Principles of tax planning

Broomberg has suggested that the taxability or deductibility of any amount is affected primarily by its source, timing, incidence and nature.

The source of an amount of income affects which jurisdiction or jurisdictions, if any, are entitled to tax that particular amount. Though South Africa and a lot of other countries operate residence-based taxation systems for residents, income source is still highly relevant in a cross-border context.

The timing of the incurral of a tax, when considered in light of the economic time value of money, can dramatically affect the economic cost of a tax. In the extreme case, an effectively permanent deferral of tax can translate a taxable receipt into a tax-free receipt.

Incidence refers to the person or entity whose is treated as the recipient of an amount of income for tax purposes. A particular taxpayer may have tax-advantaged status, either due to an exemption or a tax loss position, and different taxpayers may pay tax at different rates. In South Africa, pension funds are generally not subject to income tax, while individuals have a marginal tax rate of 40% and companies a tax rate of 29% before dividends tax.

The nature of a receipt or accrual affects under which provisions, if any, an amount is subject to tax. The capital and revenue distinction and differential tax rates thereon in South Africa is a classic example. Various conversion methods are applied in attempts to convert income from a highly-taxed form into a lowly-taxed one.

I believe this framework to be a reasonably good one, and will endeavour to comment on structures with reference to these factors. When faced with a tax problem, ask yourself if there are any ways in which you can affect the source, timing, incidence or nature of any receipts, and if any of these ways will reduce your ultimate economic tax cost (aka "fiscal drag").