Tax Advice - CC vs PTY LTD vs Trust?

[Norri]

Hi guys,

I'm earning a bit of money (R15k+/month) now from an online business of mine. The cheques are currently being sent in my wife's name but that's not ideal any more as far as tax is concerned. As far as tax is concerned and as far as KEEPING as much of it as possible is concerned, should I get a shelf CC, a PTY Ltd or an intervivos trust?

Ideally, in the long-term, we'd like an intervivos trust but I've heard that it's expensive to set up right. So perhaps one of the business options is better? There's no point in flushing half of the cheque away for setting up a trust as we need the cash.

Thanks!

[Dave A]

I'd register a company.

In the past I'd have suggested you'd have the owner of the company as a trust, but the tax implications are getting ever more severe. Unless you're HUGE or at death's door, I'm not sure the price for going the trust route is worth it anymore.

If the owners are all natural persons, and they don't have interests in other companies (other than some shares in public companies on a stock exchange t&c's apply), there are major tax advantages for a small enterprise.

[Norri]

I'd register a company.

In the past I'd have suggested you'd have the owner of the company as a trust, but the tax implications are getting ever more severe. Unless you're HUGE or at death's door, I'm not sure the price for going the trust route is worth it anymore.

If the owners are all natural persons, and they don't have interests in other companies (other than some shares in public companies on a stock exchange t&c's apply), there are major tax advantages for a small enterprise.

Thanks Dave If I'm not mistaken, in the scenario you described, tax is set at 7% irrespective of the enterprise's income. Sounds too good to be true!

[Mark Atkinson]

Thanks Dave If I'm not mistaken, in the scenario you described, tax is set at 7% irrespective of the enterprise's income. Sounds too good to be true!

Not quite. If you qualify as a Small Business Corporation your marginal income tax rate is only 7% up to an amount of taxable income somewhere around R350k. It then gets a little higher. Nowhere near the 28% of a normal company though.

I would register as a SBC but for the fact that we qualify as a personal service provider. Bleh, that should change by the end of the year though.

[CLIVE-TRIANGLE]

The rate of tax for a trust is 40%. So that's out.

The rate of tax for a company or cc, that is an SBC is:
- up to 63,556 - Nil
- from 63,557 to 350,000 7%
- from 350,001+ 28%
That's a maximum tax saving of R77,948 per year

If a trust is the shareholder then the cc/company is no longer owner managed and requires an audit, regardless of size - expensive.

Although there are still a few shelf cc's around, new ones cannot be formed, so your solution is limited to a company or sole proprietor.

[wynn]

And don't forget to register with the local Monkeypality for a trading license.

[Dave A]

If a trust is the shareholder then the cc/company is no longer owner managed and requires an audit, regardless of size - expensive.

Despite a low public interest score (below 100)?

I've just been getting an external compilation.

[CLIVE-TRIANGLE]

Yes Dave. Any company, where all of those who hold a beneficial interest in the company's securities, are not also directors. That's more or less the terms used in the act. That would at the least mean all the trust beneficiaries should be directors, and that's a problem where minors are concerned.

If that 1st test is passed, then you move on to the PI score.

SAICA and other organisations have voiced concerns, some professional bodies dispute the interpretation, but at the moment that is how it stands.

Whether anybody will be bothered about it, remains to be seen.

[Dave A]

The new MOI not requiring an audit has been approved at the shareholders AGM.
CIPRO has accepted the new MOI.

I think I'll wait for the shareholders' revolt before going back to getting an audit

[Norri]

Thanks for all this great advice, guys! Pty Ltd seems the way to go.