The session opened with Christina Jenkins of GIFS giving a warm welcome and introduction to IIG President, Thabo Twala who is also the current Head of Group Underwriting Governance at Santam.
Thabo welcomed everyone to IIG’s final Insights session with our proud partnership with GIFS. In tackling one of life’s certainties, it’s always intriguing when we think about well-known individuals globally who are often embroiled in tax evasion. A country’s tax regime is often a window into their priorities. Countries often encourage savings with tax benefits and governments use tax to drive certain behaviours.
We were then introduced to Dr. Kershen Pillay, CEO of GIFS. Dr. Pillay touched on the rising cost of living in South Africa which inevitably creating the need for more entrepreneurs. There is a growing desire amongst most South Africans to create a side hustle. He then introduced our esteemed speaker of the day.
Johan Heydenrych, a registered tax practitioner with over 30yrs of experience in tax services. Johan explained that most people when refer to a democracy think it’s a structure governed by people, but it is actually governed by law, without which, there would be anarchy. Tax legislation is a cornerstone of that democracy.
Johan’s presentation was divided into two large categories namely:
- Trading enterprises-comparing effective tax rates
- Examples where poor structuring leads to inefficiencies
Unplanned tax consequences
Johan provided a cautionary note to businesses: one needs to look at regulatory requirements before tax requirements and defined how one can operate a business. The focus should be first on running the business with the order of priority being:
- Regulatory
- Commerciality
- Tax
Johan further unpacked the difference in requirements between operating as a sole proprietor or in a partnership and the tax responsibilities between the two structures.
One of the challenges with partnerships is that one cannot register office vehicles in a company name, it needs to be an individual registration. This poses further difficulty when trying to split the business assets.
Some of the benefits and challenges of operating as a Company/CC are:
Advantages
- Simple to administer
- Limit personal liability of shareholder (unless Professional Inc.)
- Maximum distributed tax rate of 41.6% is lower than maximum individual tax rate of 45%
- Pay salary up R1 731 601 and dividends thereafter
Disadvantages
- Estate duty unfriendly
- CGT unfriendly: 80% CGT inclusion rate making effective CGT rate 21.6% before distribution as dividend which will attract additional 20%
Some of the benefits and challenges of operating as a Trading Trust are:
Advantages
- Estate duty friendly
- May vest income in the hands of beneficiaries (Section 25D) but be careful of anti-avoidance legislation.
Disadvantages
- Income Tax rate in Trust is 45%
- 80% inclusion rate for CGT – effective CGT Rate is 36%
- Anti-avoidance legislation makes transfer to Trust costly
Johan also unpacked some of the details of Shareholding via Trust
Dr. Kershen then reiterated how important it is to begin with understanding tax legislation and asked Johan to explain the difference between tax efficiency vs tax avoidance. The simplest difference as per Johan is that tax evasion is illegal whereas tax avoidance can be permissible if you invest in a tax reduction tool.
In his conclusion Johan emphasized that one should always try to know your business and strongly advised that one must invest in a trusted tax advisor. This task used to previously be done by auditors, but that role is no longer fulfilled by them. Before any big transactions, get tax certainty about it whilst knowing that tax advice and quality of advice is the saving grace.
Slide
s will be made available to wider IIG community via our website: https://iig.co.za/
Dr. Kershen thanked the speaker, attendees as well as the IIG and closed the session.
Article written by Aisya Swaleh
