As small business owners, how do we know what we don’t know with regards to taxes?
By: Catherine Young
I was struck a couple of times this week by this very pertinent question: “How do I know what I don’t know as a small business owner?” It was during the annual provisional tax calculation scramble to ensure we abide by the law, whilst working towards being tax-savvy, that it struck me that there are so many things I don’t know about getting more tax efficient in my business. I have read many articles and watched many videos on the benefits available to small businesses in South Africa, but it wasn’t until I experienced it again during this semester, that I became aware of the great value available to small businesses under the Small Business Corporation Tax Scheme. So what is this tax, I hear you ask?
Section 12E of the Income Tax Act No 58 of 1962 (“Income Tax Act”) provides for a beneficial tax dispensation for Small Business Corporations, subject to compliance with certain requirements. The main benefit that emanates from qualifying as a Small Business Corporation is that the rate of normal tax on the taxable income of a Small Business Corporation is considerably lower than the rate of normal tax (28%) for companies in general.
A “Small Business Corporation” is defined in section 12E (4) as any close corporation or co-operative or any private company as defined in section 1 of the Companies Act, 2008 (Act No. 71 of 2008), all the shareholders of which are at all times during the year of assessment natural persons. To qualify for the Small Business Corporation tax benefit, you need to meet the following criteria:
- The gross income for the year of assessment does not exceed an amount equal to R20 million;
- None of the shareholders or members, during the year of assessment, hold any shares or has any interest in the equity of any other company (other than company listed on a stock exchange, any unit portfolio, share block company, a co-operative or any friendly society). This requirement has resulted in most taxpayers not being eligible to be taxed at the Small Business Corporations tax rate and has resulted in an influx of appeals against SARS’ decision to assess them at a normal tax rate;
- Not more than 20 percent of the total of all receipts and accruals (other than those of a capital nature) and all the capital gains of the company, close corporation or co-operative consists collectively of investment income and income from the rendering of a personal service; and
- Such company is not a personal service provider as defined in the Fourth Schedule.
‘Personal service’ means: Any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftsmanship, education, engineering, entertainment, health, information technology, journalism, law, management, performing arts, real estate, research, secretarial services, sport, surveying, translation, valuation or veterinary science if that service is performed personally by any person who holds an interest in that company or close corporation. However, the services will not count as personal services if the company or close corporation also employs at least three other full-time employees throughout the year of assessment in its business of rendering services and none of those employees is a shareholder or member or its connected person.
The applicable tax rates for the new tax year looks as follows:
Bottom line – by really working hard with very knowledgeable practitioners this week, we were able to make the business more tax efficient, and allowed our business to sign a deal for employing more people in the new financial year, which otherwise would not have been possible. Make sure not to miss out on understanding this tax benefit in more detail for your organisation!