A small business may qualify as a small business corporation (SBC) if it meets certain requirements. SBCs are a new class of company/close corporation recognised for tax purposes and was introduced to reduce the tax burden on small businesses. According to the South African Institute of Professional Accountants (SAIPA) “it is designed to provide tax relief which improves the liquidity and cash flow of businesses”.
Some of the benefits of registering as a SBCs include access to additional tax incentives and a reduced tax rate, as well as accelerated depreciation allowance for movable assets.
Find out more about requirements for Small Business Corporations and its tax benefits below.
Small Business Corporation Requirements
Not all small businesses qualify as SBCs. It is a requirement that SBCs be a company or close corporation. This rules out holding companies and trusts.
To qualify as a Small Business Corporation companies must meet all of the following requirements:
- All shareholders or members are natural persons.
- All shareholders hold no shares in any other private company.
- All members hold no members’ interest in any other Close Corporation.
- Gross income for the year of assessment does not exceed R14 million.
- Not more than 20% of the gross income and all the capital gains consist collectively of investment income and income rendering a personal service.
Investment Income includes any annuity, rental income, royalty or any income from investment or trading in financial instruments, marketable securities or immovable property.
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.
The rate of tax you pay will depend on taxable income as the rates for a SBC are progressive (the higher the taxable income, the higher the tax rate).
Most companies pay income tax at a flat tax rate of 28% on their taxable income. SBCs on the other hand can benefit from a reduced tax liability if their taxable income does not exceed R550 000 in a year of assessment.
The table below illustrates the savings for SBCs :
Taxable Profit Small Business Tax STD Business Tax Tax Saving
0 – 70 700 0 19 796 19 796
70 700 – 365 000 20 601 102 200 81 599
365 001 – 550 000 59 451 154 000 94 549
Above 550 000 28% 28% Nothing from this point
When a company’s gross income exceeds the R20 million threshold it will, from the commencement of that year of assessment, be taxed at the flat corporate income tax rate of 28%.
Related: Starting a Business in South Africa