By Bradley Woolridge, Director at Burns Acutt
People often ask themselves why they need to bother with tax planning and this is not wholly a bad question to be asked. The simple answer is that tax has to be paid, as it forms part of the function of overall profit, without planning would be optional. So in laymans terms, no plan would probably equal the highest cost or the worst tax position for oneself.
The general disdain for the doing of taxes appears to stem from the inaccurate perception that there isn’t much to be done in the way of influencing the outcome of one’s tax liability. I’m here to tell you that’s simply not true.
For most medical professionals, the following example will help illustrate what I mean by this.
Within a private practice, money can be withdrawn as either a salary, or a dividend. The maximum tax rate for an individual, in the financial year ending February 2017, was 41%, while the dividend tax rate was 15%, and company tax was at 28%. Finally, the effective tax rate, which comes into play when you opt to draw money out of the company via dividend, stood at 38.80%.
Therefore, in order to enjoy the largest possible return on their taxes, medical professionals were advised to claim a salary of no more than R700k and take the rest of their earnings out via dividend.
Through having the right knowledge and employing the right skills, we were able to help our medical professional client base save 2.2% on their taxes in 2017. And before you think this doesn’t look like a sizeable saving, consider that if your earnings had been R1.7 million, you would have saved R22 000 just by simply applying the above.
Wrap your head around it this way – Do you give R22 000 away for no reason at all?
SUBJECT TO CHANGE
Fast forward to the 2018 financial year (ending February 2018), and everything is different. One of the reasons I am so insistent that you look at using expert services offered by accounting firms, is because the financial market is influenced by so many different elements, it is near-impossible to adequately predict what the tax rate percentage changes will be from one year to the next – there is no winning formula. For taxation and accounting services specialists, however, it is part of the job to keep their fingers on the pulse, re run the numbers each year after the budget speech and figure out the best possible plans for clients, year in, year out.
For instance, the maximum tax rate for an individual in the 2017-2018 financial year became 45%, while the dividend tax rate rose to 20%. Company tax, the only one that stayed the same, remains at 28%. This would mean the effective tax rate now stands at 42.4%.
Given the new tax parameters, optimal return on a medical professional’s taxes would result from a salary draw of no more than R1.5 million, and with the balance taken out via dividend.
Failure to adapt to this change would’ve meant a loss of 1.4% for the typical medical practitioner. Again, nothing to scoff at if you consider that on an amount of R800 000, you would’ve lost R11 200. Sure, this amount in context may seem nominal to some, but if I had to walk up to you now and ask you to give me R11 200 for nothing, would give it to me? Of course not, so why would you give it to the taxman? In essence, this is what tax planning is all about. Same as before, no one gives money away for no reason.
MAKING A PLAN
So to go back to the initial question raised in this article: tax planning is extremely relevant, if not crucial, to ensure one’s continued financial success. This stands true even without considering the severe consequences that can result from provisional tax underpayment, late payment, invalid VAT claims, or having overdrawn loan accounts – all of which can be avoided by speaking to some recommended tax accountants or partnering with a taxation consultancy services provider.
As any financial specialist will tell you, tax planning is one of the first lessons one learns when studying tax. We run scenarios and learn that whichever scenario result in the lowest tax liability, is the most efficient tax structure for the scenarios being calculated. We are taught that every person has the right to structure their financial affairs in the most tax-efficient way possible – it is at the core of tax planning.
If you’re still feeling overwhelmed or confused by this topic, please don’t feel discouraged. Tax is one of the most complex areas of financial planning, which is why I have been covering it so extensively.
It is the reason most medical and other professional’s first turn to us for help. If you would like to do the same, and put your mind at ease regarding your tax affairs, feel free to contact us.