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Two businesses? And only one is making a profit? Use this escape hatch to pay less tax

by , 12 January 2017
Two businesses? And only one is making a profit? Use this escape hatch to pay less taxYou may think your only option is to close down the company that isn't making a profit. But don't be too hasty with your decision.

There's an escape hatch you can use to save your company and pay less tax.

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Breaking news: There's a 33% chance SARS' assessment of your tax return is wrong!

And most mistakes made by SARS on assessments are to your detriment!

If you're self-employed or a small business owner, you need to be particularly careful!

Find out how you can protect yourself from SARS' errors

 
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What is the escape hatch?
 
It's a sneaky way of getting out of paying tax on an unprofitable company. But only if you're a sole proprietor or a salaried individual and have some extra businesses (not cc's or PTY's) on the side. You can offset the profits from one business to the other to cover its losses (Section s20 of the Income Tax Act).
 
Say for example, you're an accountant but you also operate a security business on a part-time basis. The security business isn't doing well so you use the profits you make from accounting to
offset the losses your security business makes. This will lower the tax you have to pay. This is because, on your tax return, you'll have all the income reflecting as one amount. So if one company is running at a loss and the other one is making profits, your net income will be lower, putting you in a lower tax bracket, saving you money.
 
How to qualify for the escape hatch
 
To qualify you must show the following:
  • Your trade is a business, not a hobby (something SARS classifies as a suspect trade) nor a tax-avoidance scheme;
  • There's a good chance your trade will make a profit; and
  • You'll be able to make profits in 6 out of 10 years.
Find out if your trade is truly a trade, in The Practical Tax Handbook here. Read on to see if you still qualify for the escape hatch.
 
************* Editor's choice *************
 
Don't become SARS' victim by not completing your ITR14 correctly
 
Do you have to submit your ITR14? Do you know how to complete it correctly? If you've opened the return you'll see it's quite tricky.
 
SARS is doing everything in their power to boost tax compliance by getting you to declare your company income and expenditure.
 
Here's how to avoid becoming their next victim


 
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Your trade must make a profit
 
You must be able to prove your trade will make a profit. If you can't you won't qualify for the escape hatch.
 
You must make profits in 6 out of 10 years
 
The escape hatch won't apply if you incur six years of losses during the previous 10 years of assessment. This includes the year at issue before you take into account any balance of
assessed loss you carry forward. This limitation is the '6 out of 10-year rule'.
 
For a detailed practical example of how to do this, get your copy of
The Practical Tax Handbook now.
 

This is just one of the ways you can save on tax. For more go here.


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