Your tax bill is about to become more than a little taxing

Wealthy taxpayers were left gasping when Finance Minister Pravin Gordhan announced in parliament during his 2017/18 Budget Speech an increase in their marginal rate of tax by four full percentage points. However, Master Tax Practitioner and Director of Innovative Accounting Solutions, Renier Nell, says there are steps that wealthy small business owners can still take to reduce the tax blow.

The announced increase takes the marginal tax rate for people earning in excess of R1.5 million a year to 45%. An increase had been expected in the tax burden on wealthy individuals, says Nell “but the scale of the increase left me shocked”.

“It is clear that government is targeting wealthy people, each year sees an increase in the top marginal tax rate, as well as other wealth taxes like estate duty and transfer duty, and this trend is going to continue. High income earners need to meet with their financial advisers to create appropriate structures, or they will find themselves having to cut their lifestyles to fund the extra tax payment,” continues Nell.

In what has become colloquially known as the ‘Robin Hood’ speech, Gordhan certainly lived up to the hype by depriving the wealthy of a fair amount of their annual income. This means that almost half of their income (at the marginal rate) will be going to the taxman. The next highest tax bracket is just 41% so the most obvious tactic would be to reduce one’s income to beneath the threshold for the maximum tax rate, which would be R125,000 a month.

Whether this is possible depends on each person’s circumstances, because one has to declare sufficient income to cover expenses. In the case of a business owner, where the director’s expenses are below this level, then some of his income can for instance be shifted to dividends.

“Dividend tax has also been increased from 15% to 20%, reducing the potential for saving here but there is still the differential between 45% and 20% to arbitrage, and it is perfectly legal,” explains Nell.

A second potential tactic to reduce the tax rate is to ensure your business qualifies for the small business corporation tax rate of 10% rather than the corporate tax rate of 28%.

Nell says that many small business owners could pay 18 percentage points less tax if they put legitimate business structures in place. There are rules to qualify for the lower small business corporation tax. Firstly, the company director has to be a director of that business only and no other; and secondly, the business’ annual turnover must fall below R20 million. In addition, the director or the firm cannot have investments anywhere of more than R20 million.

“Where a business is a partnership or family firm, the option exists to split the business into two or more distinct operations, with each partner or family member being a director of one component, and each having a turnover of less that the R20 million threshold,” says Nell.

For those believing the tax hike cycle may now be over, Nell disagrees saying that at best there may be a pause for the next three to five years, “but rates for top earners will not fall”.

“Government is clearly targeting high income earners. It is more symbolic than anything else: only about 130 000 negligible number of individuals in South Africa earn above R1.5 million a year and with such a small base at the high end of the income distribution spectrum, the room for further tax hikes is limited,” concludes Nell.

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