By Gareth Price, Founder of Cloudworx and Investmint and CFO at Back A Buddy
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 fueled by people like Uncle Dave, who will sit around the braai and regale us with stories about 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. And there is very little we can do to change that number, unless you have enough money to offshore the business, however that process is full of restrictions and is very costly.
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 from “how do I pay as little tax as possible” 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 cashflow 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 is a phrase that accountants get excited about but means very little to the average person. So I explain it like this:
Imagine I worked for you, and I had a company credit card. And at the end of the month, you go through my statement and see what I spent money on – if you would be happy with me spending your business’s money on it, then it’s likely to be deductible. If you’re not happy that I am spending your business’s money on it, 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 R7m in tax.
Imagine my surprise when the gentleman smiled and thanked me. HE SAID “THANK YOU”!
Now this was not what I was expecting, but when I thought about it, he may have had to pay R7m in tax, but he still had R21m left over afterwards, which isn’t a bad result for a year’s work.
And that changed my mind about tax.