The Income Tax Act in its current form provides an array of tax incentives to incentivise the growth of small business corporations (‘SBC’). A small business corporation is basically, subject to certain exclusions, any close corporation, co-operative or private company of which all the shares are held by natural persons where the gross income of that close corporation, co-operative or private company does not exceed R20 million per year of assessment.
An entity qualifying as a SBC is currently entitled to accelerated tax write-offs in in the form of a full write-off for manufacturing assets during the year of assessment in which the assets are brought into use and for non-manufacturing assets it would also have the benefit of electing between a general write-off allowance that varies depending on the type of asset or a 50/30/20 per cent write-off per year of assessment (depending on which of the two is the most beneficial). It does, however, not stop there. SBCs are also not taxed at a flat rate of 28 per cent like all other companies. SBCs are taxed according to the sliding scale table below:
|0 – 70 700||0% of taxable income|
|70 701 – 365 000||7% of taxable income above 70 700|
|365 001 – 550 000||20 601 + 21% of taxable income above 365 000|
|550 001 and above||59 451 + 28% of the amount above 550 000|
The draft Taxation Laws Amendment Bill brought about some unwelcome changes to the SBC regime. It was proposed that SBCs be taxed in the same manner as all other companies (i.e. at 28 per cent from the firs Rand of taxable income) and that they instead receive a refundable compliance rebate (‘RCR’) of R15 000 per year of assessment should they be fully tax compliant to compensate them for their compliance costs. No mention was made as to whether SBCs would lose their accelerated write off clauses even though it was assumed that it would be the case.
Erich Bell, Acting Head of Tax Technical at the South African Institute of Tax Professionals (‘SAIT’) explains that rationale behind the proposed changes was to enable the smaller SBCs to also benefit from the regime. ‘Under the current SBC regime, SBCs with a taxable income below R70 700 or who were in an assessed loss position drew no benefit’ Bell explains. The RCR was aimed at incentivising these smaller SBCs by providing them with cash in their pocket. Bell, however points out that the regime contained various flaws which are evident when one considers the following:
- Previous studies indicated that the compliance costs of small business entities are over R60 000 per year of assessment. When one compares this to the value of the RCR, then one can clearly see that the RCR doesn’t even cover a quarter of the compliance costs. Bell, however concedes that the intention was never for the RCR to cover all of the compliance costs of the small entities.
- The only SBCs that stood to gain from the proposal were SBCs with a taxable income of below R53 574. Bell reiterates that under the proposals, a SBC with a taxable income of R550 000 stood to lose R79 298 had the regime been adopted. ‘The R79 298 could have been used to employ and additional employee’ he explains.
‘Although the proposals were aimed at incentivising the smallest of the SBCs, it cannot be done at the cost of the more successful SBCs – SBCs that are actually contributing towards the economy’ Bell explains.
In this regard SAIT made submissions to National Treasury and also presented on this particular topic to the Standing Committee on Finance on the 26th of August 2014. The main submission of SAIT was to delay the implementation of the proposed RCR scheme subject to further consultation with industry and other stakeholders. The secondary proposal of SAIT was to increase the RCR per sliding scale depending on the level of taxable income of the SBC.
In response to the submissions made, National Treasury decided to withdraw the proposal for further consultation with stakeholders, including the new Small Business Ministry and the Davis Tax Committee. Bell reiterates that National Treasury must be commended on this decision. ‘Was the proposal adopted, it could have led to major losses to the more successful SBCs’ Bell reiterates.
Bell reminds the public that participation in the legislative process forms one of the corner stones of a democratic state. ‘For now, small business owners can take a sigh of relief’ he states.