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Minimise tax liability with tax-free earnings

From 1 March 2011 increases in rebates and the so-called foreign dividend and interest exemption for individuals have enabled taxpayers to earn a reasonable amount before becoming liable for normal tax.

A couple over 65 years of age may, for example, now earn R126 150 each including interest of at least R33 000, before becoming liable for normal tax in the 2012 year of assessment. Together, this couple may therefore earn R252 300 including interest of at least R33 000, without paying normal tax.

Small business corporations

In order to minimise natural persons’ normal tax liability when they trade through a small business corporation (SBC), the taxable income earnings should be allocated as follows:

  • first, a taxable income of R59 750 in the person’s own name (R59 750 x 18% = R10 755 less primary rebate of R10 755 = taxed at 0%);
  • the next R59 750 of taxable income in the name of the SBC (taxed at 0% but keep in mind that STC still applies);
  • thereafter, R83 000 (R150 000 – R59 750) of taxable income in the person’s own name (taxed at 18%); and
  • lastly, a taxable income in excess of R150 000 through the means of a SBC (taxed at 18% when below R300 000).

Capital gains tax

When purchasing a capital asset, keep in mind that capital gains are taxed differently in the case of a natural person and that of a small business corporation:

  • Natural persons include in their taxable income 25% of their net capital gain and this net capital gain is determined after the annual exclusion of R20 000 has been deducted. Depending on their marginal tax rates, their taxable capital gain is then taxed at a rate ranging from 0% to 40%. This results in an effective capital gains tax ranging from 0% to 10%.
  • A corporate taxpayer includes in its taxable income 50% of its net capital gain. No annual exclusion applies. Where a small business corporation has a taxable income of between R59 750 and R300 000, the tax rate is 10% and the effective capital gains tax rate is only 5%.

(Source: Kevin & Lindsey Mitchell: SAICA’S annual tax legislation update for specialists seminar of December 2011.)

For further information, contact Sonja Frank in Stellenbosch on tel. 021 882 8140 or e-mail sonja@exceed.co.za.

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