Alternating tax years

[BratG]

Hi there,

I was wondering if you could help? I have heard of the following strategy being used to maximize profits and wanted to find out if it was within the legal bounds of tax management:

Let's say a company A, with a financial tax year from march to feb, has an extremely good year and as a result, they would have to pay a significant amount of their profits to tax, money that could be well spent on growing the company. Could they Open up another company B with a tax year from jul to jun, and just before company A's tax year ends, they pay a significant portion of their profits from company A into company B which allows them to pay tax on a smaller profit level for company A, but still retaining the bulk of the funds in company B, allowing the company to use the extra time in company B's alternate tax year to utilize the funds for growth?

Is this possible and most importantly, is it legal?

Thanks and looking forward to your thoughts
BG

[Justloadit]

I am not sure about the new company registration, if it will allow you to select a different tax period.
My CC years ago was Dec to Jan. SARS changed this a couple of years back to Mar to Feb, when I inquired at SARS, they said all companies are now the same tax period, and mine was promptly changed. That specific year then became a 14 month tax year, to bring it in line to the adjusted tax year

[CLIVE-TRIANGLE]

Could they Open up another company B with a tax year from jul to jun, and just before company A's tax year ends, they pay a significant portion of their profits from company A into company B which allows them to pay tax on a smaller profit level for company A, but still retaining the bulk of the funds in company B, allowing the company to use the extra time in company B's alternate tax year to utilize the funds for growth?

Unless there was a legitimate arms length expense, any scheme like that amounts to tax evasion.

[Marq]

Its a fine line between tax avoidance and tax evasion.

Often what appears to be a legal scheme, will be overridden by the tax man mainly because they can.
I agree with Clive, you would have to have a damn good reason to be moving profits around.
It may be easier to go down and negotiate the payment terms which after all is what you are looking at, delaying cash outflows.

[BratG]

Thanks all, that's food for thought - so you say that even though it's within legal bounds, the taxman might frown upon it in any case and could actually do someone about it since its in their power to do so?

[BratG]

Also, if the taxman did decide to punish, what kind of penalties could be forthcoming from something like this?

[CLIVE-TRIANGLE]

If the transaction is not an arms length one, in other words grounded in commercial causes, then the chances are that its sole purpose is to avoid tax (even if there is nothing untoward about it). That being the case, it can be disregarded by SARS as if it never took place.

Should that happen, you found yourself in the realm of discretionary penalties. SARS are presently not known for a benign attitude, the opposite is true and they may well impose a maximum penalty of 200% (of the additional tax imposed).

Having said that, a proper answer can only really be offered if one knows all the facts; the nature of the business, the profit and the tax thereon, and then the nature of transaction envisaged between A & B. If the company is a Medium to Large or a Large, the "connected person" disclosures in the tax return are quite comprehensive.

Marq has offered an alternative option. Also remember a February return is due on the last day of February the next year. An assessment raised on a return submitted on the last day is usually payable by between the 4th and 7th of March, but in reality you should already have paid the tax via provisional tax returns, and if not then that brings it's own parcel of problems.