Do you qualify as a Small Business Corporation and are you aware of the incentives available?

Time and again clients sit before me and refer to themselves as being ‘Small Business’ owners, but in all honesty few, if any, understand the true or technical definition of a ‘Small Business Corporation’ (SBC) and are aware that advantages in taxation exist to assist such entities.

In this month’s newsletter we have a look at the requirements to be classified as a ‘Small Business Corporation’ and the tax benefit available for qualifying entities.

 Qualifying criteria

A business will need to meet the requirements below in order to qualify as a ‘SBC’ – this is a yearly verification in order to qualify;

  • The business must be registered as either a Close Corporation (CC), Co-operative (Co-Op), Private Company (Pty) or Personal Liability Company (Inc.),
  • Shareholders must be natural persons for the full duration of the measured tax period,
  • None of the shareholders / members, during the year of assessment may hold any shares or any interest in equity of any other company, close corporation or co-operative,
  • Gross income for the tax year may not exceed R20m (apportioned over the number of months if not a full tax year),
  • Not more than 20% of the total monies received or accrued (other than those of a capital nature, i.e. from sale of capital assets such as a fixed property) and all the capital gains may consist collectively of “investment income” and income from rendering a “personal service”,
  • The company may not a Personal Service Provider (PSP). A company (or Trust) will be regarded as a PSP if:
    • Services are rendered personally by any person regarded as connected to the Company,
    • And such a person would be regarded an employee
    • OR duties are performed mainly at the premises of the client AND subject to control or supervision
    • OR where more than 80% of income is derived from a single client

 Benefits of qualifying and registering as a Small Business Corporation

  • SBC’s qualify for a 100% wear-and-tear of all plant or machinery brought into use for the first time by the entity for purpose of its trade (other than mining or farming) and used by the entity directly in a process of manufacture or similar process in the year of assessment is allowed.
  • The SBC can elect under section 12E(1A) to claim depreciation on its depreciable assets (other than manufacturing assets) at write-off rate of 50:30:20 percent over a 3-year period.
  • SBCs are not taxed at the same rate as with normal corporates but are taxed at progressive tax rates based on various income bands. See tax rates below.

SBC tax rates for financial years ending on any date between 1 April 2018 and 31 March 2019

Taxable income (R) ​Rate of tax (R)
0 – 78 750 0%
78 151 – 365 000 7% of taxable income above 78 150
​365 001 – 550 000 20 080 + 21% of taxable income above 365 000
​550 001 and above 58 930 + 28% of taxable income above 550 000

 

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