Many companies are adversely impacted by the coronavirus pandemic and have recently been physically wrecked by the unrest in some of the provinces. Tax legislation offers a legal leverage for companies to reduce their tax burden.
Affected companies who have experienced a reduction in sales volumes (a reduction of `gross income’ as defined in the Income Tax Act) to less than R20-million in a tax-year, may commence the test to determine whether they qualify for the benefits applicable to a Small Business Corporation (SBC).
These benefits are quite generous. Qualifying businesses enjoy a much faster depreciation allowance and low tax rates. The SBC may deduct 100% of the cost of any plant or machinery used in manufacturing, or if not used in manufacturing, then there is a three-year deduction formula.
The tax rates range between 0% up to R87 300 of taxable income, 7% of taxable income above R87,300, R19,439 + 21% above R365 000 and R58 289 + 28% above R550 000.
The South African Institute of Professional Accountants (SAIPA) recently held a webinar to give guidance on how small businesses can ensure that they reap the benefits offered under the SBC tax regime. It is very critical that all the requirements listed are met.
Mahomed Kamdar, tax specialist at the South African Institute of Professional Accountants (SAIPA), says the tax relief for an SBC is designed to encourage the proliferation of small businesses that creates employment.
Qualifying criteria for SBC
Only companies, and not individuals will qualify for the SBC relief. In order to qualify all the shareholders must be natural persons, the gross income of the company during the year of assessment may not exceed R20 million, and all investment income or income from a personal service may not exceed 20% of all the revenue receipts, accruals, and capital gains.
“It can be that the entity will qualify in year one, but not in year two and again in year three. Hence, this test must be conducted annually, and importantly, at the end of each tax year,” advises Kamdar.
It is important to note that a company must not be a Personal Service Provider and all investment income or income from a personal service may not exceed 20% of all the revenue receipts, accruals, and capital gains.
Underlying philosophy
It is critical to understand the underlying philosophy of SBC – it is designed is to provide tax relief which improves the liquidity and cash flow of business.
The South African Revenue Service (SARS) has “taken offence” to the creation of PSPs during the 80s and 90’. What essentially happened was that employees resigned from their employment, establish a company or a trust, and offered their services back to the employer.
This was done mainly to obtain a tax saving. However, SARS amended the legislation so that if someone qualifies as a PSP the company receiving services from the person will have to deduct Pay-As-You-Earn at a rate of 28% and pay it to SARS. On top of that, the deduction of business expenses is limited.
Expanded definition
Kamdar says over the years the definition of a PSP has been expanded. If the person rendering the service to the client would have been regarded as an employee if the service was rendered directly to the client and not through the company or the trust, he will be deemed a PSP.
SARS will also consider the person to be a PSP if the services are performed mainly at the client’s premises, and the person is working under the supervision of the client. If more than 80% of the income of the company during the year of assessment comes from one client, the person qualifies as a PSP.
Escape the net
But, says Kamdar, there are ways to escape the PSP net and the `personal service’ definition for SBCs. The company can employ three or more people on a full-time basis, for the complete year of assessment, and they must be directly involved in the business activities. The employees may not be connected to the company or the owner.
When the company ticks all the boxes, it will be able to qualify for the generous SBC benefits and further accelerate its recovery from the crisis facing the country because of improved cash position.