

You may conduct the business in your own name as a sole proprietor, a company or a close corporation. Turnover tax is based on cash receipts from business rather than the profit.

You need to keep little or no records and you don’t have to account to SARS for value added tax (VAT), capital gains tax, dividend tax and normal tax.

A small business corporation includes companies and close corporations whose turnover does not exceed R20 million for the tax year ended 28 February 2017. Preferential rates of tax are applicable to such small business corporations.

TAX AVOIDANCE AND TAX EVASION

Tax avoidance is an attempt to minimize tax liability using legal means i.e to regulate ones affairs to pay the minimum amount of tax rather than the maximum. Tax evasion is the use of illegal means to reduce tax liability for example falsifying of books, suppression of income over statement of deductions and so on.

TAX PLANNING

Taxpayers are entitled to arrange their business affairs to pay the least amount of tax. No person wants to pay more tax than required. The government promulgates the law relating to taxation. As such, taxpayers are able to plan their tax affairs, within the law, to be most tax efficient. Tax planning is highly subjective and varies from person to person and company to company.

The government or the South African Revenue Services (SARS) are not mandated to ensure optimal tax efficiency and saving – you must do that!

The Tax Company is a well established accounting and tax practice in the central business district of Stanger.

We specialise in accounting for sole proprietors, companies, close corporations and trust, as well as the related tax planning for these various business entities to you in structuring your business in the most tax efficient manner.

- The Tax Company

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