Top marginal tax rate hits 45% – how franchisees can find relief
Franchises are not meant to be get-rich-quick schemes. You make yourself rich.
Yet the franchise system is a model which potentially can enable franchisees to become wealthy. Particularly if they acquire multiple franchises over time.
So when finance minister Pravin Gordhan announced in parliament during his 2017/18 Budget Speech an increase in the top marginal rate of tax by no less than a full four percentage points, many wealthy franchise and small business owners were taken aback. Of course, it has become customary for the wealthy to be targeted by the government to bridge the fiscal deficit (they’ve become colloquially known as the ‘Robin Hood’ speeches!), but no more than a two percentage point increase had been anticipated.
The increase takes to 45% the marginal tax rate for people earning in excess of R1.5 million a year. Only 75,000 taxpayers declare an income above the R125,000/month threshold it takes to earn R1,5 million a year. That may include some franchise owners, given that www.payscale.com says the median salary for restaurant managers in South Africa is not far off that level at R94,324/month.
1. Rather take dividend income than personal income
The advice of one tax practitioner is that wealthy small business owners can still take steps to minimise the tax blow.
The next highest tax bracket below 45% is just 35%, so the most obvious tactic would be to structure things so as to reduce one’s income below the threshold for the maximum tax rate. This depends on each individual’s personal circumstances, and wealthy taxpayers must at all times be careful to declare at least sufficient income to cover one’s expenses and to be tax compliant. If a franchise owner is in the super-wealthy bracket, but has expenses below R125,000/month, then there is a case for changing some of that income to dividend income from the business.
However, dividend tax was also increased from 15% to 20% in the Budget, thereby reducing the potential for saving. Nonetheless, 20% is still lower than 45% which can give a perfectly legal tax saving.
2. Split your business and turnover
Another potential option to reduce one’s tax rate is to check whether your business pays:
- the small business corporation tax rate of 10% or
- the corporate tax rate of 28%.
There are criteria to qualify for the lower small business corporation tax. For instance;
- the company director must be director of that one business only.
- The business’ annual turnover also must not exceed R20 million.
- Finally, neither the director nor the firm can have investments of more than R20 million.
Some franchises may be paying the higher 28% rate of tax simply out of ignorance of tax law. Others may not realise they could split their business in order to qualify. If a business for instance owns multiple franchises, or even a single business is capable of being split into two or more distinct operations, this option may be feasible. Each business would have to be separately owned with a different partner listed as the director, and each generating a turnover below the R20 million threshold. Franchise owners should seek advice from their accountants or tax practitioners to ensure they are tax compliant and not evading tax, as that could have serious repercussions for the business.
Don’t wait for the maximum tax rate to fall as it did during the tenure of previous finance minister Trevor Manuel. The tax practitioner says that the top tax rate is not likely to fall any time soon. Given there were only 75,000 taxpayers in this bracket in 2015, the tax hike is more symbolic than anything, but quite deliberate, as the measure is therefore only likely to raise around R4.4 billion.