Ah, taxes. Nobody likes them, but they are here to stay, so we may as well learn to live with them. There is this misconception that there is a way to be “tax-
efficient”, which is really a euphemism for paying as little tax as possible. It’s fuelled by people like Uncle Dave, who at every family braai would regale us with how “I’ve been in business for 20 years and I’ve never paid a cent in tax”.
This may well be true but it means that either he’s running a very poor business that has never made any money, or we’re going to be reading about him in the media shortly. The fact is that if your business makes a profit, you are going to have to pay tax. In reality, the only way to reduce tax is to make less money, which is suboptimal because then you have less money.
So instead, when looking at tax efficiency, we need to reframe the question to: “how do I track and plan my tax liabilities so that I am never surprised when I have to pay it?”
The best way of doing this is to ensure that your business’s financial systems and processes are sufficient to drive accurate, real-time management reporting. This way you will be able to see what your monthly profit is and calculate your estimated tax payable. Keep this number in your head and put it into your cash flow projections.
Of course, we need to know what can and can’t be deducted for tax purposes. The rule is “any expenses that are incurred in the production of income”, which means very little to the average person.
I like to explain it like this:
Imagine I worked for you and I had a company credit card. At the end of the month you go through my statement and see what I spent money on – if you are happy with me spending your business’s money on it, then it’s likely to be deductible. If you’re not happy then you probably shouldn’t be either.
In closing, I’d like to share a short story about a young article clerk (me!) who, with much trepidation, walked into a client’s office with the news that he owed R7-million in tax.
Imagine my surprise when the gentleman smiled and thanked me.
Now this was not what I was expecting, but when I thought about it, he may have had to pay R7-million in tax, but he still had R21-million left over afterwards, which isn’t a bad result for a year’s work.
And that changed my mind about tax.
- Price is founder of Cloudworx and Investmint and CFO at Back A Buddy
Follow @SundayWorldZA on Twitter and @sundayworldza on Instagram, or like our Facebook Page, Sunday World, by clicking here for the latest breaking news in South Africa. To Subscribe to Sunday World, click here.
