Companies are taxed at a flat rate of 28% however S12E of the Income Tax Act allows for certain qualifying companies (Small Business Corporations (“SBC’s”)) to be taxed at marginal tax rates being 0%, 7%, 21% and 28% for taxable income in excess of R550,000 per annum. In addition, it provides accelerated depreciation allowances on certain capital assets brought into use by the SBC.
Sounds great! However, many business owners and their accountants may overlook this tax break. In some instances, they will disqualify themselves as a SBC as they would they would not meet the criteria at face value or as a result of poor income tax planning. You should be asking yourself why your business has not qualified and whether there is a more efficient income tax structure to suit your business.
Now that we have unpacked the criteria of who qualifies as a SBC, a more detailed application can be found by SARS Interpretation Note 9 SBCs.
Let’s have a look at an example:
Company A sells computer equipment and provides IT services to a number of clients, has six full-time employees (two holders of shares, X and Y, and four other employees).
The employees are all involved in rendering IT services to clients throughout the year of assessment.
Company A’s gross income from Computer Equipment for the year of assessment was R13 million, IT Services R2 million of which was directly from services of the 2 shareholders and R1 million rental income.
Company A purchased a delivery vehicle for R200,000 during the year. Directors remuneration and other operating expenses amount to R15 million for the year.
In addition to the shares in Company A, X is the holder of a number of shares in a share block company and Y is the holder of shares in Company Z, which is inactive and has assets of less than R5 000.