Good tax planning is not about last-minute tricks at filing time. It is about structuring your business and your records throughout the year so that you pay what the law requires, and not a rand more. These five strategies apply to most South African businesses.
1. Keep complete records all year
Every deduction you claim must be supported by records. Keep invoices, receipts, bank statements, contracts and payroll records for every transaction, and reconcile them monthly. The Tax Administration Act generally requires you to keep records for five years from the date your return is submitted, and SARS can ask for them during that period.
Businesses that keep clean records claim more of what they are entitled to, because nothing gets lost by the time the annual return is prepared.
2. Get provisional tax right, and pay on time
Companies, and individuals who earn income that is not fully taxed through PAYE, generally have to pay provisional tax in two instalments during the tax year. For a February year-end, the first payment is due by the end of August and the second by the end of February. An optional third, voluntary top-up payment can reduce interest on any shortfall.
Underestimating your taxable income can lead to penalties and interest. A realistic estimate, based on up-to-date management accounts, avoids that.
3. Claim every expense you are entitled to
Expenses incurred in producing your income are generally deductible, as long as they are not of a capital nature. Common examples include rent, salaries, professional fees, software subscriptions, repairs and business travel. Assets such as vehicles, computers and machinery usually qualify for wear-and-tear or other capital allowances over time.
Timing matters too. Planning when you buy equipment can bring an allowance into the current year instead of the next.
4. Check whether you qualify as a small business corporation
Companies that meet the requirements of a small business corporation (SBC), including a gross income limit and rules about who the shareholders are, are taxed on a lower, progressive rate scale instead of the standard corporate rate of 27%. They may also qualify for accelerated allowances on certain assets. The rules are strict, so it is worth checking each year whether your company qualifies.
5. Review VAT and your business structure
Make sure you know whether you are required to register for VAT, and whether voluntary registration would benefit you. Once registered, accurate VAT returns and claiming input VAT on qualifying purchases have a direct effect on your cash flow.
Your business structure also affects how much tax you pay. A sole proprietor, a private company and a trust are taxed very differently. As your business grows, the structure that suited you at the start may no longer be the most efficient.