Too much Net Profit

[Marius1975]

Hi Guys,

We in the sh#t, basically we are standing on R650k Net profit for the year so far, we did not know we'd get TAX'ed by SARS for making profit if we go over R501k...So, what can we do to bring the profit down or even making a lost for the remainder of the financial year?

It's me and my brother 50/50 in a CC and the accounts person works from home part time. We pay ourselves R12k each and she gets R3500. I was thinking maybe we should earn more but not more but have no idea how much more. On AV we do about R225k turnover p/m with R100k AV Net profit p/m. We will probably need to add things like Pension and Medical also?

We've been walking a very straight line, we have not been putting any of our own expenses thru the business like many other business owners are doing and know I think I get it... I don't understand why SARS wants to nail us for making Profit, it's basically telling us now, you have to pay big salaries and put a lot of unnecessary expenses thru the business or do I have it @ss to face?

Thx!

[Dave A]

As long as the bulk of that profit is being realised in cash, this is not a problem. In fact many companies wish they had your headache

What you should do now is start looking at how to be as tax efficient as possible. This isn't about loading personal expenses against the business, but working out the most efficient way of distributing or applying those profits.

For example, probably the most important figure in this is the marginal rate on personal income tax vs corporate tax.
Based on a corporate tax rate on undistributed profits at 28%, it's preferable to draw up to R258 750 per annum each as a taxable salary. This is the line where the marginal rate on personal income jumps from 25% to 30% for the 2014 tax year.

[Marius1975]

Thank you Dave, yesss, never thought I'd be in this position. R258 750 seems so little...I wanted to jump to R40-45k pm...but I have it structured, I know the pensions are capped at R1750 pm, no idea how the medical aids work and what else is left? Annuities? Also R1750?!? I have also looked at marketing, the front page on a popular magazine will run as R22k and we'd get a editorial in there as well, so that's a marketing expense. Also looking at getting a flashy website, those can cost a pretty penny. Al least these expenses are not a total waste of money..

[Dave A]

Reading that - I always get a little concerned when people get too focused on reducing tax bills. Whatever you do, don't get sucked into spending money simply for the sake of reducing the tax bill. Now that you've got options, go where the net returns after tax are going to be best for you - in the medium and long term. (For example, I'm far from convinced annuities is it ).

And build some reserves for leaner times. If they don't come, cool. If they do, you want to be prepared for them.

Whatever you do, don't make hasty decisions and don't screw up the disciplines that got you to this point. Blowing a good thing is way easier than getting it all together...

[FACE]

Hi Guys
Can I plse get your input on this as well
Do I understand correctly that on your nett profit less the R501K you pay 28%?
Furthermore I would like to know if you can buy for instance a bakkie for your bussiness and pay cash for it so as to reduce your nett profit?
Thanks

[Dave A]

Do I understand correctly that on your nett profit less the R501K you pay 28%?

Just to cover the "net profit" usage - Technically we're talking about nett taxable earnings, being gross income less allowable expenditure for tax purposes.

To understand the tax rates for qualifying small business corporations (SBC's), this page from SARS is helpful. Essentially there is a sliding scale which currently is this:

Taxable income (R)	Rates of Tax (R)
0 - 67 111	0% of taxable income
67 112 - 365 000	7% of taxable income above 67 111
365 001 - 550 000	20 852 + 21% of taxable income above 365 000
550 001 and above	59 702 + 28% of the amount above 550 000

If you're an SBC, you can also use an accelerated depreciation rate on many assets effectively as follows:

Year 0	50%
Year 1	30%
Year 2	20%

For clarity, the wording per INTERPRETATION NOTE: NO. 9 is:

An SBC may elect an accelerated allowance for any machinery, plant, implement, utensil, article, aircraft or ship (other than plant or machinery used in a manufacturing or similar process) acquired on or after 1 April 2005. The accelerated allowance is 50% of the cost of that asset in the year of assessment during which that asset was brought into use for the first time, 30% in the first succeeding year and 20% in the second succeeding year.

[FACE]

Hi Dave
I would like to say thanks for the feedback. I have downloaded the interpretation note and will read and discuss with accountant.
I would like to say to Marius: Take an increase in salary - just make sure you stay on the good side with SARS wrt your PAYE deductions. You can always reduce your salaries again if needs to. Just make sure your lifestyle stay the same and you do net get used to that increased salaries! I have found that is how we have survived over the last couple of years.

[Marius1975]

Thanks for the feedback guys!

[wynn]

Now can you share a bit of that too much profit with the rest of us?