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SBC tax relief to be revised

08 Oct 2014

David BadenhorstThe revision of the small business corporation (SBC) tax regime has been proposed in a new Draft Amendment Bill.

The draft Taxation Laws Amendment Bill (TLAB) – which aims to give effect to the various tax proposals announced in the 2014 budget speech – was released in July 2014 by National Treasury, and contains important information regarding small business corporations.
 
A small business corporation, as defined in Section 12E of the Income Tax Act, No 58 of 1962, is:

  • any close corporation or cooperative or any private company, as defined in the Companies Act, No 71 of 2008 (thus excluding trusts, sole proprietors and partnerships);
  • of which all shareholders are at all times during the year of assessment natural persons;
  • where the gross income for the year of assessment does not exceed R20 million per annum;
  • where no shareholder holds any interest in any other close corporation, cooperative or private company; and
  • less than 20% of the income is investment income or personal service income.

An enterprise which complies with all of the above-mentioned requirements may opt for the SBC tax regime. In terms of this regime, an SBC is not taxed at the flat company rate of 28% but rather at a much more favourable progressive tax rate.

The Davis Tax Committee recently released an Interim Report on Small and Medium Enterprises: Taxation Considerations. In terms of this report, the current lower tax rates for SBCs are not effective and do little to support the objective of small business growth.

The report states that the current regime is not beneficial to SBC’s with zero taxable income, despite them having the same tax compliance burden as their profitable counterparts. The current SBC regime furthermore only provides relief to 50 000 enterprises, some of which have been unintended beneficiaries. The report further contends that over 50% of SBC’s have an annual turnover of less than R1 million, therefore making the turnover tax regime arguably more suitable for them.

In order to mitigate the concerns raised in the report, TLAB proposes to replace the reduced-rate SBC regime with an annual refundable compliance rebate (RCR). SBC’s will be taxed at 28% and not according to the progressive rate. Enterprises with a turnover of between R1 million and R20 million, who are tax-compliant with regards to tax returns and liabilities, will be entitled to receive an annual refundable tax rebate of R15 000. As this rebate is refundable, enterprises in a tax-loss position are also eligible recipients.

As SBC’s have indicated that tax compliance costs remain a major problem, the proposed RCR regime is meant to reward tax-compliant SBC’s and compensate them for the additional costs incurred in achieving tax-compliant status. This is illustrated by an example in the Draft Explanatory Memorandum on the TLAB:
 
Small business corporation B has a taxable income of R1 000 000. Under the current SBC regime, its tax liability is:
(R1 000 000 – R550 000) x 28% = R126 000 + R59 451 = R185 451

Under the proposed RCR regime, its tax liability is:
R1 000 000 x 28% = R280 000 (tax) – R15 000 (rebate) = R265 000

Under the proposed RCR regime, the tax liability of the SBC will therefore be higher than its tax liability under the current SBC regime.

The proposed amendments will come into effect on 1 January 2016 and will apply to years of assessment commencing on or after that date.

Contact David Badenhorst at our Stellenbosch office, tel 021-882 8140 or e-mail david@exceed.co.za, for more information in this regard.

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