The Income Tax Act No. 58 of 1962 (“the Act”) aims to balance collecting sufficient revenue with incentivizing entrepreneurship and the growth of small businesses. The concepts of Micro Businesses or Small Business Corporations (“SBCs”) allow small businesses some relief from the tax burden placed on larger businesses.
Micro Businesses
The Act allows persons who qualify as ‘micro businesses’ to follow a less complex turnover tax system. The turnover tax system substitutes income tax, provisional tax, capital gains tax and dividends tax applicable to other persons. Micro businesses may still register for VAT should they qualify. Turnover tax is determined by applying a sliding scale to the level of the micro business’ ‘taxable turnover’ as defined in the Sixth Schedule to the Act. These provisions are easy to understand and allow for simple bookkeeping for small businesses.
Allowing businesses to follow the turnover tax system simplifies administration since these businesses do not have to keep extensive records. The records to be kept are listed within the Sixth Schedule to the Act.
Micro businesses must make interim tax payments, much like provisional tax. Since a micro business must have a February year-end, the tax becomes payable as follows:
- The first payment is due on the last business day of August,
- The second payment is due on the last business day of February, and
- The last payment may only be payable should the assessment by SARS indicate that additional tax is payable.
A person must elect to be registered as a micro business and notify SARS should they no longer qualify or voluntarily want to deregister.
Natural persons and companies can qualify as micro businesses. To qualify, a person may not have a ‘qualifying turnover’ exceeding R1 million. What constitutes qualifying turnover is defined in the Sixth Schedule. This amount must be apportioned where a person carries on business based on the number of months in the year that the person carried on business.
Micro businesses are not aimed at persons who carry on service-based or investment businesses. The Sixth Schedule contains extensive provisions on what would disqualify a business from registering as a Micro Business.
Should the business not be profitable, it may be more favourable not to use the turnover tax system since it does not allow for deductions and the offsetting of assessed losses.
Small business corporations
If your business is not a micro business, it may still qualify as an SBC. SBCs do not follow the turnover tax system. Instead, SBCs are subject to normal tax. SBC status is advantageous since an SBC is subject to a progressive tax table that is less stringent than the flat rate of 27% applicable to non-qualifying juristic persons.
Unlike micro businesses, natural persons cannot qualify as SBCs. A business can only qualify as an SBC if its gross income does not exceed R20 million. Additionally, the shareholding of an SBC must comply with the limitations of the Act. For example, only natural persons may be shareholders of SBCs. These shareholders are further restricted since they are limited in the other investments that they may hold. These provisions are aimed at preventing companies and persons from abusing the favourable tax treatment of SBCs.
SBCs are restricted in the type of business they can conduct. Like micro businesses, SBCs are not aimed at service-based and investment businesses.
It is possible for small to medium-sized businesses to save a significant amount on tax annually by using turnover tax or the progressive tax table available to SBCs. Whether your business qualifies as a micro business or SBC is important since the requirements are not always straightforward. Therefore, it is important to consult your tax advisor.