Technology companies are on the rise and having an accounting and tax specialist in this sector can be hugely beneficial.
According to Johannesburg accounting firm The Beancounter, there are five tax savings for tech companies and they describe them as follows on their website:
1. Research & Development Allowance
This tax saving is still relatively unknown for most businesses within the tech space, but the saving is huge. If you embark on research or a new development, then you can apply for this allowance with the Minister of Science & Technology. The application process is online and if you qualify, then you can claim a “super deduction” of an additional 50% on operating expenses and an accelerated wear & tear allowance on items of equipment. This means that you can claim 150% of all expenses against your taxable income. Huge savings!
There have been limitations on the number of applications approved by the Minister of Science & Technology in the past, but recent business news headlines have shown an increased devotion by the South African Government, to not only enhance the application process but also to provide the necessary financial assistance to qualifying businesses in this sector. If your business thus attains the required approval for this allowance, the tax saving as a result thereof is extremely beneficial.
2. Claiming Employee Tax Incentives (ETI) on salaries paid to interns
The Employment Tax Incentive (ETI) is an incentive mainly aimed at encouraging employers to hire young and less experienced work seekers. This will include hiring interns within your business structure and is especially lucrative for tech companies looking to hire young trainee developers or sales teams.
When you hire these individuals, SARS will give you a rebate against the salary paid and you can claim up to 50% back depending on the amounts paid.
There are qualifying rules and the tax saving will be dependent on each qualifying intern’s monthly remuneration.
3. Classification of your Company as a Small Business Corporation (SBC)
If your business qualifies as a SBC the tax saving can be extremely beneficial, as the tax rates applied to the business’s taxable income for any year of assessment falls within a pre-set tax bracket and is not automatically taxed at the usual flat rate of 28%. The result is a saving of more than R100k per year.
To qualify as a SBC, the business needs to meet certain requirements. One of them is that the turnover must be below R20m for the year. As most tech companies will fall under this in their startup phase, they usually qualify for it but never know about it and therefore don’t get the savings.
4. Home Office Expenses
As most tech companies operate from home in the startup phase, this is a deduction that can be used to claim against taxable income. This home office allowance is calculated by adding certain qualifying expenses and applying the ratio of office vs. home square metres to determine the cost of the actual office space.
5. Income Received in Advance
Many tech businesses will raise income to their clients for a full year’s consulting or other tech related subscriptions. However, as you are providing your client with a monthly service within that year, the expenses to produce the service will be incurred on a monthly basis and not once off. For income tax purposes, we could thus divide the sales into the 12 month period, as the service will be rendered. Any of the service rendering months that fall outside the scope of that specific year of assessment will be taxed in the subsequent year of assessment in accordance with this section of the Act and could result in a big timing issue that can save you a substantial amount of tax.
These are just some of the most common tax incentives and rules applicable to tech companies in South Africa. Taxes are always more complicated than they seem and we would recommend that you consult a qualified accountant to advise you further on the above and other benefits that you can enjoy as a tech company