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Definition

This is the percentage of its taxable income that a company pays to the Receiver. The Income Tax Act allows companies to deduct certain initial and investment allowances when they purchase capital equipment. This allows them to depreciate such equipment much more rapidly which can result in them paying a lower rate of tax in a particular financial year. The normal company tax rate in South Africa is 27%, but by using these allowances a company can reduce that to 20% or lower. As a private investor it is always worth calculating the effective tax rate of the companies that interest you to see whether they have paid the full 28% or not. If they haven't you should be aware that sooner or later they will have to, which might mean that their after tax earnings is lower which, in turn, would impact on their earnings multiple

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