Small Businesses are the beating heart of South Africa’s economy – with estimations that over 90% of registered businesses in the country fall under this category. These corporations are the lifeline for new job creation in a country rife with unemployment, generating meaningful jobs and fostering the economy – keeping the money close to home while supporting local neighbourhoods and communities.
Due to the importance of business creation as a tool for economic growth, the South African government has incentivised business creation by adding a new corporate classification – Small Business Corporations (SBC). The pertinent questions that must be asked are “what qualifies a business to be an SBC and how does one benefit and maintain this type of entity?”
What is an SBC?
Section 12E of the Income Tax Act, pertaining to SBC’s was created for the specific purpose of encouraging start-ups and job creation by presenting the opportunity for small businesses to benefit from reduced tax rates.
Entities have to meet the following conditions to qualify as a SBC:
- The business must be registered with the Company and Intellectual Property Commission (CIPC).
- The business must have a recorded turnover of less than R20 million per year
- All shareholders in the company must be natural persons.
- As the business owner, you should only own one entity (although there are certain exceptions, including owning shares in a listed company).
- Less than 20% of turnover should come from ‘investment’ income and the rendering of ‘personal’ service.
If all these conditions have been met, a business qualifies as an SBC, meeting the requirements to make massive income tax savings.
What are the tax benefits of registering as an SBC?
Companies in South Africa (including closed corporations) are generally required to pay a flat rate of 28% income tax. However, SBC’s are subject to reduced rates on income up to R550 000. To qualify for these more favourable tax rates (seen in the table below), a business must mark on their annual company tax return that they are an SBC.
|SBC tax rates for financial years ending on any date between 1 April 2019 and 31 March 2020
|Taxable income (R)||Rate of tax (R)|
|0 – 79 000||0% of taxable income|
|79 001 – 365 000||7% of taxable income above 79 000|
|365 001 – 550 000||20 020 + 21% of taxable income above 365 000|
|550 001 and above||58 870 + 28% of the amount above 550 000|
Besides the reduction of tax rates, these entities can legally depreciate productive assets at an accelerated rate by capturing deprecation as an expense on income statements. Manufacturing equipment can be deducted fully in the year of its 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 key outcome of this taxation system is that it decreases taxable income while maintaining accounting profit, meaning lower amounts of payable tax relative to estimated profits of the company.
Maintaining your status as an SBC
This classification encourages business creation in South Africa by affording entrepreneurs the chance to watch their small business grow – without the burden of high income tax on initial profits. However, to ensure the maintenance of this classification business owners must keep a delicate balance of the SBC category requirements mentioned above. SBCs were only created to lessen tax burdens on initial profits for smaller firms, once business growth has exceeded the taxable income required for SBC status, it will then be subjected to the standard flat-rate income tax.
The world of tax can be tricky to navigate for small business owners – which is why the South African government created the SBC classification, simplifying and reducing taxes for promising start-up ventures. Benjamin Franklin was correct in saying “nothing in life can be certain but death and taxes”, however, more favourable tax rates for smaller businesses’ can always be considered a bonus in the South African business landscape.