Article by listed Accountant Riaz Mohammed Alli
A Small Business Corporation is an entity that must be a Close Corporation, any private Company registered under the new Companies Act and has the following requirements to qualify as an SBC for tax purposes:
1. Natural shareholders must hold the entire shareholding throughout the tax year
2. The shares must be held for the shareholders benefit
3. Shareholders or members may not at any time during the tax year hold any share or interest in any other CC, Company or Society. However there are certain exceptions such as, for example, holding shares in a listed Company and other investment vehicles is permitted.
4. The gross income may not exceed R14 million during the year of assessment (LATEST UPDATE)
5. The Company cannot be personal service provider as indicated in the fourth schedule AND
6. No more than 20% of the gross income of the Company may consist of investment income.
The main benefit of an SBC is that it enjoys great incentives and lower tax rates compared to normal Companies. For years of assessment ending after 1 April 2011 SBC’s the tax rates for taxable incomes below R59750 is as low as zero percent! Furthermore the full cost of any asset used in a process manufacture and brought into use for the first time may be deducted in the tax year its brought into use in terms of section 12E(1). Any non-manufacturing assets acquired under an agreement after 1 April 2005 can be written off, at the choice of the Company, either:
1. Under an allowance provided for under the Income Tax Act; or
2. At the rate of 50% of the cost of the asset in the tax year in which it was first brought into use, 30% in the first succeeding year and 20% in the second succeeding year
It can clearly be seen that SBC’s benefit from special tax rates and accelerated allowances in the Income Tax Act. Cooperatives and societies that operate as SBCs are entitled to the same tax dispensations. The example below illustrates the benefits of an SBC:
An SBC purchases a machine for R600000 during the 2012 financial year. Because the entity is a recognised SBC it will get a tax deduction of R600000 in the first year it is brought into use i.e. a 100% deduction. If the Company did not qualify as an SBC then it would have obtained a section 12E deduction of only R240000. In addition the SBC will pay lower tax on its taxable income due to the favourable tax rates enjoyed by a SBC but a normal Company would pay tax on its taxable at a much higher rate i.e. 28%. This has a direct impact on Cash Flow and tax planning for any forward thinking Company
Riaz Mohammed Alli CA(SA) HDip Tax Law
RMA Accounting, Advisory and Tax specialists