Small Business Corporations
The Income Tax Act No. 58 of 1962 (The Act) confers various benefits to companies, close corporations, co-operatives and personal liability companies if it qualifies as a Small Business Corporation (SBC). These benefits include reduced corporate income tax rates, accelerated wear and tear allowances and capital gains tax relief under the Eighth Schedule.
However, not all small businesses qualify as SBC’s. To qualify as an SBC, the following requirements must be met at all times during a year of assessment:
The entity’s gross income may not exceed R20 million for the year of assessment;
All the members or shareholders of the close corporation or company must be natural persons;
No member or shareholder of the entity may hold any shares or have any interest in the equity of another company or close corporation, other than listed companies, collective investment schemes, bar certain exemptions;
Not more than 20% of the total receipts or accruals and capital gains of the entity may consist collectively of “investment income” and income from the rendering of a “personal service”;
Whereas requirements 1 to 3 above are self-explanatory, the requirement set out in point 4 require some elaboration. The term “personal service”, for purposes of the SBC regime, is defined to include a wide array of professions, including:
any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, if
that service is performed personally by a person who holds an interest in the entity; and
that entity does not throughout the year of assessment employ three or more full-time employees (other than a shareholder or member or a connected person in relation to a shareholder or member) who are on a full-time basis involved in the business of the entity of rendering that service.
If an entity (in a year of assessment) employs three or more full-time employees (other than a shareholder or member or a connected person in relation to a shareholder or member) who are on a full-time basis involved in the business of the entity of rendering that service, it will not be regarded as rendering a “personal service” and will not be regarded as a “personal service provider”.
Turnover tax payable by registered micro businesses
In addition to SBC tax relief, turnover tax was introduced to assist micro business with their tax compliance burden. The turnover tax regime allows qualifying micro businesses to register for and pay a single tax known as turnover tax instead of various other taxes, which replaces income tax (including provisional taxes and capital gains tax) and to an extent dividends tax. A micro business is however still required to withhold payroll taxes and VAT (if voluntarily registered as a VAT vendor).
Registered micro businesses also benefit from reduced record-keeping requirements and only need to retain information relating to the following:
Amounts received during a year of assessment;
Dividends declared during a year of assessment;
An asset with a cost of more than R10 000 at the end of a year of assessment; and
A liability that exceeded R10 000 at the end of a year of assessment.
As with SBCs, micro businesses are subject to strict requirements of registration. The turnover tax is available to individuals (sole proprietors or partners in a partnership), close corporations and co-operatives or private companies if their qualifying turnover (as determined) does not exceed R1 million in a year of assessment. Certain persons are disqualified as micro businesses, including:
Persons holding shares or having any interest in the equity of a company, other than certain specific exceptions which include listed companies, collective investment schemes and others;
If more than 20% of the total receipts during a year of assessment consists of income from the rendering of a “professional service” (for natural persons) or the aggregate of “investment income” and income from the rendering of a “professional service” (for companies);
If the proceeds from the sale of certain capital assets used mainly for business purposes exceed R1,5 million over a three-year period;
Companies with a year-end other than the last day of February;
If any of the partners, members or holders of shares are not natural persons in a year of assessment;
Personal service providers and certain labour brokers;
Public benefit organisations, recreational clubs, associations and small business funding entities;
Special rules apply to partnerships.
Although some business may benefit from registration for turnover tax, it is an initiative that has not been widely taken up by small businesses to the extent that was envisioned. This might be due to the strict registration requirements and the fact that micro businesses that suffer tax losses will still be liable for turnover tax whereas entities that pay tax on taxable income will not incur any tax liability in years that tax losses are suffered.
It is important to be cognisant of the requirements and benefits concomitant to small and micro businesses at the outlay of a business endeavour. It is trite that small businesses are mostly owner managed and that business owners regard their personal tax liability and that of the business as one and the same, in some ways similar to a collective income generating unit. Utilisation of small and micro-business tax relief will lead to an overall income tax reduction of such unit, a welcome relief especially in the beginning phases of any business.