General Tax queries

[Greg C]

Thanks Greg will take that advice to heart, is SARS open on a Saturday?

Well the last I heard government services must be open during a saturday.I went to my home affairs on a saturday,they close at 1 pm on a saturday. With this logic they should be open on a saturday but please dont quote me on this,you can imagine that most municipal/government services run on a timesheet that uses invisible ink or through smoke signals, so I dont know for sure at all

 

[Stefanmuller]

Not very much wrong with much that you've said other than having a sort of impression that the net income paid from the trust wont be taxed which I am not sure you meant at all.

2ndly you just proved exactly what I was saying just by
Granted this loss can be used against future income

and this
The only time paying rent when you don't have makes sense is if you are making big profits with good cash flow and have tax problems

big profits is relative to the rent incurred. Everyone is going bananas over this which makes very little sense

Dont pay the rent- Increased income,increased tax as higher Taxable income.Higher short term income/cashflow
Pay rent-Reduce taxable income-pay less tax,possible for tax loss to offset against profits in a future periods

Keeping in mind once again IF he decides to continue not paying rent which by all means he can IM NOT G#D that if his business grows and he POTENTIALLY begins having tax concerns and decides to get charged rent or a new premises decides to charge rent without a choice...SARS may ask 'your company has been in existance for x amount of time and you didnt claim for rent as a general deduction but now you decide for this current tax assessment to do so...WHY?

The rest of what people are saying here is correct.Can we clear the air of this one...if this is the one that people are having problems with I hate to see farming income according to the rating formulas or something along those lines. Keep the questions coming

Not trying to argue with you, what I was trying to say is the following:

Someone just starting out a business from a room in his home, most likely is not making a profit yet, and likely would be focusing more on cash flow and limiting expenses wherever he can. Afterall, he is working from home for exactly that reason as he is saving the rent.

What does make sense is to charge yourself rent if you can move this expense somewhere where it is not taxable in the end and where the cash is still available to you. Usually when you have tax problems in your main company, but even if you make a loss it is a good idea to do this as you can benefit from it in future when you do make profit.

Lets say I have a IT company (company A), working from a house converted into an office which is registered in my family trust or in a seperate company of mine (entity B). My company makes a profit of R140 000 for the year, without charging rent. Entity B can now charge my It company A a market related rent of R12 000 per month (R140 000 per year) for rent, thus company A have no taxable income. In company B, I can now deduct rates and taxes, interest on bond, repairs and maintenance, insurance etc. This can be deducted from the rental income of R140 000, and whatever is left gets taxed. The actual payment can then be used to pay for these expenses and the bond, which you would have paid anyway. The idea is to match the rent with the amount of deductable expenses, without veering too far off from what a market related rent would be. If you have the home in a trust, surplus profits can be distibuted to the beneficiaries, so if you have small children or a wife that does not work, you can distibute income to them and make use of the annual exclusions plus the lower tax rate for individuals.
Should company A not make a profit, a loss will be created by paying rent to company B which can be used against future taxable income. Should the house be in your personal name, you can still charge rent but it is easier to manage the exess rent from a trust/company from which you can make distibutions.

The point is to plan your business in such a way that you can move income to where it is not taxable, or to where it doesn't cause a tax liability and at the same time still have control over the actual cash. If you can move R140K per year without having to pay tax on it, and without losing the R140k, why not use it?

So, unless the person owns the property (individually, through a trust or in a company) it does not make sense to cause a cash outflow if you don't benefit from it, and if you don't HAVE to pay rent.

 

[Greg C]

Not trying to argue with you, what I was trying to say is the following:

Someone just starting out a business from a room in his home, most likely is not making a profit yet, and likely would be focusing more on cash flow and limiting expenses wherever he can. Afterall, he is working from home for exactly that reason as he is saving the rent.

What does make sense is to charge yourself rent if you can move this expense somewhere where it is not taxable in the end and where the cash is still available to you. Usually when you have tax problems in your main company, but even if you make a loss it is a good idea to do this as you can benefit from it in future when you do make profit.

Lets say I have a IT company (company A), working from a house converted into an office which is registered in my family trust or in a seperate company of mine (entity B). My company makes a profit of R140 000 for the year, without charging rent. Entity B can now charge my It company A a market related rent of R12 000 per month (R140 000 per year) for rent, thus company A have no taxable income. In company B, I can now deduct rates and taxes, interest on bond, repairs and maintenance, insurance etc. This can be deducted from the rental income of R140 000, and whatever is left gets taxed. The actual payment can then be used to pay for these expenses and the bond, which you would have paid anyway. The idea is to match the rent with the amount of deductable expenses, without veering too far off from what a market related rent would be. If you have the home in a trust, surplus profits can be distibuted to the beneficiaries, so if you have small children or a wife that does not work, you can distibute income to them and make use of the annual exclusions plus the lower tax rate for individuals.
Should company A not make a profit, a loss will be created by paying rent to company B which can be used against future taxable income. Should the house be in your personal name, you can still charge rent but it is easier to manage the exess rent from a trust/company from which you can make distibutions.

The point is to plan your business in such a way that you can move income to where it is not taxable, or to where it doesn't cause a tax liability and at the same time still have control over the actual cash. If you can move R140K per year without having to pay tax on it, and without losing the R140k, why not use it?

So, unless the person owns the property (individually, through a trust or in a company) it does not make sense to cause a cash outflow if you don't benefit from it, and if you don't HAVE to pay rent.

Definately not arguing,enjoying this to be honest.I follow your point but on the way you said some stuff without clarifying a few things for me. According to your quote here

Lets say I have a IT company (company A), working from a house converted into an office which is registered in my family trust or in a seperate company of mine (entity B "

You mean a subsidiary?
I have never heard of a company registered as another company or within a company? Am I missing something here?
Why i ask is if it is a subsidiary you are referring to you better be sure of what you are saying with reference to how expenses and things are reported within this so called group...Just clarify what you mean here

The trust section I am 100% happy with.Everything really here is a far more detailed explanation as well as differences in scenarios for specific tax decisions that effect ones business positively.It really depends on your situation and WHAT YOU ARE TRYING TO ACHIEVE ASSUMING LEGALITY.

Anyway NEXT!

 

[Stefanmuller]

Definately not arguing,enjoying this to be honest.I follow your point but on the way you said some stuff without clarifying a few things for me. According to your quote here

Lets say I have a IT company (company A), working from a house converted into an office which is registered in my family trust or in a seperate company of mine (entity B "

You mean a subsidiary?
I have never heard of a company registered as another company or within a company? Am I missing something here?
Why i ask is if it is a subsidiary you are referring to you better be sure of what you are saying with reference to how expenses and things are reported within this so called group...Just clarify what you mean here

The trust section I am 100% happy with.Everything really here is a far more detailed explanation as well as differences in scenarios for specific tax decisions that effect ones business positively.It really depends on your situation and WHAT YOU ARE TRYING TO ACHIEVE ASSUMING LEGALITY.

Anyway NEXT!

No, no subsidiary structure. The key is having a business, in this case an IT business which is registered in company A. Then you have a house that you use fully as office space for your IT business, but is registered in a separate entity (company B, or trust, or in personal capacity). Both are still your companies as you own the shares, so technically you are paying yourself rent but getting the tax benefit without loosing the cash payment. This is common practise.

When starting out a business, and having to choose between trading as a sole prop or registering a pty or cc, it is always better to go the pty/cc route as there are many benefits and allowances you can play with which are all legal. If you are unsure about whether your new business will make it, and want to avoid set-up fees and accounting fees associated with a company/cc, then try sole prop for a year to get things going and then take the next step.

 

[Celine]

phoenix - SARS is not open on a saturday at all. they might open over the busy period i.e. july and august. phone the call center on 0800007277 and ask them when they will be opening on saturdays. but they definitely do not open to the public on weekends.

 

[ViperGTI]

Hi

Ok, so I'm looking to start declaring my rental income as of last year. Earlier was a bit tricky because the property wasn't on my name but now that it finally is, I must somehow survive this tax return.

So I when finally got the property onto my name late last year, I took some money and did a lot of work on two of the houses on the property (repainting, fumigate, repair cupboards, fumigate, fixed a bunch of other stuff)... the previous tenants were pigs.
I also built on a new office with a backup generator onto the one house.
I've now finally captured everything into a spreadsheet and basically I've divided the expenses up into the following categories:
- Advertising
- Building Maintenance
- Gardener
- Interest
- Prepaid Electricity
- Rates / Taxes
- New office building
- Bond Initiation fees & Property Transfer fees & taxes

So now I have two questions.
1. Which of these categories can I show as expenses against the rental income received? So far I'm pretty sure that I can claim Advertising, Interest on the bond and Prepaid Electricity and I've heard that maintenance is also deductable.

2. I guess the difference between the rental income and the expenses will be added to my normal salary income and tax will be calculated based on that total annual income. However, what would happen in the event that I made a loss? (Expenses more than my rental income). Will they deduct the loss from my salary income? Will the loss rather just carry over to the next year and deducted from the next year's profit?

 

[Greg C]

Hi

Ok, so I'm looking to start declaring my rental income as of last year. Earlier was a bit tricky because the property wasn't on my name but now that it finally is, I must somehow survive this tax return.

So I when finally got the property onto my name late last year, I took some money and did a lot of work on two of the houses on the property (repainting, fumigate, repair cupboards, fumigate, fixed a bunch of other stuff)... the previous tenants were pigs.
I also built on a new office with a backup generator onto the one house.
I've now finally captured everything into a spreadsheet and basically I've divided the expenses up into the following categories:
- Advertising
- Building Maintenance
- Gardener
- Interest
- Prepaid Electricity
- Rates / Taxes
- New office building
- Bond Initiation fees & Property Transfer fees & taxes

So now I have two questions.
1. Which of these categories can I show as expenses against the rental income received? So far I'm pretty sure that I can claim Advertising, Interest on the bond and Prepaid Electricity and I've heard that maintenance is also deductable.

2. I guess the difference between the rental income and the expenses will be added to my normal salary income and tax will be calculated based on that total annual income. However, what would happen in the event that I made a loss? (Expenses more than my rental income). Will they deduct the loss from my salary income? Will the loss rather just carry over to the next year and deducted from the next year's profit?

I like the fact that you have done your research.

To answer the first question as its the simplest and quickest.
If your expenses extended your income it will be used in the next tax year to reduce your profits.
Something to keep in mind here which is important. If you make a loss 3 years in a row with what you are doing the loss will be ringfenced and you will not be able to offset it against your future profits until what you are currently trading in makes a profit.
This is SARS way of saying "sure we let you rent places out" but if you do it to make a loss and cant prove that it will make a profit we will ring fence it and disallow you to use that loss until you make a profit.

Onto the 2nd.Those expenses are deductible(arent you happy).Remember to make sure you prove that it was necessary,keep relevent slips and invoices.

 

[ViperGTI]

I like the fact that you have done your research.

To answer the first question as its the simplest and quickest.
If your expenses extended your income it will be used in the next tax year to reduce your profits.
Something to keep in mind here which is important. If you make a loss 3 years in a row with what you are doing the loss will be ringfenced and you will not be able to offset it against your future profits until what you are currently trading in makes a profit.
This is SARS way of saying "sure we let you rent places out" but if you do it to make a loss and cant prove that it will make a profit we will ring fence it and disallow you to use that loss until you make a profit.

Onto the 2nd.Those expenses are deductible(arent you happy).Remember to make sure you prove that it was necessary,keep relevent slips and invoices.

Thanks for the quick and helpful reply.
The loss would only be for this year... If I can show a big enough loss now so that it will reduce my tax payable for the next couple of years, that would be good.

Just to be clear, exactly which expense categories are deductible?
I'm not sure about the building on of the new office (which might be seen as capital expense... if that is the correct term) as well as the Property Transfer fees (Bond initiation, attorney and transfer duty).

 

[Greg C]

Thanks for the quick and helpful reply.
The loss would only be for this year... If I can show a big enough loss now so that it will reduce my tax payable for the next couple of years, that would be good.

Just to be clear, exactly which expense categories are deductible?
I'm not sure about the building on of the new office (which might be seen as capital expense... if that is the correct term) as well as the Property Transfer fees (Bond initiation, attorney and transfer duty).

Again its great to see such good research

The loss for this year will be offset in the following tax years subject to my rule as I said to you above.
All good and well that you offset the loss but if you continue to make a loss through this for the next 3 years that loss will be ring fenced and you will be unable to use it and offset until you make a profit.

Capital is correct.My suggestion for the add on is twofold
Negotiate with your tenant that you get in whether they would be willing to contribute possibly etc.
The capital expenditure is in no way detrimental to you in my opinion,increasing your properties overall valuation and market value is good.Remember to offset this if you rent it out by an increase in rent,levies and electricity as well as the guarentees on the generator.

Your classifying of the expenses is pretty close to spot on to be honest with you.The property transfer fee is not something I would attempt to deduct in my opinion, you could argue that it was required to get it to that position but to get a reduction here would be a mission etc.The attorney fee as well is pushing the luck.Bond initiation most probably yes as you would have gotten the bond with the pure intention to rent the place out.

Hope I was helpful(remember anyone responding I am human, So if I was wrong somewhere,dont shut me down,upgrade me)

 

[Celine]

new building on your property is seen as an improvement and therefore will not be allowed as a deduction. only repairs and maintenance to the property is an allowable expense.

bond initiation, bond transfers etc are not allowed as an expense at all. this is for your own expense.

 

[Greg C]

new building on your property is seen as an improvement and therefore will not be allowed as a deduction. only repairs and maintenance to the property is an allowable expense.

bond initiation, bond transfers etc are not allowed as an expense at all. this is for your own expense.

Glad I am in actual fact human. Nothing more or less what celine Said. Actually looked for my own battered ego and indeed 100%. Only the maintenance and repairs are allowable.

Incurring of a loss still is applicable.Occur a loss this year offset next subject to a 3 year ring fencing(proof of profitability).

 

[Stefanmuller]

Glad I am in actual fact human. Nothing more or less what celine Said. Actually looked for my own battered ego and indeed 100%. Only the maintenance and repairs are allowable.

Incurring of a loss still is applicable.Occur a loss this year offset next subject to a 3 year ring fencing(proof of profitability).

He can deduct stuff like electricity, gardening, insurance, security, rates too, and wear and year on appliances, furniture and fittings but think you got those. Generally, if the place is newly on bond, you would probably make a loss. With the ring fencing means he can't keep on using his rental loss to decrease his tax liability from other sources like salary. If losses are continued then SARS will reverse all those previous losses claimed. This is to prevent doctors, lawyers and other rich people to start hobbies like farming disguised as a "business" in order to use the intentional loss to lessen their high tax burden, effectively loring their tax bracket. If I remember correctly, ring fencing used to be 5 years and only for people already in the too bracket of 40%?.

Otherwise, making losses for more than the ring fence time is allowed as long as you do receive income and are carrying on a business to make profit, but you can only use this loss against future income from the same business (renting). That is how I understand it so correct me if I'm wrong.

 

[ViperGTI]

Thanks for all the assistance. I think I got that sorted now.

Just one more question. I've been renting out the property for the whole year, however, it only got transferred onto my name late last year. Basically for the first 8 months, I used to pay off the home loan, but it wasn't on my name then. Any idea how I should handle the first 8 months? Since the property / bond wasn't on my name, I doubt that I'll be able to claim the interest on the bond and I'm not willing to declare that income as clean profit. Perhaps if I show rent as an expense (thus sub-letting) or just don't declare it (since the income was less than the monthly "rent" / installment). Suggestions?

 

[Celine]

it is income whether or not it was in your name. it was your choice to let the property out before the transfer went through. by the way, just how were you able to rent out property that wasn't in your name?

 

[ViperGTI]

I know it was income, but it was not profit which means that it shouldn't have an impact on the tax due. The problem with it not being on my name is that the expenses might be rejected. I don't have a problem with paying tax where due but there is no way that I'm going to pay tax as if the full income was clean profit when that is not the case.

The property (a 7ha plot) was on my parents name. However, they never used it so a couple of years ago, I decided to build houses on it and develop it further. They took the bond out in their name which I basically paid from my side. They didn't want to transfer the property to me back then because they still had ideas to build a house there themselves someday but eventually decided against it which is why I then could to "buy" it from them, but it had to be at an inflated price to keep Sars happy.

 

[Greg C]

I know it was income, but it was not profit which means that it shouldn't have an impact on the tax due. The problem with it not being on my name is that the expenses might be rejected. I don't have a problem with paying tax where due but there is no way that I'm going to pay tax as if the full income was clean profit when that is not the case.

The property (a 7ha plot) was on my parents name. However, they never used it so a couple of years ago, I decided to build houses on it and develop it further. They took the bond out in their name which I basically paid from my side. They didn't want to transfer the property to me back then because they still had ideas to build a house there themselves someday but eventually decided against it which is why I then could to "buy" it from them, but it had to be at an inflated price to keep Sars happy.

No need to be mean to the revenue service.If it were a normal buyer and seller deal then both of you would be hunting for the best price however because you are connected persons and disposing of this property at less than its true MV will be seen as a donation.So in a way its good that you are keeping them happy.Gz on the house btw.

 

[Greg C]

He can deduct stuff like electricity, gardening, insurance, security, rates too, and wear and year on appliances, furniture and fittings but think you got those. Generally, if the place is newly on bond, you would probably make a loss. With the ring fencing means he can't keep on using his rental loss to decrease his tax liability from other sources like salary. If losses are continued then SARS will reverse all those previous losses claimed. This is to prevent doctors, lawyers and other rich people to start hobbies like farming disguised as a "business" in order to use the intentional loss to lessen their high tax burden, effectively loring their tax bracket. If I remember correctly, ring fencing used to be 5 years and only for people already in the too bracket of 40%?.

Otherwise, making losses for more than the ring fence time is allowed as long as you do receive income and are carrying on a business to make profit, but you can only use this loss against future income from the same business (renting). That is how I understand it so correct me if I'm wrong.

Stefan I am confused as to why you continue to post almost identical information as myself and say it differently.A side from the fact that for the ring fencing to occur you must be in the highest tax bracket the rest has all been said to him.

To clarify its 3 out of 5 years or 6 out of 10 years of consistently making a loss. Please do read above much of what you have already said has been mentioned.Anyway thanks for the post

 

[Celine]

I know it was income, but it was not profit which means that it shouldn't have an impact on the tax due. The problem with it not being on my name is that the expenses might be rejected. I don't have a problem with paying tax where due but there is no way that I'm going to pay tax as if the full income was clean profit when that is not the case.

The property (a 7ha plot) was on my parents name. However, they never used it so a couple of years ago, I decided to build houses on it and develop it further. They took the bond out in their name which I basically paid from my side. They didn't want to transfer the property to me back then because they still had ideas to build a house there themselves someday but eventually decided against it which is why I then could to "buy" it from them, but it had to be at an inflated price to keep Sars happy.

to SARS it doesn't matter whose name the bond was in. WHO was receiving the income! you were therefore you are responsible to declare the income and claim any expenses relating that income. if the bond was only transferred 8 months later, then too bad. you enjoyed the benefit of the income so pay the tax on it, be it a loss or otherwise.

 

[ViperGTI]

to SARS it doesn't matter whose name the bond was in. WHO was receiving the income! you were therefore you are responsible to declare the income and claim any expenses relating that income. if the bond was only transferred 8 months later, then too bad. you enjoyed the benefit of the income so pay the tax on it, be it a loss or otherwise.

If I can deduct my expenses for the first 8 months against the income, then I have no issue with declaring it. Declaring it however will not have any effect on the amount of money that will be paid over.

My question though, is as what do I claim the interest / instalment that I paid for the first 8 months. Do I claim the interest (even though the bond was not in my name) or do I claim it as "Rent Paid" or something like that?

 

[Celine]

you can only claim interest on bond from the time the bond went into your name.