Two years on tax exemption for grants to small businesses fails to take off

More than two years after it came into effect, a tax exemption for entities approved by the SA Revenue Services (Sars) that provide grant funding to small businesses has failed to take off.

The tax exemption has been in effect since March 2015, yet only a single entity has applied for and received approval from Sars commissioner Tom Moyane (pictured above, left with Finance minister Malusi Gigaba) to operate as a small business funding entity.

Under Section 10 (1) (cQ) of the Income Tax Act such entities that provide small businesses, including startups, with grants have since March 2015 been exempt from paying tax. The provision was included in the 2014 Tax Law Amendment Bill. In addition grants that are provided to small businesses have also been tax exempt.

Sars spokesperson Sandile Memela however said just one such entity has applied for and been granted tax exemption. He said no further details can be provided in keeping with taxpayer confidentiality prescriptions in Chapter 6 of the Tax Administration Act of 2011.

Only one entity has applied for an been granted a tax exemption as a small business funding entity says Sars

Memela said however that there are other avenues for entities that fund micro enterprises — namely through the provisions of Section 30 read together with 1(p) of Part I of the Ninth Schedule to the Income Tax Act, 1962.

Section 1(p) allows for those entities that fund non-governmental organisations (NGOs) that provide support to emerging micro enterprises “which may include the granting of loans on such conditions as may be prescribed by the Minister by way of regulation” to make tax-deductable donations.

“Sars does inform entities that may fall outside of the requirements of 1(p) and Section 30 of the possibilities of an application in terms of the provisions of section 10(1)(cQ). Given that 10(1)(cQ) does not have the added benefit of tax deductible donations many clients do not opt for this route,” he said.

No donations deduction

Ricardo Wyngaard, a Cape Town attorney who specialises in non-profit law, said unlike in the case of Public Benefit Organisations (PBOs) that are in line with Section 18a of the Income Tax Act, donors that place funds in small business funding entities are not able to get tax deductions. He surmised that this might have something to do with the slow take up of such entities.

“Why would someone set up a small business funding entity if there is no certainty of attracting money,” he added.

Wyngaard also surmised that the National Treasury had opted to introduce the small business funding entity form because PBOs under Section 18a are limited to funding a smaller size of small business.

Despite this he said he did not believe that the requirements for any organisation getting approval as a small business funding entity are onerous.

In order to qualify for tax exemption organisations making grants to small businesses must apply for exemption from the Sars commissioner.

The requirements among others include that the small business funding entity must have a committee, a board of management or similar governing body consisting of at least three natural persons who are not connected persons in relation to each other to accept the fiduciary responsibility of that small business funding entity.

“My understanding is that the process to apply is not much different from making application, for example, to be approved as a public benefit organisation under section 30 of the Act,” said Wyngaard.

‘Incentive little known’

Philippa Hurley a specialist from NGOLaw who consults to NGOs noted in addition that the incentive is little is known in the business world, and that few accountants or lawyers understand the legislative provisions and application processes.

She said Sars’ tax exemption unit had indicated to her organisation that the exemption was introduced to cater for organisations which failed the PBO test.

“Looking at the legislation and the undertaking for office bearers, you can’t help thinking that the aim was to have larger corporations form their own, ‘offshoot’ SBFEs (small business funding entities) – the management structure is limited to ensure that not more than 50% of the office bearers are involved in the funding entity.”

Hurley said if the beneficiaries of the small business funding entity are at least 75% black, then the entity, as a specialised enterprise under the amended Black Economic Empowerment (BEE) codes, would be regarded as 100% black-owned, with a Level 1 BEE rating.

“This could be attractive to entities that needed to increase their own black ownership levels, as, if shares in these corporates were sold (on loan) or donated to the SBFE, the ownership would flow through from the SBFE.”

She added that if the SBFE were set up as a non-profit company or voluntary association (not a charitable trust), it would need to conform with the requirements of a broad-based ownership scheme in order for this ownership to flow through. The requirements include 50% black and 25% black female directors.

“I would be comfortable that this structure would comply with the objects of the BEE Act, in that there would be significant black participation and benefit – not your usual form over substance,” she added.

‘Suppressed economy’

Saica senior executive of tax, Peter Faber said the current suppressed economic climate could also account for the low number of registrations.

He pointed out that perhaps the tax incentive would also have to be amended, as has been the case with other incentives such as the 12J venture capital tax incentive. The incentive initially drew few registrations before the National Treasury made the rules around the incentive less onerous.

Featured image: (left to right) Sars commissioner Tom Moyane with Finance minister Malusi Gigaba GovernmentZA via Flickr