In this article, I want to shine a light on small business corporations, the qualifying criteria, and how they can benefit from certain tax breaks.
The SME segment is a vital cog in the SA economy and one that is set to grow even further as the country recovers from the pandemic. They make up a fundamental part of our nation, driving innovation, providing unique products and services, and reaching people in ways that larger companies cannot.
However, SMEs and sole proprietors often face obstacles that prevent them from reaching their full potential – with tax one of the most common barriers. Many are also still experiencing great uncertainty due to the pandemic, energy crisis, and limited access to digital technologies.
This year, it is especially important to overcome the challenges of juggling running a business with meeting complex tax expectations, as SARS is tightening the screws regarding compliance, non-payment and penalties.
However, it’s straightforward to remain in compliance and submit on time by working with an accountant and leveraging the right technology. Additionally, there are certain legal breaks available that can play a significant role in simplifying processes and boosting cashflow.
SARS registration and tax breaks
Businesses and self-employed individuals are obliged to register with SARS, file tax returns and pay their taxes on time. However, SARS allows for certain breaks for owner-operated businesses designed to stimulate growth.
For instance, a standard company or close corporation gets taxed at 28% from the first R1 of profit generated in the year of assessment. By contrast, the tax of a small business corporation (SBC) is calculated according to a more tax-effective table as illustrated below. Companies meeting the criteria of an SBC often fail to utilise this tax break, resulting in them paying unnecessary tax.
To determine whether an SME qualifies for these tax benefits, we need to compare it against the qualifying criteria. An SBC is a close corporation, private company (other than a personal services provider) or personal liability company of which:
- Natural persons hold the entire shareholding or membership for the entire year of assessment.
- The gross income does not exceed R20 million during the assessment year.
- None of the members or shareholders, at any time during the year of assessment, held shares in any other company other than listed companies, collective investment schemes, body corporates, share-block companies, specific associations of persons, friendly societies, less than 5% interest in cooperatives, a venture capital company, shares in inactive private companies with assets of less than R5,000 or had taken steps to liquidate, wind-up or deregister.
- Not more than 20% of the sum of gross income and capital gains consists of investment income and income from the provision of personal services.
- If engaged in the provision of personal services, maintains at least three full-time employees (none of whom may be a shareholder or a connected person in relation to the shareholder) for core operations.
Suppose a company or close corporation meets all the above criteria. In that case, the following tax table will apply with regards to the SBC’s tax liability calculations for the year of assessment:
Financial years ending on any date between 1 April 2021 and 31 March 2022
Calculated accurately, an SBC can save up to R95,711 in taxes annually by utilising this relief system. This addition to cashflow would be a welcome boost for most businesses, especially during turbulent economic periods.
We strongly advocate for tax optimisation through lawful structuring and efficient advice for all our SBC clients. If you’re still unsure whether you qualify for this valuable tax benefit, speak to your accountant.
Use technology to help streamline the process in future
To ensure that your tax season goes as smoothly as possible, be sure to take full advantage of technology.
Using cloud technology can help you massively reduce some of the manual tasks associated with tax and helps you track finances closely throughout the year so that there are no nasty surprises when tax season arrives.
Using platforms like Xero makes it simple to streamline the process – you can use bank feeds to help pull through your business transactions each day, snap receipts and upload expenses instantly and then eFile VAT directly to SARS.
This reduces error-prone spreadsheets and traditional processes and frees you up to focus on running your business.