The tax rate for companies has been reduced to 30 percent, while income tax is payable at more than 30 percent on every rand earned over R33 000 up to the maximum 45 percent on every rand earned over R120 000.
There is clearly a temptation to look at ways of paying company rather than personal income tax, that is to consider incorporating.
If you are currently operating your own business as a sole proprietor or in partnership, selling your business into a company is a business decision, and provided that you value your business properly and the sale agreement is correctly worded, you should not have any problems from the South African Revenue Services (SARS).
However, if you are currently employed and are considering resigningto become a contractor to your employer through a company or close corporation (CC) in order to benefit from the lower corporate tax rate there are a few things you need to know.
Equally so, if you are an employer and your employees are suggesting that they become contractors through companies or CC's.
Firstly, it is important to realise that, unless the SARS has issued a directive to the contrary, an employer is liable for tax deducted from an employee. An employer who fails to pay this tax will additionally be liable for penalties and interest on the unpaid tax.
For tax purposes a labour broker, a person, company or CC whose business it is to provide client(s) with a person or persons, is considered to be an employee.Unless the SARS issues a labour broker's exemption certificate or a directive to deduct tax at a lower rate, employees' tax must be deducted from payments to the labour broker. If the labour broker is a company or CC, payments must be taxed at 30 percent.
SARS won't provide a directive unless the labour broker is "independent" which means not under the supervision and control of the employer regarding hours of work and the manner in which duties are performed.
You should also remember that you will have to pay 12,5 percent secondary tax on companies (STC) on company or CC money you want to take out in the form of a dividend (not taxable in the recipient's hands).
Lastly, if you are considering forming a company or CC, remember the costs of doing so (formation, accounting, auditing) which need to be measured against the benefits. You may be able to claim certain expenses against the income, but these may be limited, depending on the nature of the work you do. You may also lose entitlements to medical and retirement benefits.