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5 Best Tax Reduction Strategies For Local Businesses In South Africa
1. Claiming Section 12J Investments
What is it?
Section 12J is a tax incentive that allows you to invest in Venture Capital Companies (VCCs) and deduct 100% of that investment from your taxable income. It’s like putting your money into a growing South African business while slashing your tax bill at the same time.
Analogy:
Imagine you’re a spaza shop owner in Soweto. Instead of handing over all your hard-earned profits to SARS, you can “buy shares” in a growing kasi business that could thrive with your support. It’s like planting a tree that gives you shade and fruit.
Teach Concept:
Here’s the deal: when you invest in a SARS-approved VCC, the amount you invest reduces your taxable income for that year. So, if you made R1 million in profits and invested R200,000 in a VCC, you’d only be taxed on R800,000. It’s a win-win because your tax bill goes down, and your money helps another local business thrive. Keep in mind, though, you need to hold onto the investment for at least five years to avoid a clawback.
Example:
Let’s say you own a logistics business in Durban. You’re taxed at 28% on profits of R1.2 million. By investing R300,000 in a Section 12J-approved VCC that supports small transport companies, your taxable income drops to R900,000, saving you R84,000 in taxes that year.
2. Maximizing Small Business Corporation (SBC) Tax Rates
What is it?
Small Business Corporations (SBCs) benefit from reduced corporate tax rates in South Africa, but you need to meet specific criteria to qualify. It’s like getting a VIP discount on your tax bill for being a smaller player in the big game.
Analogy:
Think of it as getting a loyalty card at your local Spar. You’re still buying groceries like everyone else, but your card gives you a special price because you’re a regular and they want to keep your business.
Teach Concept:
If your business’s annual turnover is less than R20 million and you don’t earn most of your income from investments or personal services, you could qualify for SBC tax rates. These rates are way lower than the standard 28%. The key is to ensure your business structure (e.g., private company or close corporation) and operations align with SARS requirements.
Example:
A bakery in Pretoria with a R3 million turnover qualifies as an SBC. Instead of paying 28% corporate tax, they pay a stepped rate, with the first R91,250 being tax-free and the next portion taxed at reduced rates. This strategy saves the bakery tens of thousands in taxes annually.
3. Leveraging Tax-Deductible Expenses
What is it?
Tax-deductible expenses are costs you incur while running your business that can be subtracted from your taxable income. Think rent, salaries, advertising, and even certain repairs.
Analogy:
It’s like trimming the fat off your meat at a local butchery before selling it. You only pay tax on what’s left after you’ve accounted for the “necessary waste.”
Teach Concept:
You don’t need to pay tax on every rand that enters your account. SARS allows you to deduct costs that are directly related to running your business. The trick is to keep records of everything—those receipts from Builders Warehouse or invoices for marketing campaigns matter. Be thorough but honest.
Example:
A plumber in Cape Town spends R200,000 annually on tools, vehicle maintenance, and marketing. By recording these expenses properly, they reduce their taxable income by R200,000, saving around R56,000 in taxes for the year.
4. Using Depreciation Allowances
What is it?
Depreciation allowances let you write off the cost of equipment, machinery, and even vehicles over time. It acknowledges that assets lose value as they age.
Analogy:
Imagine you’re a farmer in the Free State. The tractor you bought last year is worth less today because of wear and tear. Depreciation is like putting a “discount” on your taxes to account for that loss in value.
Teach Concept:
When you buy an asset for your business, you don’t have to deduct its cost in one go. Instead, SARS allows you to claim a portion of the cost each year as a depreciation expense. There are various schedules, like 50:30:20 for certain equipment, which means you claim 50% of the cost in the first year, 30% in the second, and 20% in the third.
Example:
A construction company in Johannesburg buys a R1 million excavator. With the 50:30:20 schedule, they claim R500,000 in the first year, R300,000 in the second, and R200,000 in the third, significantly reducing taxable income each year.
5. Claiming Employment Tax Incentives (ETI)
What is it?
The ETI is a government incentive that gives businesses tax breaks for employing young people (aged 18–29) who earn below a certain threshold.
Analogy:
It’s like hiring your nephew fresh out of high school to work in your family’s fish and chips shop, and the government helps cover some of his pay because you’re giving him a chance to learn the ropes.
Teach Concept:
By hiring young, entry-level workers, you can claim up to R1,500 per month per eligible employee in their first 12 months and R1,000 per month in the next 12. These savings come straight off the PAYE you owe SARS, reducing the cash you need to fork out every month.
Example:
A retail store in Port Elizabeth employs five young cashiers earning R5,000 per month each. The business claims the ETI, saving R7,500 in PAYE each month, which adds up to R90,000 a year. That’s enough to pay for new shop fittings or a marketing campaign.
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10 Best Tax Reduction Strategies For Local Businesses In South Africa
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