By Yolandi Esterhuizen
More South Africans are supplementing their income from their day jobs or primary business with income from a part-time business or side hustle, such as renting a property, cryptocurrency trading, or working part-time as DJss or wedding photographer.
It’s important to note that any income earned from side gigs needs to be declared to the South African Revenue Service (SARS) each tax year.
The good news is that you may seek tax deductions for your part-time business work in your favour. This shouldn’t be confused with illegally evading or avoiding tax but rather about making use of the legitimate deductions SARS allows to help you grow your business.
One good strategy is to use any net losses from your part-time business to offset some of the tax you pay on your primary income. When your side business is new, it might be running at a net loss after you’ve tallied up all the expenses.
This loss can be used to reduce your income tax bill, but with some caveats. SARS might ask you to show that your side business has growth potential. It will want to ensure it’s a legitimate business rather than a hobby and that it will generate taxable income within a reasonable period. In other words, the motivation shouldn’t be to run at a loss forever to reduce your tax burden.
Is it a legitimate business?
While SARS supports part-time business owners benefiting from their net losses in their first two years, its assessments become more stringent when you enter the third year of losses. At this point, SARS will determine that losses from the side gig may no longer be offset against the tax on the rest of your income. The loss may be offset against future profits from your side business. This is known as ‘ringfencing’.
It’s important to keep in mind that you need to declare any income from a side business, even if it’s small. If you are operating as an individual rather than through a limited company, your part-time business makes you a sole proprietor and a provisional taxpayer. The net losses tax benefit is worth pursuing if your part-time business is in the start-up phase when profits tend to be non-existent.
Small and medium businesses (SMBs) are the backbone of the global economy. Many of them start as part-time businesses, so yours could grow into something unique in time and perhaps even into your full-time job. But it is important to be compliant right from the start.
Here are four quick tips to streamline your tax declaration for your side business:
1. Keep your personal bank account separate from the one you use for your part-time business to make it easier to track your income and expenses.
2. Keep accurate records of your expenses – Wi-Fi, inventory, contractors, and so on – including any invoices and statements. This will enable you to claim them as tax deductions. SARS tends to flag provisional taxpayers for verification, so it’s good to be able to show the receipts.
3. When your part-time business becomes profitable, ensure you keep money in your bank account to pay provisional tax in August and February.
4. Cloud-based accounting software is easy to use and gives you visibility, flexibility, and efficiency to manage your business, helping you automate processes such as invoicing, making it easy to record transactions, and enabling you to easily share information with your accountant.
SARS is getting stricter about approving tax benefits, particularly as trends like working from home and building portfolio careers become part of the future of work. It’s wise to speak to a registered tax practitioner for expert guidance based on a thorough financial assessment of your specific circumstances.
Yolandi Esterhuizen, registered tax practitioner and director: Product Compliance, Sage Africa & Middle East
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