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If you're not using these tax savings, you're paying too much tax

by , 29 September 2016
If you're not using these tax savings, you're paying too much taxBy now you've probably already registered your business for trading. But depending on how you're registered, it can massively impact your tax savings.

Each of the following business entities have their own set of tax savings:

Sole Proprietor
A Partnership
A Company
A Trust

Over the next few weeks, I'll show you the tax savings and benefits of each one. But today, I'm going to focus on sole proprietors. Let's have a look...

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Five tax benefits of trading as a Sole Proprietor
Tax saving number 1 – your first R75 000 is tax free
You're entitled to the personal tax threshold. At least the first R75 000 of your taxable income is tax free. And on top of it, the first R30 000 of any capital gain you make is exempt from tax as well.
Tax saving number 2 – you don't have to pay the 28% tax rate
You can take advantage of the scaled personal tax tables applicable to individuals for all your business's taxable income. The tax rate you'll pay depends on how much you earn. You aren't stuck paying the flat 28% companies do.
And, your Capital Gains Tax (CGT) inclusion rate is only 33% where it would be 50% if you were trading in a CC or company.
Keep reading for the next two tax savers…

How to make yourself invisible to SARS

The key to reducing how much tax you pay is staying off SARS' radar.

SARS has conducted R1.8 million audits. It's added 100s of new tax collectors and auditors to its payroll and each one has his own collection targets to meet. This means two things:
  1. If you're not compliant, your chances of an audit this year have just doubled, and
  2. You will pay more in penalties.
But there are 139 perfectly legal ways for you to reduce your risk. Here's how…

Tax saving number 3 – claim tax credits if you're part of a medical aid
Because you include your business income in your personal income tax calculation, the taxable income from the business will decrease with any retirement annuity contributions, income protection contributions, deductible portion of medical expenses and deductible donations before tax is calculated thereon. This means your effective tax rate on the business taxable income decreases by these deductions.
If you're a member of a medical aid, you're also entitled to tax credits you can claim against the tax on your business income.
Tax saving number 4 – you don't have to pay dividends tax

There's no dividends tax to pay on money taken out of the business as all the profit earned is already yours.
But if you haven't started trading and are thinking of starting a sole prop, there are some really great savings for you. You don't have to register the business individually for income tax if you're already a registered taxpayer in your personal capacity. All you need to do is simply add the business income and expenses to your personal income tax return.
But, there are also some disadvantages. We cover these in detail in the Practical Tax Loose Leaf, make sure you know what you're in for before you end up trading as the wrong business type.

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