Recently, while helping to edit a book on tax and related topics, I was able to assist with some truisms relating to what is often seen as an onerous burden, and which should make the process a little less… well, taxing:
The right thing
True liberty is adherence to the law. Everyone who earns a taxable income has an obligation to account for such income to the state and then to pay the requisite amount of tax thereon. Taxpayers who are astute in their tax affairs can sleep easily at night. Unpaid taxes rob non-compliant taxpayers of their peace of mind.
The longer a tax problem remains unresolved, the worse the potential damage will be. Having personally had dealings with other tax collecting organisations, I can say that SARS is approachable. And I suggest those who know they are non-compliant seek the assistance of a member of the SA Institute of Tax, a professional body that regulates tax practitioners in South Africa. Keeping abreast of your tax obligations will certainly add value to your ‘wealth-building’ activities.
The only true way to save on tax is to split your income among several family members. Naturally, they have to earn the funds honestly, otherwise we’re talking tax evasion. But family businesses and various special tax vehicles such as small business corporations can be used to gainfully split taxable income and save on taxes.
If a family business has different facets, it might be worthwhile to place these activities into separate entities. Then the gross income of the family will be split, resulting in overall tax saving. This strategy is also beneficial in that the VAT threshold might not be reached in the different units. This will result in an automatic 14% price advantage to final retail consumers, as the items sold are sold free of VAT.
Beware of VAT
It is costly to administer a VAT system. You’re collecting tax for the state and the state does not pay commission! Getting VAT forms to the accountant on time and submitting the forms and banking costs associated with VAT are for the VAT-registered person’s account. With a small business it might just not be worth it.
Anyone who does business in their own name should, in my view, not be VAT registered, because if things go wrong, it is very difficult to de-register yourself and untangle the mess. Rather set up a small business entity when the VAT threshold is reached so that the registration takes place in an entity that can be wound up if things go wrong.
Trusts, as I’ve said before, are still the right vehicles to use for security. In my view, a secure endowment, which is tax-free upon maturity, is an excellent investment in trust, as it holds funds out of harm’s way and causes no tax. At the same time, retirement annuities are good for more than retirement. They are also proof against creditors and can be tax-effective both during their term of contributions and when they pay out. With a little imagination, then, it’s possible to safeguard – and create – wealth with reasonably little interference from SARS.
Peter O’Halloran is an advocate in private practice. Phone him on 00267 390 2779