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What is exempt income?

by , 04 December 2013
Did you know that there are certain types of income you don't have to pay income tax on? If not, you're not alone. Many business owners forget that exempt income exists. Now you don't have to. Read on to find out more about exempt income so you can take advantage and keep money in your business.

Don't know what exempt income is? If so, here's a simple explanation for you…

Exempt income explained

The Practical Tax Loose Leaf Service explains that exempt income is income you can exclude when you calculate your income tax.

If an amount's included in gross income, you can then check if any of this income is exempt from income tax. You can contact SARS to get a full list of exempt income.

If it is, you can deduct this amount from 'gross income' to get your true 'income'.

But there's a catch…

Before you exclude any income, you must know if it qualifies as a full exemption or just a partial exemption.

Let's have a look at the difference between the two.

The difference between absolute and partial exemptions

Absolute exemptions exempt you from tax on all income you receive or accrue, while partial exemptions exempt you from certain income only, or up to a specified maximum amount.

Here are two reasons why some income is exempt:

  1. To encourage saving and investment. For example, earning dividends, or part of your interest earned each year; or
  2. Because of the special nature of the income or the special circumstances. For example, a registered Public Benefit Organisation that's serving the community will have all of its income exempt from tax.

Caution: While your income may be exempt from income tax; you may still have to pay other taxes. If for example, you receive dividends, they are exempt from income tax but you'll still have to pay dividends tax.

Once you've determined if your income is exempt, you won't have to pay any income tax on it. This means you'll have more cash to keep in your business.

 



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