We pay no Tax. Really?

 

Every now and again I see a statement - normally from somebody who want to sell you something - stating they make a lot of money and pay no tax.

 

WOW!!

 

Now that is the type of statement that immediately get me to read further, as I know the Tax Laws and am always interested in ways to eliminate or minimise tax.

 

However, how true is that claim?

 

It is true and also not true.

 

The writer either forgot to mention they are talking about one very specific type of tax, forgot to mention it is paid by someone else or they are a liar.

 

Here are some questions I would like to ask them.

 

  • Do you only buy zero rated and exempt goods for Vat purposes? If you do - what a boring life. If not, you are a lair.

  • Do you pay rates and taxes? Either directly or indirectly? 

  • Do you put fuel in your vehicle? That certainly contains a big portion of indirect taxes. Perhaps you are walking everywhere and are one of the fittest humans on the planet. 

  • Do you ever receive dividends? Although you may not have paid tax on the dividend there were witholding taxes paid on your behalf.

  • Ever received a salary exceeding the tax threshold? Just a reminder - PAYE is also a form of tax.

 

However, if they state they are paying no income tax they may indeed be right.

 

It normally involves the following.

 

Setting up a trust.

 

Why?

 

A trust allows you to do income splitting.

 

Instead of individual A, who falls in a much higher tax bracket, being taxed on all profits, income is distributed to kid A, kid B, the husband or wife, who falls in a much lower tax bracket.

 

ALL LEGAL.   

 

Assets are protected against attacks from hostile third parties ,because it doesn't belong to any individual. 

 

TIPS:

 

When you want to use a trust as an income tax planning vehicle: 

 

  • Educate yourself about everything to do with trusts .A trust contains many other benefits. Tax planning should not be the main goal.

  • Use an attorney who specialises in trust to draw up your trust deed. If you, or your attorney, get the wording wrong, you can unintentionally give your hard earned assets away for nothing. The trust deed become a deed of donation. Be warned! 

  • Use an accountant who understands trust. Not all do! There are a lot of anti avoidance rules and tax rules change all the time. Planning needs to happen long before the end of the year and the accountant needs to understand the consequences of the entries they make in the books. 

  • Choose your trustees carefully. One needs to be independent and all need to be well educated about trust laws and understand the working of trusts. 

 

Two last thoughts.

 

  1. Trusts have been looked at for a very long time by SARS. They don't like trusts. If the conduit principle, allowing you to split income, ever falls away, trust will not be nearly as attractive to do tax planning. In fact, you may end up paying more tax.
  2. An attorney, who specialises in trusts, told me that most ministers hold their assets in trusts. Changing the Law will hurt them. 

 

If you need help with your taxes please give us a call 076 831 8514 or email tax@profittrackers.co.za