UNDERSTANDING INCOME TAX

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UNDERSTANDING INCOME TAX

The basic principle for Income Tax for businesses

Businesses are liable to pay income tax on any profits made. All business expenses may be deducted from income received to calculate its profit. Tax is then calculated on the profit amount.

Here is a basic tax calculation for a business that provides a service:

The business will therefore be taxed only on the profit made (R4 000).

The basic calculation will be slightly different for a business that sells goods to earn an income:

The business will only be taxed on the R2000 profit made

All income for services rendered or goods sold is subject to tax, unless an income is received from some government grants that are exempted from tax.

Taxable income is the profit the business has made after expenses deducted.

Deductible Expenses

Certain types of expenses are deductible from the business income, these expenses incurred in the day-to-day running of the business are deductible.

Examples of some deductible expenses:

Rent
Salaries
Telephone & Internet
Printing & Stationary
Cleaning Services
Marketing Expenses
Insurance
Security
Motor Vehicle
Fuel

All invoices for expenses must be kept for submission to SARS. Invoices must be kept for a period of at least 5 years after submitting returns. Other types of expenses are not deductible, common examples:

Personal Expenses or Entertainment
Purchase Price of Property (Assets purchased to own): deductible over a stipulated period
Purchase Price of Equipment (Assets purchased to own): deductible over a stipulated period
Purchase Price of Motor Vehicle (Assets purchased to own): deductible over a stipulated period
Purchase Price of computers (Assets purchased to own): deductible over a stipulated period

The general rule is that expenses that add to the assets of the business are not deductible (but over a period of time), while expenses that are incurred in the day-to-day running of the business are deductible.

Here is a more in-depth example of how to calculate taxable income based on deductible and non-deductible expenses

Notice that personal expenses (Entertainment) were made of R2000, tax will be paid on that as it was not for the purpose of running the business.

Wear and Tear Deduction on Assets

It was mentioned that some purchases are not deductible but over a stipulated period, usually a number of years. For example, a laptop purchase for a business lasts longer than a year, such a lifespan of 3 years before an upgrade is needed. This means that you may deduct (write off) the cost of the laptop over a period of 3 years. Example:

So, the value of R 4 000 may be deducted each year from the business over 3 years.

Different items have different Write off periods, from 1 year (for items less than R 7 000) to 25 years, other examples are:

Trucks: 3 Years
Passenger Cars: 5 Years
Refrigerators: 6 Years

Certain assets have special wear and tear write-off allowances in terms of a specific section of Income Tax Act No.58 of 1962.

Example of wear and tear deduction on taxable income

Tax rates:

Once the taxable income of the business has been established, the amount of tax payable can be calculated. Companies and CC’s are taxed at a flat rate of 28% on their taxable income. Example:

R 22 400 is therefore payable to SARS

Capital Gains Tax (CGT)

It is important to distinguish between income received that is:

Revenue (received for services rendered or sale of goods) &

Capital Asset: Income received upon the sale of a capital asset that has been held for investment (capital income)

If your business purchased a building that your company operates from, this will be a capital asset. If this building is sold, at a higher value than purchased, this is capital gain which results in CGT to be paid. Example:

Capital gain tax is dealt with differently, only a portion of 80% of the gain is taxable Income (80% for companies & 40% for individuals). For this purpose, a company gaining R200 000 capital gain, will be taxed as below:

Thus, CGT on the R 200 000 gain is R 44 800.

Provisional Tax

Provisional Tax is not a separate tax, but a form of collecting income tax in a portion twice a year. This is done every 6 months of the financial year which is an estimate of tax that the business will be liable for when the financial year is complete.

The provisional tax return is based on the same principle as income tax calculation. It is important that you estimate this correctly as SARS will impose a penalty. The general rule is that your tax calculation estimate must be at least 90% accurate for income less than R 1 million, or 80% accurate for income more than R1 million.

These provisional tax payments are offset against the year-end total tax liability, this avoids the situation where a business has no budget for a single large tax payment at the end of the year.

If the provisional estimate was 100% accurate, there may be no tax to pay at the end of the tax year end, or maybe a minimal top-up amount upon submission.

Alternatively, if the estimated provisional return payment was too high, SARS will refund the excess paid upon filing an annual tax return.

It is important to bear in mind that if a business is making a loss, it does not need to make a provisional tax payment. However, still needs to submit a nil provisional return twice a year.

Example of the first provisional return (First 6 months of the year – August)

This is the estimated amount for the full financial year, which is R 8 400, you will pay SARS R 4 200 (50% or 6 months). This means the estimated amount of the full financial year is doubled as an estimated prediction.

Example of the second provisional return (Second 6 months of the year – February)

When submitting your final Income tax Return for the financial year, these amounts paid will be used to reduce any tax that might be owing after accurately submitting final amounts in the income tax return. If you overpaid on the provisional estimates, then you will be refunded from SARS.