Income tax planning for small businesses

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Ahead of the February 2021 income tax year end, we are shining a light on S12E of the Income Tax Act, applicable to entities meeting the SARS Small Business Corporation (SBC) rules. These income tax rules apply to entities meeting these criteria:

The type of business is one of the following:
1. Any CC, or
2. Co-operative, or
3. Private company (as defined by the Companies Act), or
4. Personal liability company (as defined by the Companies Act)
Shareholders are natural persons that do not own shares in any other company, other than companies contemplated in section 12E(4).
The gross income (excluding VAT) does not exceed R20m in the year of assessment.
Not more than 20% of all (non-capital) receipts and accruals comprises investment income or personal services income.

Where these criteria are met, the entity qualifies for softer income tax rates. Companies that do not satisfy the SBC rules are taxed at 28% from their first R1 of taxable income, whereas SBC’s are taxed at this rate only on taxable income in excess of R550,000, with rates from as low as 7% at lower levels of taxable income. In other words, a progressive tax system is applied to SBC’s, whereby higher tax rates apply incrementally as the entity is more profitable.

Why the need for income planning when lower tax rates already apply?

Under S12E of the Income Tax Act, all new plant and machinery acquired by the business for a process of manufacture enjoys a write off in full in the year of acquisition i.e. 100% of the cost is written off, and no apportionment for partial periods of assessment apply.

All non-manufacturing assets enjoy accelerated wear and tear of:

50% in the year of acquisition
30% in the 2nd year
20% in the final year

The combination of accelerated write-offs in respect of capital expenditures, along with softer income tax rates at lower levels of profitability create the need for income tax planning for SBC’s. By purely timing the business’ investment in capex correctly, a legitimate and advantageous net tax position could result.

If you are a small business owner, reach out to our team of income tax professionals for advice on whether your business satisfies the SBC rules and how you can plan for lower income tax obligations for the February 2021 income tax year end.