South Africans of all income categories are increasingly supplementing their principal sources of income with so-called'side hustles,' or, as I prefer to call them, 'part-time companies.'
Due to the COVID-19 epidemic, the recent surge in part-time businesses has become a global trend, increasing people's financial precarity.
Many of our clients supplement their income by working in fields like network marketing, property renting, and cryptocurrencies. They were either hesitant to disclose their part-time business revenue or didn't believe they had to. The majority of people are unaware that their net losses from part-time enterprises can be used to minimize the tax they pay on their primary income.
Your part-time business is beneficial to your tax situation.
Many people who run part-time enterprises prefer the term "side hustle" since it has a less official connotation. Isn't a company something you register? And you only have to record income if it comes from a registered business and exceeds a specific amount, correct? Wrong, wrong, and wrong some more.
As a result of your part-time business, you are now a lone proprietor. Because there is no minimum income threshold and your ID number serves as your registration number, you must declare any additional earnings to SARS.
Smaller, newer part-time firms often don't earn much revenue, resulting in higher net losses. These losses could include mobile phone, WIFI, home office equipment, salary, and other expenses. Now is the moment to put your net losses to good use and minimize your overall income tax liability.
SARS is also much more lenient in the first two years of a part-time business benefiting from its net losses; after that, its assessments become more stringent.
Growth, legality, and ring-fencing are all important aspects of a business.
The ability to use the net losses from your part-time business to minimize your primary income tax is contingent on your side hustle demonstrating growth potential. Your motivation should involve a realistic chance of earning taxable revenue in a reasonable amount of time.
You must also show that your part-time business is legal to SARS. Anything that appears to be more of a hobby in order to qualify for tax benefits, such as part-time farming, is ring-fenced. Keep in mind that the list of dubious trades is reviewed and revised on a regular basis, so talk to your tax advisor before jumping on the net loss bandwagon.
When SARS analyzes your application to use your part-time business's net losses as a tax benefit and determines there has been too much loss and not enough growth, this is known as ring-fencing (Section 20a of the Income Tax Act).
SARS does not like it when a loss occurs year after year and works on a 3-out-of-5 ratio. SARS will erect a fence around your part-time firm if it has lost money for three out of the last five years (metaphorically speaking). You don't lose the money; the benefit is retrospectively granted once your part-time business starts producing money. It's time to start paying provisional tax as soon as your part-time business becomes lucrative!
Taxing stuff
If your part-time firm is still in the early stages, the net losses tax benefit may be worth pursuing because it might save you money on your principal earnings' income tax as a sole proprietor.
SARS, on the other hand, is becoming more stringent in its approval of tax benefits, especially when trends such as working from home and developing a portfolio career gain hold and challenge the existing quo. Your best choice is to seek professional counsel based on a full financial analysis of your unique circumstances - the net losses tax benefit may not be applicable to you, but there may be others that are.