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Save Tax If Your Company Makes P300 000 Or Less

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THE TAX DIALOGUE

Jonathan Hore

In today’s installment of my weekly tax articles, I want to show you that you can take advantage of one of so many instances where tax laws give back to taxpayers. You can pay less tax when you operate a company which has an annual turnover of not more than P300 000. Allow me to, for simplicity, call this the small companies’ election.

To be honest, even my fellow tax practitioners will tell you that they rarely discuss this concept. I am not sure why it gets ignored in most tax discussions when it can actually result in massive tax savings. In this article, words importing the masculine shall be deemed to include the feminine.

Enter the small company

The Income Tax Act defines a small company as an entity whose annual turnover does not exceed P300 000. The company should be a private resident company, a term which covers most of the companies registered at CIPA. Any company qualifies to make the small companies’ election, including those engaged in offering multi-residential units, bed and breakfast ventures, consultancies and farming activities.

But what’s all this about?

Before I go any further, let me state that I am talking about income tax or corporate tax. The law allows shareholders of small companies to make an election to be taxed as if they were partners in a partnership and not shareholders. Yes, you have that right. Partners are taxed using the PAYE/individual rates whose maximum tax is 25%. Partners end up paying less tax if they make the election in the sense that the first P36 000 is exempt from tax. So if we have two shareholders in a company, they save tax in the sense that P72 000 (P36 000 x 2) will not be taxed if they utilise the said election.

If shareholders make the election to be taxed as partners, it means that the company does not pay tax. Remember that a partnership is not subjected to tax in its right but tax is levied on the hands of the partners. What this means is that the profits made by such companies will be split between the shareholders as if they were partners using their percentage shareholding.

Persons who make the small companies’ election should notify BURS in writing of the election within six months from their year-end. Further, the Income Tax Act stipulates that the election must remain in force for three years, including the one in which it is made. For example, if the election is made in 2020, it will apply to 2020, 2021 and 2022.

Here are your tax savings

Lets us assume that Tiro and Gorata each hold 50% shareholding in TG (Pty) Ltd which records sales of P290 000 and profits of P200 000. If they submit their income tax return as a company, they will pay tax at 22% of P200 000, which amounts to P44 000. Now let’s assume that they opt to pay less tax using the small companies’ election, it means that their profit of P200 000 is split using their shareholding such that both of them are taxed on P100 000 (P200 000 divided by 2). The company won’t pay tax but the shareholders will be treated as partners and taxed using PAYE rates.

The PAYE/individual rates yield lower tax as Tiro and Gorata will each pay tax of P5 300, bringing their combined tax bill to P10 600, compared to P44 000. The small companies’ election allows them to realise tax savings of P44 000 less P 10 600, which leaves them with P33 400. But of course they may not know about this election and will need tax consultancy services.

I am sure they have Yours Truly’s cell number so they can call when the need arises. I am certain that this has enabled you to appreciate that the taxman doesn’t just collect taxes; sometimes he gives back. If this has opened your eyes, say this with me, “Bravo Yours Truly!”

Well, folks, I hope that was insightful. As Yours Truly says goodbye, remember to pay to Caesar what belongs to Ceasar. If you want to join our Tax Whatsapp group, send me a text on the cell number below.

 

This article is of a general nature andis not meant to address particular matters of any person. Tax advice is recommended if transactions are contemplated. Jonathan Hore is a Managing Tax Consultant at Aupracon Tax Specialists and feedback can be relayed to jhore@aupracontax.co.bw or 71815836.

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