In order to foster growth in the SME environment, the government introduced a small business incentive program known as small business corporation (SBC) incentive. This allows for accelerated depreciation allowances for certain capital assets as well as beneficial tax rates based on the businesses profit for the year.
Benefits of being an SBC
Accelerated Depreciation
Assets used directly in the process of manufacture or a process of similar nature may qualify for a 100% write-off in the year in which it is brought into use.
Other assets may qualify for a write-off over 3 years at a rate of 50, 30 and 20% in the respective years.
Favourable Income Tax Rates
An SBC is taxed on a sliding scale based on the taxable income of your business. Below is the table for working out the tax payable.
For Financial years ending on any date between 1 April 2021 and 31 March 2022:
When unpacking the difference between the standard tax rate of 27% (As from 1 April 2022), it becomes evident the significant difference in taxes:
Company A is a SBC and has earned R550,000 in taxable income for the year will pay in tax:
R19,163 + (21% x R185,000) = R58,013
Company B with the same income of R550,000 that is not an SBC will be subject to the normal tax rate of 27% (from 1 April 2022) will pay in tax:
R550,000 x 27% = R148,500
For the total saving of R90,487 (at 27%) in tax it is certainly worth checking if your business qualifies as a SBC. The tax saving along with the accelerated depreciation allowance significantly helps reduce the tax liability of a small business starting out in South Africa.
The 4 qualifying requirements for SARS purposes:
Legal Requirement
- Your entity needs to be one of a close corporation, private company, co-operative or personal liability company.
Sole proprietors do not qualify for this tax benefit
Holder of Shares Requirement
- All shareholders must be natural persons throughout the whole year of assessment.
- Shareholders or members of the entity cannot be shareholders or hold an interest in any other companies other than collective investment schemes, share block companies, body corporates and other excluded associations.
A qualifying entity whose shares or members interest are held in a trust may qualify as an SBC provided that the beneficiaries hold a vested right in those shares or members interest throughout the year of assessment and are all natural persons.
Shares in listed companies and S12J Venture Capital companies as well as any companies that have taken steps to liquidate/deregister are permissible.
Gross Income Limitation Requirement
- Gross income of your entity may not exceed 20 million rands for the year.
What if your company has started during the course of the year?
The income needs to be apportioned for the number of months of trading and to see if meet the requirement. If you have been trading for 6 months the calculation for the threshold for SBC is:
6/12 x 20 million = 10 million will be your new limit for turnover.
Business Activity Requirement
- Your entity will not qualify as an SBC if more than 20% of all income relates to investment income* and income from rendering a personal service**.
In addition, the entity may not be a personal service provider*** as defined in the Fourth Schedule of Income Tax Act.
Personal service and personal service provider exclusion
In order to exclude your business from being seen as performing a personal service (or being a personal service provider), only one of the below needs to apply:
- Throughout your financial year, you employ three or more employees on a full-time basis, excluding people who owns shares or are members and people connected to shareholders/members.
- The services are not performed by the person holding interest in the entity or by any person who is a connected person to anyone holding such an interest.
Important definitions
Investment Income*
(i) any income in the form of dividends, foreign dividends, royalties, rental derived in respect of immovable property, annuities or income of a similar nature;
(ii) any interest as contemplated in section 24J18 (other than any interest received by or accrued to any co-operative bank as contemplated in paragraph (a)(ii)(ff)), any amount contemplated in section 24K19 and any other income which, by the laws of the Republic administered by the Commissioner, is subject to the same treatment as income from money lent; and
(iii) any proceeds derived from investment or trading in financial instruments (including futures, options and other derivatives), marketable securities or immovable property.
immovable property typically refers to when a person has exclusive use to a property or portion thereof for periods exceeding one month. Therefore, shorter term rentals are not seen to fall into the definition of investment income.
Personal Service**
A company, co-operative or close corporation that provides services in the field of:
- Accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science.
If that service is performed personally by any person who holds an interest in that entity or by any person who is a connected person in relation to the person holding said interest.
Personal Service Provider***
Is defined in the Fourth Schedule as a company, if the services rendered on behalf of such company to a client are rendered personally by a connected person in relation to the company and
- the connected person would be regarded as an employee of the client if that person had rendered the service directly to the client; or
- the services must be performed mainly at the premises of the client and the connected person or the company is subject to the control or supervision of the client as to the manner in which the services are rendered; or
- more than 80% of the income of the company during the year of assessment is or is likely to be received directly or indirectly from any one client or associated institution in relation to that client.
