BDO SA’s Louis van Manen unpacks how CFOs can benefit from their tax obligations.
Nobody enjoys paying tax, but since it’s our legal obligation, we may as well make the most of it by legitimately saving where we can. Because tax savings – even if fractional – compounded over prolonged periods of time can contribute significantly to a company’s financial position.
Sars remains under a lot of pressure to collect what it can from the tax base. This comes with heavy penalties and interest fees for those who don’t meet their tax requirements. So, for a CFO looking to reduce their company’s tax burden, the trick lies in finding a way to do so while also keeping their company’s overall tax risk low.
Here are five ways CFOs can maximise their company’s tax deductions while staying on the right side of SARS.
1. Investing in vehicles exempt from capital gains tax (CGT)
Qualifying Collective Investment Schemes (CISes) and Real Estate Investment Trusts (REITs) enjoy exemption from CGT on the disposal of qualifying underlying assets. Many associate this tax-saving benefit with individuals or trusts, but it applies to any sort of investor – including companies.
So for any company looking to invest, especially as a long-term investment, the CFO should pay heed and consider doing so in a REIT or CIS. This is because instead of investing directly, doing so via CISes and REITs means the company will not suffer CGT consequences every time an underlying asset is sold by the CIS or REIT. The CIS and REIT are accordingly able to reinvest pre-tax money following asset disposals.
The company will be liable for CGT when disposing of the CIS or REIT investment, but by then, compounded interest should have already enhanced the value of the investment. Depending on the nature and size of an asset already held by a company, such assets can potentially be swapped for shares in CISes or REITs applying tax rollover relief.
2. Renewable energy incentives
Typically, businesses think of investment in renewable energy from the point of view of their operations. But there are also several tax benefits that can come from investing in renewable energy.
Businesses are eligible for a 125 percent tax incentive for new and unused energy assets such as wind, solar PV, concentrated solar, hydropower and biomass. In addition, businesses can get an upfront, higher-than-cost once-off deduction of 125 percent. At present, this incentive applies from 1 March 2023 to 28 February 2025. Qualifying renewable energy investments will otherwise be claimed over three years: 50 percent of the cost in the first year, 30 percent in the second and 20 percent in the last.
3. Employment Incentives
An unfortunate number of taxpayers are facing Sars scrutiny for claiming
employment tax incentives or learnership allowances under what the Revenue Authority considers to be schemes. But there are a number of legitimate opportunities to employ young people and legitimately qualify for employment tax incentives, or learnership tax allowances.
CFOs often fail to realise that a portion of their staff complement qualifies for such incentives and that these can be quite lucrative – but just be aware of schemes.
4. Doubtful debt deductions
Doubtful debt deductions are much more favourable than they were a few years ago. This is due to the fact that they are now linked to numbers determined under IFRS, for companies applying IFRS 9, which to a large degree takes away the subjectivity of claiming those allowances and the need to motivate them to Sars, as the Act refers to IFRS amount.
The allowance has also increased from the traditional 25 percent to 40 percent in these cases.
This deduction mostly applies to larger businesses applying IFRS 9, but for smaller businesses, there is also a good doubtful debt allowance available, based on the ageing of your debtors, regardless of whether they are doubtful or not. The reason for this is that a lot of small businesses historically have gone out of business because of cash flow problems with long outstanding debtors.
Our legislation now effectively gives these businesses a healthy tax deduction on long-outstanding debtors, which will help with that cash-flow constraint by effectively avoiding paying tax in full on an amount that hasn’t been received yet.
In addition, on application to SARS, a taxpayer may be issued a directive to increase the 40 percent deduction up to 85 percent. In deciding on such a directive, SARS will consider factors such as:
- The history of a debt including its age and the number of repayments not met;
- Steps already taken to enforce repayment;
- The likelihood of the debt being recovered;
- Security available in respect of affected debts; and
- Criteria applied by the taxpayer in classifying debt as bad.
5. General wear and tear allowance
Assets used by a company in its trade which do not qualify for specific tax write-offs allowances, such as renewable energy or manufacturing assets, usually qualify for the general wear and tear allowance under section 11(e). Sars’ Interpretation Note 47 in this section provides for asset write-off periods which it regards as acceptable for various assets, such as the following typical examples:
- Computers (personal) 3 years
- Computers (mainframe/servers) 5 years
- Delivery vehicles 4 years
- Furniture and fittings 6 years
- Generators (portable) 5 years
- Generators (standby) 15 years
What CFOs often forget is that their companies can apply to Sars for a shorter write-off period where the useful life of an asset in the company’s case may be shorter. Factors that Sars will consider in granting a shorter write-off period include the environment in which the asset operates as well as the intensity with which it is used.
Given some of the current environmental factors most companies face, such as loadshedding and the condition of roads and other infrastructure, companies should consider applying to Sarsfor shorter write-off periods for affected assets. A standby generator, for example, may not have a 15-year useful life when it is expected to do much more than provide electricity only on an occasional basis.