How does tax ACTUALLY work?

L

LoganY87

Active Member
Joined
Jul 15, 2015
Messages
78
Reaction score
0
Location
3rd Rock from the Sun
I've been working as a freelancer for just over 2 years.

One of the projects I've been working on in that time now has me in a position where I can start earning some serious cash (conservative monthly amounts could end up in the neighborhood of R500k). This project carried potentially enormous risk so I structured the deal in such a way that I own the IP, and I get paid a stack for delivery of the product. The guy was so happy to have someone who'll develop the product for him that he put me down as a partner in his company with an initial stake of $50k (he's based in the US) and a 30% profit share. Wow!

Recently I've become a member of my mom's CC and put "trading as" notices on all my quotes and invoices.

Now tax is even more of a concern, but I'm not sure I'm understand correctly how it works.

Here's my understanding:

My business partner pays my company (my mom's CC), lets say what amounts to R405k next month and every month this year (just to simplify the scenario) which is my 30% profit share as per our agreement. Over a 12 month period this would bring the company to an annual income of R4 860 000. The CC no longer qualifies for turnover tax so we move to small business tax (as we're basically only 2 people right now).

The applicable tax rate here as indicated on the SBC tax rate is:

[table="width: 500"]
[tr]
[td]Taxable income (R)[/td]
[td]Rate of tax (R)[/td]
[/tr]
[tr]
[td]500 001 and above[/td]
[td]59 245 + 28% of the amount above 550 000[/td]
[/tr]
[/table]

By my calculations, this would mean tax paid amounting to R1 266 045.00 on an annual income of R4 860 000.

Now, out of that R4.86m, I still need to pay rent for my offices, water & lights, ADSL, salaries, office supplies, cars (if I'm buying company vehicles), business trips to the US (because I need to train people how to use the delivered product and have meetings with my partner there), etc.

So lets say after all that, my profit is R2m since I don't get taxed on gross income. By the same calculations with which I just worked out the R1 266 045 annual tax payment, I'm now only paying R 465 245.00 annually.

Is this correct?
 
Tax is calculated on net profit. So only after taking off all allowable deductions. Short answer as I'm on mobile.

With the turnover you talking about I would advise on paying an accountant/bookkeeper to keep your affairs in order. Shouldn't cost more than a few thousand rand a month and will be based on the complexity of the structures and transactions.
 
signates said:
Yes. There are however exceptions to what companies qualify as an SBC. You need to qualify as an SBC first. Otherwise its 28% on total net profit.
Click to expand...

28% on net profit is 28% on (using my scenario), R2.68m is R750 400 which would still leave me with just over R1.9m profit after tax.

Again, I'm just trying to understand how things work and doing the numbers like this, I feel, makes an example of what I understand.
 
LoganY87 said:
28% on net profit is 28% on (using my scenario), R2.68m is R750 400 which would still leave me with just over R1.9m profit after tax.
Click to expand...

Except that when you withdraw your 1.9 you are liable for dividends tax of 15%
 
Your assumption seems correct, anything above 550k NET PROFIT will be taxed at an additional 28%.

This is exactly why most small (micro enterprises) add as much expenses as possible to their books to minimize their total Net Profit for the year.

Hire an accountant, they will be able to assist with what additional expenses you can create to minimize your tax payment.
 
Company making R4m profit pays 28% tax. I earn R700k. Pay 40%. Correct?
 
ambroseg1 said:
Company making R4m profit pays 28% tax. I earn R700k. Pay 40%. Correct?
Click to expand...


Correct. But if the company paid out a dividend, they must withhold 15% as Dividend Withholding Tax making the effective tax rate 43%. Can't keep all that profit in the company indefinitely though.
 
signates said:
Correct. But if the company paid out a dividend, they must withhold 15% as Dividend Withholding Tax making the effective tax rate 43%. Can't keep all that profit in the company indefinitely though.
Click to expand...

Indeed, us poor small companies get nailed from every angle :(
 
I would try and register a CC in a tax haven like Malta (if possible, don't know how possible), as you're not operating in South Africa.

Just my 2c.
 
All CC's by law must have an Accounting Officer. So you will have to appoint an accountant to do your books.

You will pay tax in the country where you "apply your mind, skills and time" regardless of where your CC is registered.
 
With that kind on money, NEVER bring it back to SA.
Get the US guy to pay you outside SA in some tax haven.
Why on Earth do you want to sponsor this guvament?
 
Why would you have your profit share paid to the CC? Is that even possible since it's a natural person?

Aren't you just going to pay tax twice then? Surely paying it directly to the person owning the share is the best way and only gets taxed once?
 
Btw, income tax was introduced in South Africa on this day, 20 July, in the year Nineteen Fourteen.

Income tax is one hundred and one years old today.

It doesn't have to be this way. Time to throw off the shackles of oppression and stop funding our overlords.
 
You must log in or register to reply here.
Back
Top
Sign up to the MyBroadband newsletter
X