This topic has been a contentious one for many businesses in South Africa.
There is no prohibition on minimising your tax payable in South African tax law, however, there’s a fine line between tax avoidance and tax evasion – with severe consequences for those who dare cross it. Understanding the difference between tax avoidance and evasion is key; avoidance is the act of using legal methods to minimize tax liability, while evasion is any illegal method undertaken to minimise tax liability through fraudulent techniques such as deliberate understatement of taxable income or inflating expenses. Ensuring legality when reducing tax requires the correct planning and monitoring, which is where tax planning comes into play.
Tax planning is the process of analysing one’s financial situation in the most efficient manner, to avail various exemptions and deductions legally. The businesses that consider the tax consequences of each transaction or investment made are those that make the most savings in tax as they realise that it’s the continual process that yields benefits. The use of professional practitioners in a business’s tax planning could be essential to gaining these savings as each year new regulations and amendments are made to ensure these tax loopholes can be combatted, ensuring maximum tax contributions.
Tax liability chargeable
Depending on the registration status of your business, the tax liability chargeable will vary. Turnover tax is chargeable if your SMME yields a turnover of less than R1 million per annum. Turnover tax replaces VAT (if you have chosen not to elect your business for the VAT system), provisional tax, income tax, capital gains tax, secondary tax on companies (STC) and dividends tax. Thus, qualifying your businesses to pay a single tax instead of various other taxes. For turnover tax rates, link: https://www.sars.gov.za/Tax-Rates/Pages/Turnover-Tax.aspx
For registered Small Business Corporation (SBC), incentivised tax rates will apply. Companies in South Africa (including Close Corporations) are generally required to pay a flat rate of 28% income tax. However, SBC’s are subject to reduced rates on income up to R550 000. To qualify for these more favourable tax rates (Check SARS web for more info), a business must mark on their annual company tax return that they are an SBC.
Understanding what your businesses tax liability is will aid in tax planning – allowing the maximum savings in tax for your business.
Tax evasion penalties
In terms of penalties, small business owners must be aware of the understatement penalty regime. A tax understatement is defined as any prejudice to the South African Revenue Service (SARS) or the fiscus as a result of: a default in rendering a return, an omission from a return, an incorrect statement in a return or if no return is required, the failure to pay the correct amount of tax. The highest understatement penalty applicable is dependent on the amount understated – with the highest percentage payable being 150% of the understated amount for a first offence. With other penalties payable including:
- If a substantial understatement, 10% of the understatement will be fined.
- If reasonable care is not taken in completing the return 25% of the amount will be fined
- If there are no reasonable grounds for tax position taken, 50% of the amount will be fined
- Impermissible avoidance arrangement will be penalised with a fine of up to 50% of the payable amount
- If gross negligence is proven 100% of the payable amount will be fined
- If intentional avoidance is proven 150% of the payable amount will be fined
- If there is a repeated offence 200% of the amount payable could be fined
Tax planning makes good business sense, by finding legal ways to reduce tax payable, your business could save the needed capital to ensure growth. However, in trying to take these tax reductions to the extreme, ensure your business is always on the right side of the law.
Tax avoidance. Tax evasion. One is legal and one isn’t – be sure to know the difference, or your company could pay the ultimate price.