Advantages of Small Business Corporations

By Janice Roberts

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While the Davis Tax Committee is proposing drastic reforms to the current Small Business Corporation (SBC) tax regime it is still considered advantageous for any company or close corporation who meet the requirements as stipulated in Section 12E of the Income Tax Act to be taxed as a Small Business Corporation.

Should the taxpayer qualify to be taxed as a Small Business Corporation, the entity will be taxed on a sliding scale as opposed to the standard company tax rate of 28%. The tax rates for Small Business Corporations with years of assessments ending between ending between 1 April 2015 and 31 March 2016 is detailed in the table below:

[twocol_one]Taxable income[/twocol_one] [twocol_one_last]Rates of tax[/twocol_one_last]

[twocol_one]R0 – R73 650[/twocol_one] [twocol_one_last]Nil[/twocol_one_last]

[twocol_one]R73 651 – R365 000[/twocol_one] [twocol_one_last]7% of amount of over R73,650[/twocol_one_last]

[twocol_one]R365 001 – R550 000[/twocol_one] [twocol_one_last]R20,395 + 21% of amount over R365,000[/twocol_one_last]

[twocol_one]R550 000 and over[/twocol_one] [twocol_one_last]R59,245 + 28% of amount over R550,000[/twocol_one_last]

In addition to the advantageous tax rates for Small Business Corporations, the entity also qualifies for accelerated wear and tear allowances. The full cost of any plant and machinery used directly in a process of manufacturing and brought into use on or after 1 April 2001 may be deducted in full in the first year of use. Other assets which qualify for Section 11(e) wear and tear allowance may be written off at 50% in the first year of use, 30% in the second year and 20% in the third year.If a company has taxable income of R550 000 and does not qualify as a Small Business Corporation it will pay tax of R154 000.  If the same company qualified as a Small Business Corporation it would be liable for tax of R59 245.

In order for the entity to qualify as a Small Business Corporation the following requirements need to be met:

  • All shareholders or members throughout the year of assessment are natural persons who do not hold shares in any other private companies or members’ interest in any other close corporation or co-operatives other than those who are inactive and have assets of R5 000 or those companies who have taken steps to liquidate, wind up or deregister;
  • Gross income for the year of assessment does not exceed R20 000 000;
  • Not more than 20% of the gross income and all the capital gains consist collectively of investment income and income from rendering a personal service. If the entity employs 3 or more unconnected full-time employees, for core operations throughout the tax year, the entity will qualify as a Small Business Corporation provided that the other conditions are met;
  • The company, close corporation or co-operative is not an employment entity.

All of the above requirements need to be met before the entity will qualify. The onus is on the entity to provide evidence as to why the entity should qualify as a Small Business Corporation. SBC status is not something achieved automatically every year of assessment. The entity should assess on an annual basis whether they would qualify as an SBC or not.

If the entity has a turnover of R15 000 000 during the 2015 year of assessment for example it would qualify as a Small Business Corporation (assuming all other requirements are met). Should the same entity have a R25 000 000 turnover during the 2016 year of assessment, it would not qualify as a Small Business Corporation for that year due to the turnover being above the threshold.

The Davis Tax Committee has recommended some drastic reforms to the legislation regarding Small Business Corporations including the removal of some of the more onerous requirements for a taxpayer to qualify as a Small Business Corporation. Another recommendation of the committee is the implementation of a refundable compliance rebate for Small Business Corporations who have achieved tax compliance status. The aim of this rebate is to compensate the entity for additional costs incurred to achieve tax compliance status.  As an office we have made recommendations to the Committee in this regard.

Should you require any further information regarding the above, kindly contact your nearest PKF office.

Article compiled by Jaco Muller

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