Small Business Corporation Regime

Small business corporation regime – taking the sting out of tax on your company’s early profits in order to grow

Tax season is open – and SARS is on a mission this year. Fiscal budgets are under immense pressure. Political and economic circumstances in SA is causing an exodus of both tax payers and taxable assets. Many wealth management firms make a living purely from helping high net worth individuals move their income generating assets abroad.

This means that tax paying entities operating in SA will be under more scrutiny this year than ever before. The 2017 tax season for individuals has opened in July. The company provisional tax deadline follows close behind it. As business owner, mid-year is the perfect time to be doing some serious tax planning.

Smart, pro-active planning coupled with the correct use of available incentives can go a long way to help founders manage their total tax liability. For business owners who meet the criteria, electing to be taxed as a Small Business Corporation (SBC) can save them a good deal of tax – close to R100,000 saved on their first half a million rand’s profit each year! Let’s have a look at the qualifying criteria:

  • SBC’s must:
  • be a registered company, close corporation, co-operative or personal liability company;
  • have only natural persons as their shareholders who only own one business;
  • have gross annual turnover of less than R20 million per year;
  • not earn investment income or personal service equal to more than 20% of total turnover;
  • not be a ‘personal service provider’ as defined (unless it employed more than three full-time non-shareholder staff).

Qualifying Small Business Corporations are taxed on a reduced sliding scale, with tax rates staggered from 0% to 28% as the entity approaches R550,000 of taxable profit. This compares quite well to regular entities, which are taxed at 28% from the first rand of profit. The sliding scale for the 2017/18 tax year is as follows:

Taxable income                                         Tax rate
R 0 – R 75,750                                               –  No income tax payable
R 75,751 – R 365,000                                   –  7% of taxable income above R 75,750
R 365,001 – R 550,000                                –  R 20,248 + 21% of taxable income above R 365,000
Above R 550,000                                          –  R 59,098 + 28% of taxable income above R 550,000

Looking at three quick examples, John’s two year old digital platform company with its R60,000 profit for this year will pay no tax (R60,000 x 0%), saving him R16,800’s tax that he would have paid without SBC status.

Lisa’s three year old design studio is set to make R300,000 profit this tax year. As SBC, she will pay only R15,698 in tax (7% x {300,000 – 75,750}) instead of R84,000. That’s a tax reduction of over 80%!

Sibu and Alu’s five-year-old green energy company will boast R700,000’s profit this year. That means that they will pay R101,098 (59,098 + 28% x {700,000-550,000}), halving their tax liability.

Each rand that these founders saved on tax is one more rand that can go straight back into building their companies.

But there’s more – Small Business Corporations are also eligible for generous accelerated amortisation of assets. That means that they can deduct assets purchased for tax even faster than they deduct them as part of depreciation in their financial statements. Let’s have a look:

Manufacturing equipment can be deducted fully in the year of its purchase. Other business assets can be amortised at a rate of 50% in their year of purchase, 30% in their second year and 20% in their third year. The main positive implications are that this lessens taxable income while not affecting accounting profit, leading to a smaller amount of tax paid in comparison with reported company profit.

John, Lisa, Sibu and Alu are all smiling this tax year. Their SBC status is helping them keep the maximum amount of cash in their companies to fuel growth by managing their tax liability down legally. Don’t miss out on taking advantage of all tax incentives this financial year as SARS will be watching more closely than ever.

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