Income Tax

[StephanieB]

Hi everyone
I hope someone will be able to assist me.

I would like to know if I do work for a number of different people (software development) will be best. if I invoice them in my own name or should I invoice them in the name of my CC (theres nothing really going on in the CC). The question is which one will be better considering the income tax payable.

Thanks for the help.

[Nickolai Naydenov]

Well consider this as a sole prop you will pay tax in your own capacity so lets say you earn R1 000 000 for the year you will pay 38% tax where in a cc you will pay 28% tax. In both scenarios you can claim expenses. The difference is a sole prop is yourself where a cc the member and the company are two separate legal persons. In a cc you can pay youself a salary and claim it as ctc in the generation of income for the company

[eitnob]

Well consider this as a sole prop you will pay tax in your own capacity so lets say you earn R1 000 000 for the year you will pay 38% tax where in a cc you will pay 28% tax. In both scenarios you can claim expenses. The difference is a sole prop is yourself where a cc the member and the company are two separate legal persons. In a cc you can pay youself a salary and claim it as ctc in the generation of income for the company

Assuming the CC does not qualify as a "Small Business Corporation" which it wont as it is dormant, it would be beneficial to do it as a sole trader, as you may utilise the primary discount against that income.
Personal income tax on additional income is calculated on a sliding scale and may be more beneficial if you are in the lower income ranges, and probably not if you already earn more than the threshold where tax is calcualted at 30%. It may be worthwhile to do a simple comparison between the two scenarios.

[StephanieB]

thank you so much. Much appreciated.

[AmithS]

Hi Nickolai,

Will in the end you not end up still paying about the same tax\ possibly more as the cc will be taxed at 28% and you will also be taxed on your salary at the determined sliding scale?

Or does the savings come in the form of you only taking a portion of profits out of the business which you will be taxed at the determined rate in your personal capacity and the remainder will be 28% but remains in the cc?

If that makes any sense!

[Nickolai Naydenov]

Hi Nickolai,

Will in the end you not end up still paying about the same tax\ possibly more as the cc will be taxed at 28% and you will also be taxed on your salary at the determined sliding scale?

Or does the savings come in the form of you only taking a portion of profits out of the business which you will be taxed at the determined rate in your personal capacity and the remainder will be 28% but remains in the cc?

If that makes any sense!

Yip it makes sense lol... I'd personally go for a CC if there was one registered(you can no longer register a cc) reason I'd do that is because me and the company will be two separate entities while as a sole prop me and the company are the same person. Another major point is tax, if you make say million rand a year profit as a sole prop you'll be paying 38% tax on that income as compared to a company where you'll pay 28%. in both cases you can claim all the expenses and etc. in a cc you can pay yourself a salary which will be claimed as an expense and you can decide the number and yes you will pay tax on that at your marginal tax rate, but that doesn't mean that you can't take more money from the company. I have numerous clients in that situation for which I have done sone income restructuring to be most tax effective, just to give you an idea you pay yourself a salary of which you claim all ypur personal tax deductable stuff like retirement annuity, income disability, med aid and etc so what happens you don't pay fringe benefit tax, your salary reduces your company's income, and end of the day you can distribute dividents at 15% witholding tax and you can take money from the companytaxed at 28%, you can also create loan and debit accounts. Should a person pass away a company can be sold as a business whete a sole prop or a partnership has to be dissolved, so you can see how many loop holes are there in a cc and why they stopped them.

[eitnob]

Gents, Saying it will be taxed at a higher rate as a sole proprietor vs a CC/company is a very simplified way of looking at the scenario and you may end up making the wrong decision.

By way of a simple explanation:
As an individual - you are taxed on a sliding scale of which the higher rates only applies to the income above certain amounts.
As a legal entity - you are taxed at a lower rate, yet profits will still be "locked in to the business" Distribution of that profit will be subject to an additional dividend tax , which will bring the net post tax (i.e.cash) profit to very close to what you'll get a sole proprietor.

May be worthwhile to have a chat to an accountant or a friend to explain in detail. Personally I would go with the CC in this case. The net tax rate is not the real reason though...

[Dave A]

The main advantage I see in incorporating the business from a tax point of view is you can choose in which hands "distributable profits" are taxed. You can also choose whether those funds going to the owner is a salary or a dividend.

Then there's also the issue of assessed losses - you can carry these forward in an incorporated entity; you can't as a sole prop.

Incorporating the business means you've got options to choose from to achieve tax efficiency. Trading as a sole proprietor means you're locked into one option.