DOES YOUR BUSINESS QUALIFY AS A “SMALL BUSINESS CORPORATION” ACCORDING TO SARS?

fhbc_blog_jan_03

First things first 

The South African Revenue Service (SARS) has made complying with tax obligations for Small Business Corporations (SBC) a lot easier over the last few years and recognises the economic importance of small businesses.  To motivate entrepreneurs, businessmen and women, the legislator incorporated certain tax incentives designed especially for small businesses.

But, first – what is a SBC?  

Section 12E(4) makes provision for the definition of SBC’s and can be summarised as follows:

The elements of a SBC

1. Type of business
  • Any close corporation; or
  • co-operative; or
  • any private company as defined in section 1 of the Companies Act 71 of 2008; or
  • a personal liability company as contemplated in section 8(2)(c) of the Companies Act.

The company may not be a “personal service provider” as defined in the Fourth Schedule of the Income Tax Act Nr 58 of 1962.

2. Type of Shareholders or Members
  • All shareholders must be natural persons (at all times during the year of assessment).
  • None of the shareholders or members may hold any shares or have an interest in the equity of any other company (other than the companies as contemplated in section 12E(4)).  
3. The gross income limit
  • The gross income of the business may not exceed R20,000,000 (twenty million Rand) per year of assessment. 
4. Receipts and accruals
  • Not more than 20% of the total of
    • all receipts and accruals (other than those of capital nature); and  
    • all of the capital gains of the business;
  • may consist collectively of “investment income” as defined in in section 12E(4) and
  • it may also not consist of income derived from rendering a “personal service”, as defined in section 12E(4).

Thus, if at any time during a year of assessment, the small business does not comply with all of the above – such business will not qualify as a SBC and will therefore not be able to benefit from the SBC tax relief measures.

What are the tax benefits of a SBC?

  1. More favourable income tax rates apply, as a SBC is taxed at a progressive rate (the higher the taxable income, the higher the income tax rate).  See the 2019/2020 tax table for SBC’s below:
    SBC tax rates for financial years ending on any date between 1 April 2019 and 31 March 2020
    Taxable income (R)
    0 – 79 000
    79 001 – 365 000
    365 001 – 550 000
    550 001 and above
    Rate of tax (R)
    0% of taxable income
    7% of taxable income above 79 000
    20 020 + 21% of taxable income above 365 000
    58 870 + 28% of the amount above 550 000
  2. All plant and machinery brought into use for the first time by the business, for the purpose of its trade (and if used directly by the company in a process of manufacturing or similar process, in the year of assessment) qualifies for an immediate write-off.
  3. Regarding the entity’s depreciable assets (other than manufacturing assets) – the entity also qualifies to make use of either the “wear-and-tear” allowance (under section 12E(1A)(a), read with section 11(e)) or the “accelerated write-off” allowance (under section 12E(1A)(b)).

Lastly, remember “to be or not to be” a Small Business Corporation isn’t simply a choice to be made, but it is subject to various prerequisites that must be met – before a SBC will be able to reap the fruits of the available tax incentives.

For more information kindly send an email to Chantél van der Merwe at c.vandermerwe@fhbc.co.za.

Source:

SARS Legal Counsel: Tax Guide for Small Businesses 2018/19

SARS Small Business Corporations Webpage

https://www.sars.gov.za/ClientSegments/Businesses/SmallBusinesses/Pages/default.aspx

SARS SBC Relief Webpage

https://www.sars.gov.za/ClientSegments/Businesses/SmallBusinesses/Small-business-relief/Pages/default.aspx