Have you ever investigated passive income opportunities to earn extra money? Did you consider the effect that earning additional income might have on your current income tax liability? If your income increases, whether from a passive income source or otherwise, SARS will soon come to the party to claim its share of your profits. Do you know what the effect of earning passive income might be on your present tax situation? If not, do read the rest of this article.
What is passive income?
Passive income is money you earn now which you didn’t have to work for now. However, you did work for it when you set up your source of passive income in the past.
If you set up your passive income source correctly, it will continue to generate income with either a minimum or no presence from you as the business owner. That’s what makes passive income so attractive: there’s no direct link between the number of hours you work and/or must be present in the business, and the amount of money you can make.
Provisional tax considerations
A taxpayer will not be required to submit provisional tax returns if his/her only source of income is remuneration from their employer and the employer deducts PAYE on a monthly basis from such remuneration.
PAYE can only be deducted by an employer from remuneration paid to its employees. If you earn passive income which is not subject to PAYE, you will have to submit provisional tax returns. Provisional tax is calculated on the estimated taxable income for a specific tax year. Please consult your tax adviser for advice regarding any potential provisional tax obligations.
Income tax considerations
As with any type of business income, passive income will be subject to income tax. SARS will allow a taxpayer to deduct the expenses incurred in generating the passive income, provided that the expenses are tax deductible in terms of income tax legislation. A taxpayer earning passive income will thus be taxed on the resulting profit (passive income less expenses incurred to generate that passive income).
For an expense to be tax deductible against passive income, it must fulfil all the following requirements:
- It must have been actually incurred (i.e. the expense must either have been paid already or be due and payable);
- In the carrying on of any trade;
- In the production of passive income (there must be a link between the expenditure and the passive income); and
- Not be of a capital nature (i.e. the expense must not give rise to an enduring/long term benefit).
If you are not sure whether an expense will be tax deductible and/or at which amount, please consult your tax adviser for advice.
Dual-purpose expenses (i.e. expenses that were incurred both for business and private purposes at the same time) may be apportioned according to the ratio of the business-related portion to the total amount of the expense. Only the business-related portion of the total expense will be tax deductible.
The profit you earn as a result of your passive income venture will be added to your taxable income for a specific tax year. If you already earn income from another source (e.g. salary/wages), that income and the profit from passive income will be added together to determine your taxable income. Taxable income will thus increase, which might put you into a higher tax bracket with a higher tax percentage.
To avoid nasty surprises it is important to consider the income tax implications of a passive income opportunity before taking advantage of such an opportunity. Although the figures you use for the calculations will be estimates and might not be that accurate, it’s still better to do some semi-accurate calculations than no calculations at all.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Accessed on 3 September 2015:
Accessed on 9 September 2015: