Do you know how to ensure that your small business can pay less tax?
Many businesses are classified or are being labeled as Small to Medium sized enterprises (SME’s). Do you however know that SARS has a specific tax incentive scheme through which small business can pay less tax? And that being labeled an SME does not mean that you automatically qualify for this tax incentive?
I see myself as a Small Business. How do I know if I qualify?
Small Business Corporations (SBC’s) are only applicable to Close Corporations and Companies and has a favorable tax rate structure when compared to their regular counterparts, such as Trusts, partnerships and sole proprietors.
I am a Close Corporation or Company. Do I automatically qualify?
You will qualify if you can meet the following criteria:
- The entire shareholding / membership is held, for the entire year of assessment, by natural persons, who hold no shares in any other private company or member’s interest in any other close corporation or co-operatives other than those which are inactive (dormant) and have assets of less than R5000;
- The gross revenue for the year of assessment does not exceed R14 million;
- Not more than 20% of the company’s gross revenue consists of investment income, and the rendering of personal services *, and
- Such companies / close corporation is not a personal service provider * (before 1 March 2009 not an employment company)
* “Personal service” is defined as any service which is performed personally by any person who holds an interest in the close corporation or company referred to in the definition of “small business corporation” except where such SBC employs three or more unconnected full-time employees for its core operations.
Great, I meet all the criteria, so what exactly will be my benefit?
As we mentioned SBC’s have a favorable tax structure that is made up as follows:
For the periods ending before March 2016: Rate of Tax
|Taxable income up to R73 650||0%|
|Taxable income R73 651 to R365 000||7% of the amount above R73 650|
|Taxable income R365 001 to R550 000||R20 395 + 21% of the amount above R365 000|
|Taxable income in excess of R550 000||R59 245 + 28% of the amount above R550 000|
Let’s use an example:
ABC Trading will have a taxable income as at 29 February 2016 of R500 000
ABC Trading is a normal Company and their tax liability would be calculated as follows:
|Taxable Income x Corporate Tax Rate||R500 000 x 28%|
If ABC Trading however qualifies as a Small Business Corporation, its calculation would be as follows:
|Taxable Income according to the sliding scale|
|21% of the amount above R365 000||(R500 000 – R365 000)= R135 000|
|R135 000 x 21% = R28 350|
|Plus: R20 395||R28 350 + R20 395 = R48 745|
By qualifying as a SBC, ABC Trading saved R91,255 in income tax!