At tax year-end your accountant is normally summoned to use his/her number crunching skills and/or knowledge of the Income Tax Act, to work his/her magic to maximize your tax deductions and write offs for the business.
“Loopholes” are gaps in tax legislation, which is used by tax practitioners, to circumvent tax laws, therefore making it easy to reduce tax. Beware; loopholes are a tightrope between tax avoidance (legal) and tax evasion (illegal) method of reducing taxes.
Over the last ten years or so, The South African Revenue Service (SARS) has clamped down on loopholes, thus making it next to impossible to use them. Rigid taxation laws can lead to greater risk, as far as the taxpayer is concerned. In short, the risk of using a particular loophole outweighs the benefits to be derived.
The question is, how does a taxpayer (company or individual), save taxes? Of course the answer is not easy. And every tax practitioner might have a different answer to this question.
Our advice is twofold.
- Proper tax planning/administration
Proper tax planning;
Start with the basics, and maintain proper records for all financial/business transactions. As a small business or cash strapped individual, you might lack the resources for a tax department/ tax practitioner. So do it yourself, by recording transactions and filing and storing your own documents.
From these records you can determine the following;
- Does the business qualify as a Small Business Corporation, taxable at a lower rate?
- Were any new machinery purchased, which qualifies for legal tax deductions.
- Can you claim wear and tear rates on all assets purchased?
- Revalue assets never recorded on the books, and claim the appropriate wear and tear.
- Reclassify as many assets used for business purposes and claim wear and tear allowances.
- Do you need staff? Rather opt for a Learnership, and claim the appropriate deduction from your taxes.
- Finance charges on HP arrangements, or lease payments should be checked, and considered for tax deductions.
Read on Section 11(a) to (g) of the Income Tax Act, and you will notice that any expense in production of income is tax deductible. It might be that these expenses were not included on your expense accounts, but could legitimately been used in the production of income.
- Pay provisional taxes on time, to avoid unnecessary interest and penalties, as well as benefiting from possible refunds from SARS.
It is surprising how taxpayers pay more tax, by overlooking simple errors on their tax assessments, as well as not staying up to date with pronouncements, such as the Budget speech and interim reports from SARS.
- Review your tax assessments for mistakes. Who said SARS is perfect? They make substantial mistakes on assessments.
- Compare tax assessments received, to a provisional calculation prepared prior to submitting a return.
Here follows examples of common mistakes made by SARS on Assessments:
- The rebate has not been credited to the tax assessments.
- A tax loss reflects as a taxable profit.
- PAYE and SITE has not been credited to the tax assessments.
- Provisional Tax paid, has not been credited to the tax assessments.
- Income has mistakenly been included into the assessment, which the taxpayer has no proof for.
- Interest and penalties have been raised, whereas the tax have been submitted and paid on time.
- Tax deductions claimed have been overlooked.
The list goes on. Contributing to the problems is a lack of skills at the South African Revenue Service. The taxpayer should either acquaint him/herself with tax procedures (Via SARS website and e-filing), or procure the services of a tax expert. It will have to be one of the two, other than that big trouble will inevitably be faced.
Be aware that you can object or appeal against wrong taxes, and request that your tax affairs be reviewed.
Through proper tax planning and vigilance, you can save yourself the risk of court action, and substantial costs, and taxes! The best way out is preparing/budgeting for taxes, and then paying, what is only due, nothing more!