This depends on a number of issues including the size of your business, your target market, the level of risk associated with your business, tax related issues, cost implications and client perceptions. We would be happy to give you further advice on this at an initial and cost free meeting.

Corporate entities are currently taxed at a flat rate of 28%. There are also lower tax rates applicable to Small Business Corporations as defined. It is also important that the corporate tax rate applicable to your business is considered against both the profitability of the business and also the rate of tax that you as the director may be paying on salary benefits received from your business. Dividend tax implications may also need to be considered for the larger and more profitable corporation.

Under the New Companies Act, most smaller (Pty) Ltd’s will no longer require an audit. Further an Independent Review will only be required in certain very limited circumstances. For most, the compilation of the Annual Financial Statements and an opinion expressed on these by an Independent Professional Accountant will suffice. This last is very much our target market.

If your turnover is over one million rand, then VAT registration is compulsory. Below this it is voluntary. If you fall into the voluntary registration category, we would be happy to advise you as whether it would be preferable for your business to be VAT registered or not as this will depend on a number of factors. The actual process of VAT registration can be a minefield for the inexperienced and we strongly recommend that this particular registration is handled by a professional.

If you employ staff, then UIF registration is necessary. Also Paye registration should any salaries be above the tax threshold. It is important to note that you as the director are also an employee as defined.

This is what we do. Your focus should be on generation of income as opposed to being buried in paperwork. For the majority of our clients, we attend the entire accounting function on a bi-monthly or monthly basis including the VAT and management reporting function. This means the client is not lumped with a huge bill at the end of the year and has regular access to quality information during the course of the year. However, this is not cast in stone and we cater to each client’s individual and specific needs.

Again, this is what we do and where we excel as registered tax practitioners. Our primary function is to ensure that both you and your business receive ALL the tax deductions that you are legally entitled to. If your business is profitable, we WILL save you money from a tax perspective.

The corporate entity will be registered as a provisional taxpayer. A provisional taxpayer is required to pay tax twice annually, once in August and once in February. At these times we will determine the estimated taxable income for the corporation based on current and historical information and calculate provisional taxes payable accordingly. After the end of the tax year, the Annual Financial Statements are prepared and the actual company tax return is submitted based on these Financials. On assessment by SARS, the final tax liability for the corporate entity is determined.

As a director, you will also be required to be registered as a provisional taxpayer. The timing of your provisional tax payments are the same as for the company and the process is similar as mentioned above. However, in addition, the director is still obliged to pay monthly Paye on his salary but these payments are taken into account when the provisional tax calculation is performed and the liability is reduced accordingly.

The following information has been supplied:

• Business purchased in 2000 for R40 000
• Selling Price: R2 400 000
• Business is in a CC 50/50 members interest; Member 1 (age 64) & Member 2 (age 52)
• Both the Buyer & Seller are VAT registered vendors

SCENARIO 1: THE BUSINESS IS SOLD OUT OF THE CC:

VAT IMPLICATIONS:

Both are registered VAT vendors and assuming the going concern concept applies and the Agreement of Sale contains the necessary clauses to effect this, the transaction will be zero rated as regards VAT.

CAPITAL GAINS TAX:

The capital gain is represented by the proceeds on disposal (R2.4 bar) less the base cost.

The base cost will include the cost of acquisition and the cost of improving the asset. As no valuation of the business was done in October 2001, the time apportionment method will be used to calculate the base cost. For the purposes of this exercise, I have assumed the following: ((R2.4 bar less R40k)/ 17years) = R138 k less R40k = R98K estimated base cost October 2001 with October 2001 being the date CGT came into effect. Note the actual calculation is more complex and this example is for illustrative purposes only.

Capital gain then estimated at: R2 302 000

80% of this amount will be included in the taxable income of the CC @ R1 841 600.

This in turn will be subject to company tax at 28% (Note you may find some additional small relief if the CC qualifies for SBC tax rates but, for the purposes of a comparison between scenario 1 and scenario 2, I have used 28%).

Expected company tax payable: R515 648

DIVIDEND TAX:

Any distribution of the resultant amount received (for purposes of the exercise estimated at R2.4 bar less R516k = R1 884 352) will attract dividend tax at 15%.

Estimated dividend tax payable: R283 000

 

SCENARIO 2: THE MEMBERS INTEREST IN THE CC IS SOLD:

VAT IMPLICATIONS:

The transaction represents the sale of a financial instrument and is therefore an exempt supply. Accordingly, no VAT is payable.

CAPITAL GAINS TAX IMPLICATIONS:

Each member will have a separate CGT calculation.

The capital gain will be the Proceeds on disposal (R2.4 bar/ 2 members = R1.2 bar) less the base cost.

The base cost will be the original cost of acquiring the members interest (R40k/ 2 members) = R20K.

An additional exclusion amount for Member 1 i.t.o. para 57 of the 8^th Schedule up to an amount of R1.8 bar will only apply where a person who has reached age 55 disposes of an ENTIRE direct interest of at least 10% of the CC.

There are also 3 other requirements for member 1 to qualify for this exclusion:

• The interest must relate to active business assets
• The business must be a Small Business (The market value of the assets should not exceed R10bar)
• The owner must have held the business for at least 5 years
• The owner must have been substantially involved in the business

CGT calculation for Member 1 based on this assumption:

R1.2 bar less R20k = R1 180 000 less exempt amount R1 180 000 = Zero taxable Capital Gain

CGT calculation for Member 2:

R1.2bar less R20k = R1 180 000 less R40k (annual exclusion) = R1 140 000

R1 140 000 at inclusion rate of 40% = R456 000

This amount would be included in the 2018 personal tax return and be subject to tax at the taxpayer’s marginal tax rate. I have assumed a marginal tax rate of 36%.

Estimated CGT liability for Member 2 will be R164k

CONCLUSION AND RECOMMENDATIONS:

Given the assumptions used above, there is a significant tax saving should the members sell the members interest as opposed to selling the business out of the CC and trying to retain the members interest.

However, there would be a disadvantage for the Purchaser should they opt to purchase the members interest in the CC as opposed to buying the business out of the CC: The Purchaser will assume the CC’s underlying CGT and dividends tax liability when they sell the business down the line.

45%

Payable on all acquisition of property that are not already subject to VAT

• Payable on the disposal of assets by the trust in the net capital gain. Maximum effective rate: 32.8% (max effective rate for an individual 16.4%, company 22.4%)
• This gain can however be distributed to the beneficiary by the trustees who will then be taxed at the lower individual rate. However, this distribution must take place in the same year that the gain accrues

• Donations tax levied at flat rate of 20% on value of property donated with the first R100000 of property donated each year by a natural person being exempt from donations tax (i.e. can donate R100000 per spouse to the trust each year). I.e. this “donation” to the trust is then used to pay back the Founders loan account.
• NB: If property sold for a consideration that is not an adequate/ market related consideration then there is a deemed donation.

• Estate duty at a flat rate of 20% is levied on all property of natural persons on their death.
• However, the following basic deductions are first allowed before the application of the 20% levy: R3.5 million as well as deductions for liabilities and property accruing to the surviving spouse.
• Capital Gains Tax will also be applicable on death of a natural person.
• However assets, once owned by the trust, will NOT be subject to estate duty or Capital Gains tax on the death of the Founder.
• Property to Trust ex Founder via loan account: Will be the Founding Creditor therefore no donations tax.
• Interest should be charged on the loan account so created at market related rates (else trust income will be deemed to accrue to the founding creditor to the extent that interest should have been charged). See also below Judge Davis proposals
• NB: Transfer of title subject to transfer duty.
• Growth on assets where ownership has been transferred to the trust will take place in the trust and not in the hands of the Founder. I.e. The increase in value will not be included in the Founder’s estate, but only the balance on the loan account.

Discretionary trust empowers trustees to apply income at their discretion. Where income or capital gains are paid out to beneficiaries in the same tax year they are treated as income in the hands of the beneficiaries and not taxed in the trust. This may result in tax saving.

• Trusts are less tax efficient as vehicles for holding property since the introduction of capital gains tax, since they are subject to CGT at a higher rate than individuals. Also they do not qualify for the primary residence exemption (R2 million) available to individuals.
• Trusts also pay a higher rate of transfer duty.]
• NB: The disposal of assets to a trust will have Capital Gains Tax implications in the hands of the Founder
• Other: Trust can hold shares in Pty Ltd. I.e. There is then no directors personal loan account in the Pty Ltd for any creditors to attach.
• Trusts – Judge Davis has recommended to the Government that the ‘first salvo’ against Trusts dealing with interest on loan accounts should be broadened and that if no interest is charged on such loans, all the assets of my Trust should be deemed to belong to me at the time of my death and be exposed to Estate Duty.  In other words that the Government be entitled to effectively ignore the existence of the Trust completely.  In addition to this Judge Davis has recommended that the ‘flow-through principle’ should be blocked and only allowed in very limited circumstances.  In this regard and as the law stands, Trustees can decide to pass on to Beneficiaries of the Trust, pre-tax income where the tax will then be payable by the Beneficiaries.  This is done quite regularly to benefit from the difference between individual and Trust tax rates. (Sept 2016)