I don’t know a single person who doesn’t enjoy getting something back from the taxman at the end of the year. But some prefer to stay as far below the taxman’s radar as possible – by not registering as tax payers or by not submitting a tax return. If you are one of these, you could be shooting yourself in the foot and robbing your own household of extra cash in the bank. Let’s look at a few scenarios where registering as a taxpayer or submitting a tax return could benefit either the household and/or the taxpayer.

In the first scenario a spouse is employed by the husband or wife’s business. The husband may be officially retired according to SARS’s records, but in reality receiving a salary – off the record – from the cash earnings of his wife’s business for administrating or supervising part of the business. The husband doesn’t want the hassle of submitting a tax return every year and has convinced his wife, the owner of the business, to not disclose his salary to SARS. Other than the fact that the non-disclosure of income is an illegal action, the husband could also be robbing his own household of after-tax earnings. In which circumstances would this be the case?

If the husband’s salary is disclosed in the business’s books, the business would be entitled to deduct that salary from its income, which results in a lower taxable income and less tax payable by the business every year. Even if the employee spouse now has to pay tax, that amount would be exceeded by the tax saving of the employer spouse in all circumstances where the employee spouse’s tax rate is lower than the employer spouse’s tax rate. The household (the employer and employee as a combined entity) will therefore be left with more after-tax income by disclosing the salary.

There are a few administrative hassles, though. In the scenario above, the wife would have to register with Revenue as the employer of the husband and contribute 1% of his salary to UIF every month and the husband will also sacrifice 1% of his salary (capped at R125 per month) to UIF. If the salary exceeds the 2009/2010 tax thresholds (R54 200 for persons under the age of 65 and R84 200 for those above 65) the wife would also have to deduct PAYE and/or SITE from the salary. If the husband earns less than these thresholds, he would not have to be registered as a taxpayer with SARS, but the business still enjoys the tax relief of deducting his salary from its taxable income.

To prevent businesses from abusing the potential tax relief associated with employing spouses, the Income Tax Act stipulates that only the payment for services by a spouse that truly contributes to the trading income of the business may be deducted as business expenses. The Act also specifically prohibits the deduction of any domestic or private expenses. In the scenario above, it would therefore not be possible for the wife to deduct payment to the husband for moving the lawn of their private residence or for managing their household chores. Excessive salaries will also raise a flag with SARS. If you pay your spouse a salary that is higher than the going rate in the market for similar services, SARS may disallow that business deduction.

But if you are truly employed by the business and paid a market-related salary, disclosing your income could be a relatively easy and painless way to leave you, as a couple, with significantly more after-tax income at the end of the year.

Tags: cash back from the taxman, employed spouse, tax relief, tax return

This entry was posted on Wednesday, September 16th, 2009 at 1:12 pm and is filed under Money matters, business. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.