Tax concessions for small businesses
by Gareth Cotten on 12/04/11 at 10:58 am
1 comment
While the majority of businesses are subject to the standard corporate tax rate (currently 28%), very few business owners realise that there are two dispensations, available only to small businesses, that entail a number of tax concessions. These have been introduced for the dual purposes of expanding the small business sector by offering tax relief, and expanding the “tax net” to increase the number of businesses complying with tax law and contributing to the fiscus.
The first dispensation for small business corporations (SBCs). An SBC is not a separate legal form of business (such as a close corporation or a private company), but rather a tax “concession” that existing businesses can qualify for. While there are certain specific benefits to qualifying as an SBC, such as accelerated asset write-off periods, the main benefit comes from paying a reduced percentage of tax on profits in a tiered manner – as compared to a flat rate of 28%, which is the case with a standard business. For the 2010-11 tax year (which applies to most tax returns being completed at the moment and in the near future), a qualifying SBC pays 0% tax on the first R57,000 profit made during the year. After this, it then only pays tax at 10% on profit up to R300,000. And it is only on annual profits over and above that R300,000 that the standard corporate tax rate of 28% then applies. All in all, there’s a potential tax saving of as much as R60,000 a year.
But SARS doesn’t want just anybody to be able to get this saving, so there are restrictions on who qualifies. All of the following criteria must be met (for the full tax year):
The business must be a close corporation or a company (sole proprietorships and partnerships excluded).- The business may not be an employment company.
- All members or shareholders must be natural persons.
- The members or shareholders cannot hold an interest in any other business (with certain specific exemptions).
- Turnover for the year may not exceed R14 million.
- Not more than 20% of the total income may come from investments or from the rendering of personal services (certain exemptions apply as well).
The second dispensation was introduced much more recently, and is known as turnover tax. Under this concession, businesses with an annual turnover of R1 million or less can choose to be taxed on their turnover figures instead of their profit figures. The intention here is to simplify the admin burden, as business owners would only need to have their turnover figures to be able to calculate their tax liability. The single tax figure calculated includes the business’ VAT as well, further simplifying the situation (although it would need to deregister for VAT if it is already registered). One of the restrictions is that personal service providers and “professional services” (auditors, lawyers, consultants, and so on) are excluded from qualifying.
The rates at which the turnover tax is paid are as follows (for the 2010-11 tax year):
|
Turnover |
Rate of tax |
|
R0 – 100,000 |
0% |
|
R100,001 – 300,000 |
1% of taxable turnover above R100,000 |
|
R300,001 – 500,000 |
R2,000 + 3% of taxable turnover above R300,000 |
|
R500,001 – 750,000 |
R8,000 + 5% of taxable turnover above R500,000 |
|
R750,001 and above |
R20,500 + 7% of taxable turnover above R750,000 |
The one thing to remember with turnover tax is that the tax is payable regardless of whether or not the business makes a profit. This, along with VAT and other implications, should definitely be taken into account when deciding to apply for this dispensation.
As always, when making a decision involving your business’s finances, seeking professional advice is always recommended, especially when you need to make strategic changes to qualify for certain concessions. All in all, though, these concessions can be substantial – they could even be the difference between your business being viable and not – and should at least be considered when doing financial planning.
Gareth Cotten is one of the growing breed of SA entrepreneurs with that ‘world-domination’ look in his eyes. Gareth runs the coaching and consulting practice 'Good Advice'. Gareth is also the 'course convener' for the University of Cape Town (Law@Work) Start and Manage a Small Business course and the University of Cape Town Basics of Financial Management course. View more articles by Gareth Cotten.
Tags: SA tax, small business south africa, tax
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