Small Business Corporation regime takes sting out of tax on those early profits

Tax season is open – and the SA Revenue Service (Sars) is on a mission this year.

Fiscal budgets are under immense pressure. South Africa’s political and economic circumstances has seen 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.

It means that tax paying entities operating in South Africa will be under more scrutiny this year than ever before.

The 2017 tax season for individuals opened at the beginning of this month. 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.

‘If elected to be taxed as Small Business Corporation your firm can save close to R100 000 on the first half a million rand’s profit each year’

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 services provider” as defined by Sars (unless it employed more than three full-time non-shareholder staff).

Qualifying SBCs 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 2016/17 tax year is as follows: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 in 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 a SBC, her company will pay only R15 750 in tax (R300 000 – R75 000 x 7%) 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 in profit this year. That means that they will pay R101 150 (R59 150 + 28% x {R700,000 – R550 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 – SBCs 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:

As a SBC one can make a full deduction of manufacturing equipment in the year of the equipment’s 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.

Featured image: GotCredit via Flickr (CC 2.0 license BY-SA, resized)