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Two tax saving secrets to help you meet your tax saving target for the year

by , 20 August 2014
Half the year has already flown by. Can you believe it?

And, if you're anything like me, there's still so much to do before December rolls around. Targets to meet, projects to launch.

But speaking about targets to meet, have you met your tax saving target for the year? Well, if you haven't do stress. I have two money saving tricks you can use to still reduce your tax payments.

Let's see what they are...

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Two tax saving secrets to help you meet your tax saving target for the year

Tax Tip #1 - Use your debtor's allowance to make a profit 

If you sell goods on long-term credit to someone, you can claim an allowance. This allowance is an instalment sale allowance (Section 24 of the Income Tax Act).
 
If you use this allowance, you can defer your tax liability when you:
  • Make the sale; and
  • Deliver the goods to the client, but you only receive payment over a long period of time. 
Sounds easy enough right? It is as long as you meet the following six criteria.
 
Six requirements you must meet to claim the allowance 
  1. You must have an agreement in place with the buyer; 
  2. A transfer of ownership must exist, and you must pass this on to the buyer. It doesn't matter if the property is movable or immovable; 
  3. You must receive either partial or full payment; 
  4. You must include the amount you receive in your gross income. You must also include finance charges.

    A little tip for you: You can claim a debtor's allowance, based on your gross profit percentage;
     
  5. You must add the allowance back to your income the following year; and
  6. The allowance may not create a loss. If it results in a loss, it's limited to an amount that results in your profit being NIL
 
Let's have a look at how Company C handled this situation.
 
Example
Company C sells goods subject to suspensive sales agreements as follows.
 
  Year 1 Year 2
Turnover attributable to suspensive sales (excluding Vat and finance charges) R 1 000 000 R1 300 000
Cost of sales attributable to suspensive sales R600 000 R780 000
Gross profit R400 000 R520 000
Gross profit percentage of sales: 40%    
 
If at the end of the year 1 the debtor's balance amounts to R100 000, and at the end of year 2 it amounts to R120 000, then the debtor's allowance is as follows:
 
Year 1 - R 100 000 x 40% = R40 000
Year 2 - R 120 000 x 40% = R48 000
 
You calculate the taxable income for the company as follows:
 
  Year 1 Year 2
Gross income (S 24) R 1 000 000 R1 300 000
Less: Cost of sales R600 000 R780 000
Add: Debtor's allowance (previous year)   R40 000
Less: Debtor's allowance (current year) R40 000 R48 000
Taxable income R360 000 R512 000
 
Checklist: Four requirements for a successful debtor's allowance claim 
  • There must be a contract in terms of which ownership in the property only passes to the purchaser once the amount of the purchase consideration is paid;
  • Include the initial sale, as well as any finance charges levied, in your gross income;
  • Add back the allowance claimed this year in the following year; and
  • The allowance may not create a loss. 
 
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Tax Tip #2 - Maximise your tax relief for BEE deals 

If you remember from the article on page 5, gross income is an amount in your income when it accrues. It doesn't matter if you haven't actually received payment.
 
So, when it comes to BEE deals relating to the buying and selling of equity shares, it creates a problem because you might not have the cash flow to pay the tax  when you actually sell the shares. This is because payment on BEE deals may only be made in the future.
 
But, in situations like this, why not make use of Section 24N of the Income Tax Act? This way you only have to pay tax on an amount once you receive the payment for the shares.
 
The same will apply when you incur an expense to purchase equity shares through a BEE deal. You only have to deduct it once you make the payment.
 
What happens when you sell shares to someone else?
 
If you sell shares to someone, but the amount they must pay isn't due or they don't have to pay it during that year of assessment, the amounts don't accrue to you in that year as a result of Section 24N.
 
Nor are they treated as expense incurred for the buyer. 
 
But with all things, there are requirements you have to meet.
 
Make sure you meet these eight requirements to qualify for the Section 24N relief
 
To qualify for this relief you must comply with the following eight requirements:
 
1.       The transaction must relate to the sale of equity shares;
2.       Entered into on or after 24 January 2005, when this section became effective;
3.       Where more than 25% of the amount is due and payable after the end of the tax year;
4.       The amount payable depends on the future profits of that company;
5.       The value of the equity shares that have been disposed of exceeds 25% of the total value of equity shares in that company;
6.       The purchaser and seller are not connected persons (i.e. people related to each other) after the sale of shares;
7.       The purchaser is obliged to return the equity shares in the event of failure by the purchaser to pay any amount when due; and
8.       The buyer doesn't pay the amount via tradable shares in the open market.  This means, you can't swop shares for shares under this section. The buyer must pay with cash or another thing of value, but not equity shares.
 
Let's look at an example.
 
Example
 
A black empowerment group wishing to take advantage of the business opportunities afforded by BEE legislation identifies a business (ABC (Pty) LTD) that agrees to a takeover bid.
 
In terms of the agreement, the individual members of the consortium agree to purchase 80% of the equity shares of ABC (Pty) LTD from a single shareholder. The purchase consideration for the shares is R5 million plus 10% of the cumulative profits for the next three years. The full consideration is payable in year three.
 
After three years the company generates cumulative profits of R5 million. The group of purchasers and the seller aren't connected parties after the transaction, and it's agreed that the shares will be returned to the seller should the purchasers not pay up in year three. Assume a base cost to the seller of R100 for the shares sold. Consider the tax consequences to the seller with and without the operation of Section 24N.
 
Seller Section 24N applied Section 24N not applied
     
Capital gains tax:    
Year 1:Consideration R nil R5 000 000
Base cost R nil R100
Capital gain R nil R 4 999 900
Year 3: Consideration R5 000 000 R nil
Base cost R100 R nil
Capital gain R 4 999 900 R nil
 
From the above, it's clear that the effect of Section 24N is to defer the tax consequences of the disposal of the shares to the year the buyer pays for the shares.
 
Section 24M also finds application in this example in that the amount paid for the asset (shares) is unquantifiable in year 1, but can be quantified in year 3. The operation of Section 23M accords with the application of Section 24N in this example.


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