An income tax return outlines the income earned by the company, the expenses incurred, and the taxes due. The purpose of filing a return is to calculate the business’s tax liability (or refund) based on the profits it has made during the financial year.
For companies in South Africa, income tax is governed by the Income Tax Act, which specifies how much companies are taxed, when they should file returns, and what deductions they can claim.
Every company conducting business in South Africa is obligated to submit an income tax return. This includes:
- Private companies (Pty) Ltd
- Public companies
- Close corporations (CCs)
- Non-profit companies (NPCs)
- Companies operating as branches of foreign entities
Even if your company made no profit during the financial year or is not operational, filing an income tax return is still required. Non-compliance can lead to penalties and interest, so it’s important to file on time—even if your company is not trading.
In South Africa, the tax year for the majority companies runs from 1 March to 28/29 February of the following year. This means your financial year needs to align with this period unless your company’s financial year differs from these dates. Most companies follow the standard tax year, but if your financial year is different, you need to file your returns in accordance with your financial year-end dates.
When filing an income tax return, businesses need to include key financial information. Here’s a breakdown of what needs to be submitted:
- Financial Statements
Companies are required to submit financial statements, which include a balance sheet, income statement, and cash flow statement as well as additional reports and notes detailing the facts. These financial statements provide SARS with an overview of your company’s performance over the tax year.
- Taxable Income
Taxable income is the amount of profit the company made after allowable deductions (expenses, depreciation, etc.). This is what the company will be taxed on. Taxable income is calculated by deducting business expenses, such as operating costs, salaries, and other allowable expenses, from the total income earned.
- Deductions
South African tax law allows various business-related deductions, such as:
- Business expenses: Rent, utilities, salaries, and operational costs.
- Wear and Tear: The allowable deduction for depreciation of business assets (such as equipment or property).
- Bad debts: If a customer has failed to pay for goods or services, this can be deducted.
- Interest on loans: Business loans interest payments can be deducted.
Make sure to claim all legitimate deductions to minimize your taxable income.
- Tax Computation
After accounting for all the income and allowable deductions, your company will compute the tax payable. South Africa has a flat corporate tax rate of 27% for most companies. However, if your company earns less than R 1 million in taxable income, you may qualify for a reduced rate under the small medium enterprise business tax rebates.
- Tax Credits
Companies may qualify for various tax credits, such as the research and development (R&D) tax incentive or credits for certain investments. Make sure to include any applicable credits to reduce your tax liability.
- VAT Returns
If your company is registered for VAT (Value-Added Tax), you will also need to file regular VAT returns. These returns are separate from the income tax return but may overlap in terms of financial information.
Common Mistakes to Avoid
- Failing to File on Time: Late filing can incur penalties. Even if you’re unsure about the exact tax due, it’s better to file a provisional return and amend it later.
- Incorrect Financial Statements: Make sure the financial statements are accurate and up to date. Mistakes here can lead to audits and adjustments.
- Overlooking Deductions: Take full advantage of the available deductions. Many companies miss out on legitimate claims that can reduce their tax liability.
- Not Registering for VAT: If your business meets the VAT registration threshold, failing to do so can result in penalties.
Filing income tax returns for your company in South Africa is a crucial part of running a compliant and sustainable business. By understanding your tax obligations, making use of allowable deductions and credits, and ensuring that you file on time, you can reduce your company’s tax liability and avoid costly penalties. The key is staying organized, keeping accurate records, and using the SARS eFiling system to streamline the process.
If you find the process overwhelming, you are welcome to contact Business Services.Com to assist you. We believe that Tax must be reduced within the constraints of the law, and that our clients must pay SARS what is due.