It’s peculiar that we reinforce the importance of having a tailored investment strategy, yet we neglect to consider the need for a tailored tax strategy. After all, there are only two certainties in life: Death and taxes. Given this certainty, one’s tax affairs deserve some form of strategy.
But let’s first debunk two tax strategy myths: 1.) The sole purpose of any tax strategy is the evasion of liability, and 2.) Your commercial decisions should be dictated by tax considerations.
Any tax strategy that contains these characteristics is more likely to end in catastrophic failure than bring you comfort and success.
Why you need a tax strategy
Ultimately, a tax strategy requires the harmonisation of the fair and reasonable contributions to the fiscus and the management of income. More importantly, the function of a tax strategy should be considered as a mechanism to mitigate against any tax risks inherent to the decisions taken. For example, when you receive an income from the disposal of shares, there are broadly three main risks that should be guarded against. These are:
- The classification of the income received as either trading income or income derived from long-term investments;
- Identifying the correct base cost to be attributable to the disposal of those shares; and
- Ensuring that the gains and losses are declared in the correct tax periods.
Identifying and addressing the above ensures that taxpayers submit their tax affairs accurately and don’t expose themselves to any undue risks. This type of strategy creates a win-win scenario for both taxpayers and the fiscus.
An effective tax strategy contains any of the following key attributes:
- Regular checks and balances to make sure a taxpayer’s tax affairs are up-to-date, ensuring the taxpayer is compliant;
- Identifying various income streams from which a taxpayer receives income, and checking that the income is being treated correctly from a tax perspective;
- Scrutinising the reason why receipts are not taxable; and
- Considering professional advice, to the extent needed.
Overall, the attention given to your tax affairs shouldn’t be reduced to the last-minute completion of a tax return. Instead, in every venture and decision, always ask yourself: “What are the tax considerations I need to have in mind?” Doing so might save you many sleepless nights.
Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts at AJM Tax share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday.