Legal Consultation

1.  The principle of legality: This principle states that taxes must be imposed by law and that the law must be clear and unambiguous. This principle is embedded in legislation such as the Income Tax Act and the Administration Act. Further, it ensures that certain procedures to be followed in accordance with laws. For example, taxpayers are entitled to a fair hearing before any penalty is imposed.

In the case of Abbasi v South African Revenue Service, SARS had refused to grant Abbasi, a tax consultant, a certificate of tax clearance. Abbasi argued that SARS' refusal was unlawful because he had not been given a fair hearing. The court's decision ensured that the SARS was held accountable for its actions, and that taxpayers would be given a fair hearing before the SARS could take any action against them.

2. The principle of equity: This principle focuses of taxes being fair and equitable. SARS makes a distinction between individual and corporate income tax. The individual and corporate income tax rates differ depending on the income earned. This principle is reflected in the Income Tax Act 58 of 1962. For example, it provides that taxpayers should be taxed on their "true income," which means that they should not be taxed on income that they have “not actually received.”

According to the International Bureau of Fiscal Documentation, equity can be horizontal or vertical:

Horizontal equity is where taxpayers in a similar situation (they earn the same income), Should be taxed the same way.

Vertical equity is where taxpayers in different situations (one earns more income than the other), should be taxed differently.

3. The principle of intelligibility: This ensures that taxpayers are aware of the reason for a tax investigation, and that they can challenge the legality of the investigation if necessary. This means that tax authorities cannot issue a search warrant for a taxpayer's premises without specifying the tax offence that they suspect the taxpayer of committing.

4. The principle of efficiency: This principle states that taxes should be collected in a way that is efficient, and that they should not be subject to waste or abuse.

In addition, tax assessments should be clear and unambiguous. This was confirmed in the case of Minister of Finance v FirstRand Bank. Minister of Finance made the decision to impose a tax on interest payments made by banks to their customers. FirstRand Bank challenged the decision, arguing that it was unlawful because it was not based on a clear legal basis. The court held that SARS could not impose a tax on interest payments made by banks to their customers without providing a clear legal basis for doing so.

5. The principle of arm's length: Transactions between related parties should be priced as if they were conducted between unrelated parties. The purpose of this principle is to ensure fair market conditions. Related parties are individuals or entities that have a close relationship with each other. This relationship can be financial, familial, or otherwise. Unrelated parties are individuals or entities that do not have a close relationship with each other. Related parties, such as a two subsidiaries in a group of companies, may agree to sell to each other at a significantly reduced price compared to the price of the sale if it were with another third party. This is not arms-length. The subsidiaries would have to make the sale as they would with the other third party.

6. The principle of substance over form: This principle states that the tax treatment of a transaction should be based on its underlying substance, rather than its legal form. For example, although a transaction may look like a standard sale of an asset (its legal form), when its underlying substance is considered, it is actually a donation, for which different tax consequences arise.

It is important for taxpayers to be aware of these principles, so that they can ensure that they are complying with the law and that they are not being unfairly treated.

There are several global relief incentives that South Africa can learn from. These relief incentives may reduce tax avoidance and evasion. 

A. UK's Corporate Tax Relief for Research and Development (R&D): The UK recently introduced a tax incentive that allows businesses to deduct the costs of R&D from their taxable profits. This incentive is aimed at encouraging research and development. It also reduces the costs for businesses, encouraging businesses to invest in making new products or services.

The relief qualifies as an expenditure and can be considered as a deduction thereafter. However, to qualify as a deduction, the research should be:

1. scientific or technological;

2. innovative leading to a new product, process, service or significantly improving an existing one; and 

3. substantive in nature.

B. Double Taxation Treaties: These are agreements between two or more countries. The aim of these agreements is to prevent businesses from being taxed twice on the same income. Businesses can benefit from these treaties by claiming a foreign tax credit on their tax returns.

C. The European Union's (EU) Anti-Tax Avoidance Directive (ATAD) was adopted in 2016 by all EU member states. ATAD aims to prevent multinational companies from avoiding taxes by shifting profits to low-tax jurisdictions.

ATAD’s anti-abuse measure include: 
1. The controlled foreign company rule: Multinational corporations are required to include profits of their controlled foreign companies in their taxable income; and

2. Multinational corporations are prohibited from shifting profits to low-tax jurisdictions when they relocate their assets or operations to avoid tax liability. 

ATAD plays a vital role in ensuring that multinational corporations pay their fair share of taxes and helps to level the playing field for businesses that operate in the EU. ATAD also affects multinational corporations that may be operating in South Africa but are resident in the EU. 

At the core of the National Treasury’s duties is the responsibility to formulate and implement governments’ fiscal policy. On the other hand, SARS is responsible for collecting taxes and the enforcing tax laws.

However, these institutes work closely together to provide a sound fiscal framework and the efficient collection of taxes. Through the formulation of a fiscal policy, the National Treasury provides SARS with guidance on tax policy. SARS also provides the National Treasury with data on tax collections and tax compliance.

Data collected during a tax year is important for the purposes of developing a fiscal policy. The fiscal policy determines the costs of doing business. For example, if the National Treasury decides to increase taxes, this can lead to higher costs for businesses. The tax policy set by the National Treasury, that is used by SARS in collecting taxes, can have a significant impact on the profitability of businesses.

As an entrepreneur running an SMME (Small, Medium, and Micro Enterprise), understanding when and how to charge VAT (Value-Added Tax) on goods and services is crucial for compliance and financial success.

AT, or Value-Added Tax, is an indirect tax on the consumption of goods and services. The point of VAT is for the government to generates revenue. 

The standard VAT rate in South Africa is 15%, which applies to most goods and services unless they qualify for an exemption or zero-rating. Zero-rated goods and services, such as exports and basic food items, are taxed at a 0% rate, while exemptions apply to specific services like financial services and education.

For SMMEs, VAT registration becomes mandatory when your business exceeds a turnover of R1 million in taxable supplies within a 12-month period. If you anticipate exceeding this threshold in the next year, you must apply for registration with SARS. If your turnover is below R1 million, VAT registration is optional, but you can still choose to register if your taxable supplies exceed R50,000 within a 12-month period. This applies to individuals, companies, partnerships, trusts, and other entities.

Once registered, VAT must be charged on "taxable supplies" – goods or services provided by your business in South Africa. These supplies will be subject to either the standard 15% VAT rate or a zero/exempt rate, depending on the type of goods or services offered. As a VAT vendor, you are responsible for charging VAT on these supplies (output tax) and passing it on to SARS.

To calculate the output tax, apply the tax fraction (15/115) to the price you charge. Advertised prices must include VAT, or if both VAT-inclusive and VAT-exclusive prices are shown, they must be displayed clearly and equally. Always ensure that your invoices are VAT-compliant, including your VAT registration number, the VAT amount charged, and a breakdown of the transaction. Accurate record-keeping is also essential, as it will allow you to claim VAT input credits for business expenses, reducing your tax liability. 

Understanding VAT registration requirements and processes is crucial for SMMEs. Knowing when registration is compulsory or voluntary, how to calculate and charge VAT, and adhering to advertising regulations ensures compliance with SARS and avoids potential penalties. 

Understanding the tax relief available to your small business is essential to optimising your financial management and supporting growth. The South African government provides specific tax incentives to small businesses to encourage entrepreneurship and job creation. Two key tax relief options for small businesses are the Small Business Corporation (SBC) tax relief and the Turnover Tax.

The SBC tax relief is designed to benefit small businesses that meet certain criteria, offering a lower tax rate compared to the standard corporate tax rate. To qualify as an SBC, your business must meet specific conditions outlined by the South African Revenue Service (SARS).

Your business must meet the following criteria to qualify as an SBC:

If your business qualifies as an SBC, it can benefit from the following:

Turnover Tax is another tax relief option designed to make tax administration simpler for small businesses. This tax system is targeted at micro-enterprises, offering a simplified and reduced tax rate based on your business's turnover, rather than its profits.  This form of tax replaces the need to account for Income Tax, CGT, Dividends Tax and Value-Added Tax (VAT), unless you have elected to be in the VAT system.

To qualify for Turnover Tax, your business must meet the following criteria:

Businesses that qualify for Turnover Tax enjoy the following benefits:

To claim these tax benefits, it is crucial to register your business with SARS and keep accurate records of your business income and expenses. You will need to submit your tax returns annually, providing details of your turnover and taxable income. Consulting with a tax professional can ensure that you meet all the requirements and maximise your tax relief.

Small business tax relief, through the Small Business Corporation tax relief and Turnover Tax, provides valuable support for South African entrepreneurs. These tax incentives help reduce the financial burden on small businesses, enabling them to reinvest in growth and development. By understanding the eligibility criteria and benefits of each option, you can make informed decisions that will benefit your business in the long term.

Claiming business-related expenses as tax deductions is crucial for businesses because it directly reduces their taxable income, leading to lower tax payments. By deducting legitimate business expenses, businesses effectively decrease the amount of profit on which they are taxed.

A deductible tax expense is an expense that a business is allowed to deduct from the gross income to get the taxable income, thereby reducing the taxable income amount owed to the government. Tax-deductible business expenses, also known as operating expenses, are expenses incurred in the operation of a business. These are purchases made for the purposes of running the business. Any category of business is entitled to claim legitimate business expenses as a tax deduction, even a sole proprietor. 

These types of tax-deductible business expenses apply to most types of businesses: 

If an entrepreneur incurs significant business-related travel expenses, using their personal vehicle, outside of the normal commute to and from their regular place of work, and they have not received reimbursement or a travel allowance from the employer, they may be eligible to claim the travel expenses as a deduction. Alternatively, a fixed-cost per-kilometre rate may be applied if the vehicle qualifies under SARS guidelines. Flights and public transport costs for business-related trips are also deductible if properly documented with receipts and invoices.

A detailed logbook of all business travel and vehicle expenses (fuel, maintenance, insurance, etc.) must be maintained. SARS requires the opening (1 March) and closing (end of February) odometer readings, vehicle details (make, model, year, value), and the breakdown of business versus personal mileage.

A home office may be accounted for, if you work from home and use a room that has been dedicated for the purpose of the specific trade. It may then be allowed to deduct certain expenses incurred in maintaining the office, which will be calculated on a pro-rata basis (subject to specific requirements need to be met, as outlined in Sections 11 and 23 of the Income Tax Act).  This may include rent, cleaning costs, electricity, internet and stationery.  The home office expense amount will be entered in the ‘Other Deductions’ section of your tax return together with all the evidentiary documents to back up the claim.

Office equipment, such as computers, printers, desks, and chairs, can be claimed as a tax deduction. If the item is below a certain value threshold, it may be deducted in full during the tax year of purchase. More expensive assets, however, must be depreciated over several years under the SARS wear-and-tear allowance. To claim for this expense, it is important to keep record of original invoices, maintain a detailed spreadsheet for the financial year and calculations of wear and tear to account for the depreciation amount that can be claimed for per item. 

To successfully claim tax deductions, entrepreneurs must keep accurate records, including invoices, receipts, and logbooks. SARS may require proof of business use, so maintaining detailed records ensures compliance and prevents unnecessary disputes.

Understanding eligible business expense deductions, is crucial for minimising tax liability and maintaining accurate records, like logbooks and invoices, is essential for substantiating these claims and complying with SARS requirements.

Dividends, representing a share of company profits distributed to shareholders, are subject to specific tax regulations in South Africa. The following information outlines how dividends are taxed in private companies, focusing on the dividends withholding tax (WHT) process. This is important for small businesses, as the decision to distribute profits as a salary or dividend can have significant tax implications. 

A dividend is a pay out of a portion of a company’s profits to its shareholders and investors. The payment of dividends is governed by the Companies Act and it sets out requirements and restrictions for payouts. A private company can pay out dividends at any time, however it must first comply with legal requirements. To make a distribution, it must be legally obligated to, authorised by the board, or ordered to by a court, and the solvency and liquidity test has been applied and satisfied, as provided by Section 46 of the Companies Act.

Dividends Tax is a tax on dividends when paid to the shareholders. This tax is payable by the shareholder, but it is withheld from their dividend payment by a withholding agent* (either the company paying the dividend or a regulated intermediary) and paid to SARS by the withholding agent. The Dividends Tax rate is set at flat rate of 20% (for both residents and non-residents). Dividend tax returns must be submitted to SARS on or before the last day of the month following the month in which the dividend was paid. Late payments or submissions of dividends tax returns can result in penalties and interest charges.

Under the Dividends Tax system, shareholders of dividends are entitled to an exemption (local and/or foreign persons) or a reduced rate of tax (foreign persons). Dividends are tax exempt if the beneficial owner of the dividend is an SA-resident company, or other prescribed exempt person. Dividend payments to residents are subject to withholding tax, but dividends paid to South African resident companies are exempt from this tax.

A 20% tax is withheld from dividends paid by a South African company to a non-resident, or by a non-resident company to another non-resident if the shares are listed on a South African stock exchange. This tax is levied on the dividend's actual owner, not the company paying it. 

If a shareholder of a local or foreign company listed in a South African Stock Exchange, wishes to qualify for any of the exemptions or a reduced rate, the withholding agent must send them the required declaration and undertaking form(s) for completion. The completed form must be sent to the withholding agent before it may exempt the dividend payment or withhold at a reduced rate.

In some cases, dividends paid under employee share schemes may be taxed differently. Employers should consult a tax advisor to ensure that these arrangements are structured in compliance with tax laws.

When a company owned by a small business makes a profit, the owner must decide whether to take compensation as salary (as an employee) or dividends (as a shareholder), primarily based on which option results in the lowest overall tax burden for both the owner and the company. Increasing salary increases the owner's personal income tax but provides a larger tax deduction for the company. Taking it as salary allows the company to deduct it as a business expense, reducing the company's taxable income.  On the other hand, dividends are subject to withholding tax, which is a separate tax levied on the shareholder. While dividends can be more tax-efficient for the shareholder in some cases, the company cannot deduct them as a business expense.

Understanding the rules governing dividend payouts and the application of Dividends Tax is crucial for private companies and their shareholders. Awareness of available exemptions and the proper use of declaration forms are essential for minimising tax liabilities. And the choice between salary and dividends for business owners should be carefully considered based on the overall tax implications for both the individual and the company.

Understanding corporate tax is essential for the financial health and legal and tax compliance of any business operating as a company in South Africa. The information below provides an overview of corporate income tax and its impact on small businesses. 

Companies in South Africa pay Corporate Income Tax on their income and profits, irrespective of the source of income. This is done through two provisional payments during the year, via the provisional filing system and then any additional amount owing when filing their final income tax return (ITR14).

Corporate Income Tax (CIT) applies to companies liable under the Income Tax Act, requiring them to pay tax on all income earned or accrued during a financial year. Profits are taxed at a flat rate of 27%, irrespective of value or turnover – unless the company qualifies as a Small Business Corporation or Micro Business registered for Turnover Tax. This tax rate was recently reduced from 28% from the 2023/2024 assessment year. 

Provisional Tax is not another type of tax. Rather, it is a method for businesses to pay their regular income tax in instalments throughout the year. These payments are based on an estimated taxable income, with two mandatory instalment payments and an optional third payment after the tax year ends - if amounts paid in previous payments were less than the actual tax amount owed in comparison to the estimated amount. This system helps businesses avoid one large tax bill at the end of the year.

All companies and sole proprietors use the provisional tax system.

The timing of the provisional payments for companies will depend on the company’s year end which may not necessarily be February for all businesses. Companies with a year-end other than February have six months after their year-end to make the optional third provisional tax payment. For companies with a February year-end, this payment is due within seven month of the year end.

A small business that qualifies as a Small Business Corporation (SBC) does not pay CIT.  An SBC is subject to a graduated tax rate that is significantly lower than the standard 27%. An SBC is exempt from income tax on the first R95,750 of taxable income. The rate of tax you pay will depend on taxable income as the rates for an SBC are progressive – the higher the taxable income, the higher the tax rate.

Small businesses that have a turnover of less than R1 million per annum qualify for turnover tax and do not have to pay CIT.

It is important for accurate financial statements to be submitted to be legally compliant. The Companies Act prescribes certain financial standards for reporting which must follow specific formats based on accounting standards like IFRS, IFRS for SMEs, or SA GAAP. While some small companies preparing their own statements can use their own format, most must adhere to these prescribed standards. The standard to apply depends on the type of company (public or private) and its "public interest score."* Calculating this score helps determine if prescribed standards are necessary and whether an audit or internal review is required. Signed financial statements must be submitted to SARS with the company tax returns by all companies – small, medium and large companies

An administrative non-compliance penalty for the failure to submit a return will be imposed on a business. The penalty is a fixed monthly amount, depending on the taxpayer's income for each month that non-compliance persists. The penalty is charged for up to a maximum of 35 months.

CIT reduces the funds available for reinvestment or distribution to shareholders. The main ways tax affects small businesses:

Corporate tax plays a significant role in shaping the financial landscape of any business. By planning effectively, ensuring compliance, and leveraging available benefits, you can maximise your profits while fulfilling your tax obligations.