Small Business Corporations Tax Incentives
For tax purposes a small business corporation can be a close corporation, co-operative or a private company. Small businesses enjoy a number of tax benefits.
The benefits are for small businesses that comply with all of the following requirements:
- · The gross income of the small business for the tax year may not exceed R14 million.
- · All the shareholders or members of the small business must be natural persons (individuals) at all times during a tax year and they may not hold any shares or have an interest in the equity of any other company, with limited exceptions1.
- · Not more than 20% of the total of all receipts and accruals (other than those of a capital nature) and all the capital gain of the small business may consist collectively of investment income.
- · The small business may not be a personal service provider2 unless it employs three or more full-time employees throughout the tax year (excluding shareholders or members and connected persons to such shareholders or members) who are engaged on a full-time basis in the business of the small business to render the personal service.
Small businesses are taxed on the basis of a progressive rate system in terms of which the first R63 556 is exempt from tax. This compares to the normal tax rate of 28%.
|Taxable Income (R)||Rate of Tax (R)|
|0 – 63 556||0%|
|63 557 – 350 000||7% of the amount above 63 556|
|350 001 and above||20 051+ 28% of the amount above 350 000|
E.g. on a annual taxable profit of say R500 000 the small business tax will come to R62 051 where-as the non small business entity will pay R140 000. A Saving of R77 949.
The second tax allowance is two-fold:
- · First the small business can immediately write-off all plant or machinery used in a process of manufacture or similar process in the tax year it is brought into use for the first time.
- · Second the small business is given a write-off allowance for depreciable assets (other than manufacturing assets) acquired on or after 1 April 2005 at:
50% of the cost of the asset in the tax year during which it was first brought into use;
30% in the second tax year; and
20% in the third tax year.
Speak to Sync Accounting & Business Services to assist you in minimising your tax liabilities by making use of allowed tax incentives.
Micro Businesses – Turnover Tax
Micro businesses are businesses that comply with the requirements of small businesses that have an annual turnover of less than R1 million.
The following receipts will be excluded from qualifying turnover for the purpose of the R1 million cap:
- · Any receipts of a capital nature received from conducting business.
- · Certain government grants that are exempt from income tax.
- · If 20% of its total income consists of income from professional services and investment income.
- · If they are registered for VAT.
Turnover tax is a simple presumptive tax that is calculated for a year of assessment by applying a tax rate to the turnover of a business. A year of assessment runs from the first day of March to the last day of February of the following year. Deductions are not taken into account, which means that it is not necessary to determine which expenses are tax-deductible and how to claim them. Detailed recordkeeping is also not necessary for turnover tax unlike in the standard tax system. To compensate for not taking deductions into account, the turnover tax rates are far lower than the tax rates used in the standard tax system.
Turnover tax is available to individuals (sole proprietors), partnerships, close corporations, companies and co-operatives and it is elective i.e. qualifying small businesses can choose to register for the standard tax system or for turnover tax. A typical business within the standard tax system may have to account for the following taxes to SARS: 1) Value-Added Tax (VAT), 2) Income Tax, 3) Provisional Tax, 4) Capital Gains Tax (CGT) and 5) Secondary Tax on Companies (STC). The simplified tax system replaces all of these taxes with a simple turnover tax for small businesses that meet certain requirements
The turnover tax liability for a year of assessment must be settled by means of two estimated interim payments that are payable in the middle of the year of assessment and at the end of the year of assessment.
The first interim payment is due by the last day of August within the year of assessment. It is determined by estimating the turnover of the business for the full year of assessment, calculating the turnover tax payable on this turnover, and dividing this amount by two. The estimate for the first interim payment must not be less than the taxable turnover for the previous year of assessment, unless SARS agrees.
The second interim payment is due by the last day of February (end of the year of assessment). It is determined by estimating the turnover for the full year of assessment, calculating the turnover tax payable on this turnover, and deducting the first interim payment. To avoid paying a penalty, the second interim payment must not be based on an estimate that is less than 80 per cent of the actual taxable turnover for that year of assessment.
THE MINIMAL RECORDS THAT NEED TO BE MAINTAINED FOR TURNOVER TAX The following records need to be maintained for five years from the date on which the return to which they relate is received by SARS:
- Records of all amounts received by the business for each year of assessment;
- All dividends declared for the year of assessment;
- Records of all assets with a cost price of more than R10,000 each;
- Records of all liabilities that exceed R10,000 each.
Existing small businesses can apply for turnover tax registration for a year of assessment before the beginning of that year of assessment i.e. 1 March whilst new businesses can apply for registration at any point as long as it is within two months from commencing business activities.
The following table applies:
|Taxable turnover (R)||Rate of Tax (R)|
|0 – 150 000||0%|
|150 001 – 300 000||1% of the amount above 150 000|
|300 001 – 500 000||1 500 + 2% of the amount above 300 000|
|500 001 – 750 000||5 500 + 4% of the amount above 500 000|
|750 001 and above||15 500 + 6% of the amount above 750 000|
1. The shareholder can have shares or an interest in a listed companies, a portfolio in a collective investment scheme, a body corporate, a share block company, a non-profit company, a social or consumer co-operative or a co-operative burial society where the interest held must be less than 5%, friendly societies, less than 5% of the interest in a primary savings co-operative bank, venture capital companies, a company or close corporation if the company or close corporation has taken steps to liquidate, wind up or deregister. Note: This requirement applies from the commencement of tax years commencing on or after 1 January 2011.
2. A personal service provider is a anyone that renders 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.