Don't let SARS disallow your deduction like they did to Moolah (Pty) Ltd
Moolah (Pty) Ltd had a fantastic year. They made R10 million profit at the end of February 2014. So, on 2 March the shareholders gave the directors a bonus of R5 million.
As it was already March, they accrued for the R5 million bonuses in February 2014 and paid the necessary PAYE. They then actually paid the R5 million in March.
When Moolah submitted their tax return and showed the R5 million taxable profit, they got a nasty surprise on their assessment. SARS had taxed them on R10 million! And added interest and penalties on the underestimation and underpayment of provisional tax!
Read on to find out why...
Why SARS has the right to deny your tax deductions
When Moolah objected to their assessment, SARS responded by quoting Section 7B, and denied the objection. Moolah had to pay the assessed tax on R10 million, plus the interest and penalties.
Section 7B of the Income Tax Act, gives SARS the right to deny your tax deduction if you haven't actually paid it. It deals specifically with variable remuneration, such as salaries, overtime pay, bonuses, commission, travel allowance and wages that aren't regular or a fixed amount.
Because SARS didn't allow the R5 million bonus as a deduction, Moolah underestimated and underpaid their provisional tax. They also had to wait a full 12 to 18 months before they could use the tax benefit of the R5 million bonus paid. That's a whopping R1 400 000 (R5 million x 28%) in tax that could be sitting in a bank account earning interest, or being reinvested into their business.
No one wants to end up like Moolah. Here's how to avoid it happening to you.
There's nothing better than getting money back from SARS...
But do you know if you can claim for:
Well, you can. Here's how…
The cost of new laptops for your business?
5% of building costs?
Gifts you give your clients to say thank you for their business?
Make sure you declare the deduction in the tax year you pay it
This is the most important part to get right when dealing with variable remuneration.
If you accrue for any variable remuneration at the end of the tax year, unless you have actually paid this amount to your employee, it's not deductible against your income tax. That also means you can't consider these expenses when estimating your provisional tax in both the first and second periods.
The Practical Tax Handbook shows you exactly how this could affect you. Claim your copy here...
P.S. Looking for the perfect quick solution to your own allowance and deduction problems so you won't have to spend hours doing research to find the right solutions? Click here to find out more
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