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Corporate Investment

As a business owner you are aware of certain large expenses you will need to pay in the future or any capital items that you will need to acquire or replace. The cost of these items must either be paid out of the business's cash-flow or through bank financing. If the bank loan route is followed there are two additional expenses, ie interest and a deposit that must be taken into account. How do you overcome this problem? Through holistic financial planning! The need: To finance the future business expenses in a structured and cost effective manner by making use of any tax concessions that may be applicable. The solution By structuring a regular investment in the business's name, you are able to make timeous provision for the future expense without placing undue pressure on the business's cash-flow or profits. The Corporate Investment does just that. Usually you will have a choice of investment products in which to house the financial provision that can be considered together with a qualified financial planner. The actual circumstances of the business will determine the suitability of each investment type by considering various factors like the term, accessibility, protection and tax. In addition, you may choose to invest sufficient amounts to cover all the items in one contract or you may prefer a combination of investments. How can you calculate the required recurring contribution? Firstly, the current and future cost (taking an assumed inflation rate into account) that is required for each expense or capital item is established. Secondly, the term is calculated by determining when you need the money. Thirdly, account is taken of any existing provision (with ongoing growth) in order to ensure the solution is appropriate for the need. Fourthly, an anticipated investment growth rate and any escalation in the regular contributions are factored in. Once all these factors are established a financial calculation is done to determine the required regular contribution. The capital value thus created can be used to either pay the expense, buy the asset or pay for a portion thereof. How can you afford to pay this contribution? Can you afford to make the required contributions? The actual question, bearing in mind that SARS helps in this regard through tax deductions, is can you afford not to? By making use of the available deductions to make adequate provision you will be converting a book entry into an actual asset. SARS allows a tax deduction for the actual amount of money spent on expenses that are incurred in the production of taxable income. This basic deduction in terms of section 11(a) of the Income Tax Act (ITA) includes the interest on loans used to finance production and the cost of any lease on assets employed. In addition, section 11(e) of the ITA allows a deduction for the depreciation of an asset over its useful life when it is used in the production of income. Should you be classified as a "small business" and your annual turnover is less than R20 million, you may also qualify for a reduced corporate tax rate. This concessionary rate amounts to 0% on the first R67 111 of taxable income, 7% on the next R297 888, 21% on the next R185 000 and only thereafter will you pay the normal corporate rate of 28%. By claiming these deductions in your business you will be reducing your income tax liability e.g. if your normal taxable income is R1000, your income tax payable would be R280. If you have a tax deduction of R280, your taxable income will reduce to R720 and the income tax payable thereon will reduce to R201.60. You have therefor saved an amount of R78.40 that can be used to finance the Corporate Investment. SARS will in fact be helping you provide for the future.

The benefits

Some of the benefits for the business are: Good corporate governance by making adequate provisions. Growth of alternative assets within the business, thus increasing its value to the owners. Replacement of long-term liabilities on the balance sheet with fixed assets, thus improving the gearing ratios. Improvement of the creditworthiness of the business. Systematic and structured investment for a future expense. Use of the SARS allowances to subsidise the cost. Creation of an investment that can generate tax-free capital after five years. 'Parking bay' for retained income in the future due to the 'black hole' loan facility created.
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