Generally, the profits of companies and close corporations are taxed at a standard 28% whilst the profits of trusts (other than special trusts) are taxed at 45%. A Small Business Corporation (SBC) may qualify for more favourable tax treatment however, to qualify for the small business tax rates, there are some criteria which must be met first. In this article we will briefly discuss the benefits of small business tax, the requirements to qualify for the more favourable tax rates as well as some pitfalls that might be encountered.
Benefits of small business tax
The biggest benefit is the undoubted lower tax rates applicable to SBCs, as can be seen below. These rates are applicable for financial years ending between 1 April 2021 and 31 March 2022.
| Taxable Income (R) | Rate of Tax (R) |
| 1 – 87 300 | 0% of taxable income |
| 87 301 – 365 000 | 7% of taxable income above 87 300 |
| 365 001 – 550 000 | 19 439 + 21% of taxable income above 365 000 |
| 550 001 and above | 58 289 + 28% of the amount above 550 000 |
Small business corporations also qualify for accelerated depreciation allowances on plant and machinery or movable assets acquired at a cost. Assets acquired for zero consideration will not qualify for this accelerated depreciation allowance but will still qualify for the general wear and tear allowance. This article will not go into detail insofar as it concerns depreciation allowances and we will discuss this in detail in another article.
Let us look at an example to determine the different tax treatment under normal tax rules and small business tax:
Normal tax
| Turnover | R 800 000 |
| Expenses | R 500 000 |
| Taxable income / Profit (Income – Expenses) | R 300 000 |
| Tax payable | R 300 000 x 28% = R 84 000 |
Small Business Corporation Tax
| Turnover | R 800 000 |
| Expenses | R 500 000 |
| Taxable income / Profit (Income – Expenses) | R 300 000 |
| Tax payable | R 300 000 – R 87 300 x 7% = R 14 889 |
Requirements to qualify for small business tax
To qualify for the small business tax rates, the enterprise must meet the following requirements:
| 1 | The entity must be a close corporation, co-operative, private company or personal liability company. Sole proprietors and partnerships do not qualify. |
| 2 | All shareholders must be natural persons throughout the year of assessment. A trust or other legal entity may not be a shareholder of the business wanting to make use of the small business tax rates. |
| 3 | The gross income (income before deductions or turnover) for the year of assessment may not exceed R20 million. |
| 4 | Shareholders may not hold shares / interest in the equity of other entities other than listed companies, collective investment schemes, body corporates, share block companies and certain associations. The shareholders may not hold more than 5% of the interest in certain co-operatives, friendly societies, certain co-operative banks, venture capital companies, companies, close corporations or co-operatives which never carried on any trade and never owned any assets with a total market value exceeding R5 000 or companies, close corporations or co-operatives which have initiated liquidation, winding-up or deregistration, which have not been withdrawn or invalidated. |
| 5 | Not more than 20% of the total receipts and accruals (turnover) of the entity may consist of investment income or income from the rendering of a personal service. Investment income includes local dividends, foreign dividends, royalties, rental in respect of immovable property, annuities or income of similar nature, interest and proceeds from the investment or trading in financial instruments, marketable securities or immovable property. If services are performed personally by any person who holds an interest (shareholder / member) in the entity or by a connected person to such person, the service performed are considered to be of a personal nature. However, if the entity employs at least 3 full-time employees (other than persons holding an interest (shareholder / member) in the entity or any persons connected to them) throughout the year of assessment, services performed will not be considered to be of a personal nature. |
| 6 | The entity may not be a personal service provider. A company is a personal service provider if a shareholder, member or connected person personally renders services on behalf of the company or the client exercises control or supervision over the manner in which the duties are performed and the duties are mainly performed at the premises of the client. If more than 80% of the company’s revenue for the year of assessment is derived directly or indirectly from any one client or an associated institution in relation to a client, the entity is also regarded to be a personal service provider. A company will not be regarded as a personal service provider if it employs at least three full-time employees (other than persons holding an interest (shareholder / member) in the entity or any persons connected to them) who are engaged in the business of the company throughout the year of assessment. |
Pitfalls
| 1 | Companies with other legal entities, including trusts as shareholders do not qualify as a SBC, even if all the beneficiaries of the trust are natural persons. |
| 2 | There is a prohibition on persons with an interest in these entities regarding the holding of shares or interests in the equity of other companies, close corporations, or co-operatives. |
| 3 | A single shareholder holding prohibited shares in another company may result in the SBC as a whole being disqualified even if it is the holding of shares in a dormant company. |
| 4 | Owner operated companies that mainly provide services will usually fail the 20% rule in relation to income from rendering a personal service unless the company can appoint at least three full-time employees who are not shareholders or connected persons to said shareholders. |
| 5 | Companies deriving income mainly from the rental of immovable property (or other investment income) will not qualify for small business tax rates. |
| 6 | A company with a turnover exceeding R20 million will from the commencement of that year of assessment be taxed at the flat corporate income tax rate of 28%. |
The complete guide as issued by SARS can be accessed here for more information.
Conclusion
One cannot argue against the benefits provided to Small Business Corporations under the small business tax rules. There are however a multitude of matters to consider in order to determine whether the more favourable tax treatment can be applied. Unfortunately this tax system provides no relief for small, owner operated, service-type businesses and seems to be more suited to retail, e-commerce, manufacturing and other industries alike which are more focused on production and sales.
If you think your business might qualify for SBC tax or if you’d like to discuss your available tax options, you can contact us here.
Liza Moorcroft SAIBA – BA (SA); SAIT – GTP (SA); SARS – TP
