Does your business qualify as a Small Business Corporation?

A Small Business Corporation is a private company that complies with various requirements per the Tax Act, which will be clearly set out below. If a company meets the definition and requirements of an SBC (Small Business Corporation), it can take advantage of progressive tax tables (as opposed to the fixed 27% corporate tax rate for companies) and also accelerated depreciation for certain assets.

What are the benefits that an SBC may enjoy?

1. A company is normally taxed at the standard corporate tax rate of 27% on the total amount of taxable profit. If you, for example, earned R100,000 throughout the year with R50,000’s deductible expenses, then your tax for the year would be: R100,000 – R50,000 = R50,000. R50,000 * 27% = R13,500.

   An SBC, however, is taxed on SBC tax rates, which are as follows:

If we use the above example of a R50,000 profit, there would be 0 tax payable as it is below the threshold of R95,750.

Let’s use a taxable profit of R550,000:

• Standard corporate tax @ 27% = R148,500

• SBC tax rates = R57,698

2. Accelerated depreciation on certain assets. IFRS (International Financial Reporting Standards) prescribes depreciation rates/periods for certain assets to be used on the financial statements. For example, motor vehicles get depreciated over 5 years, Computer Equipment over 3 years, Furniture & Fittings over 6 years, etc. SBC deduction rates allow for 100% of the full cost of any plant or machinery used in manufacturing in the year it is purchased, or if not used in manufacturing, then 50% in year 1, 30% in year 2 and 20% in year 3.

The requirements for a company to qualify as an SBC:

1. The annual turnover of the company may not exceed R20 million.

2. All shareholders of the company must be natural persons (meaning individuals and not other companies or trusts).

3. The shareholders of the company may not hold shares/membership in any other company or closed corporation, unless (including but not limited to):

• The other company is listed on a South African exchange

• The other company has not carried on any trade (dormant) and neither holds assets with a market value of more than R5,000

4. Not more than 20% of the gross income consists collectively of investment income or income rendering a personal service.

   • Investment income refers to interest, dividends, royalties, rental income from immovable properties, annuities, etc.

   • A Personal Service includes any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draughtsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, which is performed personally by any person who holds an interest in the company or Close Corporation, except where such small business corporation employs three or more unconnected full-time employees for core operations.

5. The company may not be a Personal Service Provider

   A Personal Service Provider is a company or trust where a person, who is a connected person in relation to such company or trust, personally renders services on behalf of the company or trust to a client. Apart from meeting this definition, one of the following also needs to be met:

   • Such a person would be regarded as an employee of the client if the service was rendered to the client other than through the company or trust under consideration, or

   • Where the service must be performed mainly at the premises of the client and the company or trust is subject to control or supervision of the client as to the manner in which the duties are performed, or

   • Where more than 80% of the income of the company or trust consists of amounts received from any one client or associated institution

   
   

   PS – A company or trust is excluded from the definition of a Personal Service Provider where, throughout the year of assessment, three or more employees are employed who are engaged full-time in the business of such company.

Phew! That’s a lot of information. In short, if you buy and sell products (and not deliver a service), your turnover is less than R20 million in a financial year and the shareholders of the company are individuals who are not also shareholders of other companies, then you have the green light. Of course, you still need to read through the fine print set out above.

If you, however, render a service and do not have 3 or more unconnected employees who assists full-time in the business operations, then things might get a bit trickier.

As always, I’m here to help - please don’t hesitate to reach out with any questions or queries. If there’s a particular topic you’d like me to explore in a future post, I’d love to hear from you.

Best regards,

Simónne Roodt (SAIPA)

CEO and Director

OPTIMUM RATIO