Small businesses are very sensitive to taxes in South Africa. For this reason, the government created a small business corporation (SBC) so small companies are not killed by high expenses and taxes. As with anything related to government, there are rules and restrictions to be classified as an SBC and can qualify if you meet certain requirements of the Income Tax Act (ITA).
So, let’s start with a breakdown of the tax benefits.
Small Business Corporation tax benefits
If you have physical assets in your company, you will know that these tend to get old, broken or just out of date quickly. As an SBC, you can deduct bigger values of depreciation against qualifying physical/movable assets – as long as it was acquired at a cost. The following is the guideline for deductions:
- Assets used directly in a process of manufacture or similar process: 100% of the cost in the year of assessment in which the asset is first brought into use.
- Other qualifying assets: 50% of the cost in the year of assessment in which the asset is first brought into use, 30% in the first succeeding year, and 20% in the second succeeding year.
You can find a calculator here by TaxTim to assist.
Income tax breaks for SBCs
SARS works on a sliding scale, depending on your income. The first R 91 250 of taxable income is tax-free – mahala! The more you earn, the more you will pay – but it’s still cheaper than the flat 28% company tax levied against big corporates.
| Taxable Income (R) | Rate of Tax (R) |
| 1 – 91 250 | 0% of taxable income |
| 91 251 – 365 0001 | 7% of taxable income above 91 250 |
| 365 001 – 550 000 | 99 163 + 21% of taxable income above 365 000 |
| 550 001 and above | 58 013 + 27% of the amount above 550 000 |
Who qualifies for a small business corporation?
With these lucrative opportunities, you can imagine that every corporate company will claim they are a small business. This is why restrictions have been added to avoid everyone misusing the tax breaks. Here are the basic requirements for being a small business corporation:
- You need to be a corporate entity*.
- Natural shareholders: Shareholders of the SBC must be human. This means they need to be legally natural persons.
- Your gross income may not exceed R20 million for the corporate entity.
- The shareholders are not allowed to hold shares in other entities*.
- Investment and personal service income restrictions. – not more than 20% of the corporate entity income allowed to come from investments that include dividends, royalties, rental property, annuities or personal services.
- Exclusion of personal service providers – discussed below
* One of the following: a closed corporation, co-operative, private company or personal liability company.
What are personal service providers concerning SBCs?
“A personal service provider (PSP) is where the owner of a business, that is, a company or a trust renders service in his or her personal capacity using the business as a vehicle. ”
PERSONAL SERVICE PROVIDERS (PSP): INCOME TAX AND VAT IMPLICATIONS
The idea of an SBC is to stimulate the economy and grow employment in South Africa and help small businesses. SARS is therefore trying to avoid sole proprietors/freelancers/self-employed individuals from registering as an SBC and pocketing all the cash themselves. The above quote is an oversimplification of what a PSP (Section 12E(4)(a)(iv)) is, but other considerations include:
- Scenarios where the person could be seen as an employee of the client,
- Where most of the work is done at the clients’ offices
- 80% of the income is received from one client
There are however ways to bypass the PSP requirements. A company will not be regarded as a PSP if it employs three or more full-time employees. They must be paid by the company and not be related/connected to the shareholders of the company.
Conclusion
SBCs are a great way for companies to pay less tax and get good benefits on depreciating assets. With the first R 91 250 of taxable income being tax-free, it can help a lot in building your small business. Though the restrictions against personal service providers are tight, there are ways to still make this work.
Happy investing!