We all know the saying about death and taxes, and even though it is true, there are a few steps you can take to make the taxes part of the saying less painful.
In this short guide to small business corporations, we will have a look at the following:
According to the 2021 Tax statistics, there were almost 2,5 million companies registered in South Africa. 812,306 of these companies were assessed during the year, and only 158,818 of the assessed companies were assessed as Small Business Corporations. If you consider that the vast majority of registered companies in South Africa are small to medium enterprises, the number of assessed small business corporations appears very low.
It appears as if a lot of businesses could be losing out on the potential income tax benefits that being a small business corporation holds.
A small business corporation is a company or close corporation that meets certain requirements set out by the Income Tax Act and qualifies for very generous tax benefits.
In South Africa, companies and close corporations are taxed at a flat rate of their taxable income of 28% (27% if your year-end is on or after 31 March 2023) of their taxable income. When your company qualifies as a small business corporation, it is no longer taxed at the flat rate, but at the rates set out below:
For financial years ending between 01 April 2024 and 30 March 2025
| Taxable income | Rate of tax (R) |
| R1 - R95,750 | 0% of taxable income |
| R95,751 - R365,000 | 7% of taxable income above R95,750 |
| R365,001 - R550,000 | R18,848 + 21% of taxable income above R365,000 |
| R550,001 and above | R57,698 + 28% of taxable income above R550,000 |
Small business corporations may also write off assets at an accelerated rate for tax purposes. New assets used for the first time in the process of manufacture can be written off in the year in which it has been acquired. Other assets can be written off at 50% in the first year, 30% in the second year and 20% in the third year.
Fidget Spinners (Pty) Ltd had a taxable profit of R400,000. If it did not qualify as a small business corporation, the tax expense for the year would be R108,000. If it did qualify as a small business corporation, the tax expense would be R26,198. That is a substantial tax saving of almost R81,802!
The following types of entities could qualify as a small business corporation:
In order for your business to qualify as a small business corporation, it will have to comply with the following requirements:
All of the shareholders of the business have to be real people. Shareholders may not be other companies, trusts, close corporations etc.
These shareholders may not hold an interest in any other private companies, close corporations or co-operatives, other than those which
are inactive or have assets with a market value less than R5,000
This one is rather straightforward. Gross income may not exceed R20 million.
Investment income includes interest, dividends, rental received from immovable property, royalties or annuities
Personal services include services in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draughtsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, performed personally by any person who holds an interest in the company, co-operative or close corporation, except where such small business corporation employs three or more full-time employees for core operations throughout the year of assessment, and these employees are not connected persons. A connected person is a spouse, close relative, or close relative to your spouse,
A personal service provider is any company, close corporation or trust where services are rendered personally by any person regarded as connected to the company, close corporation or trust, and that person would be regarded as an employee of the client if the company, close corporation or trust did not exist. If the company employs more than 3 unconnected people who are involved with the core business of the company, it would not be a personal service provider.
ABC (Pty) Ltd is a private company involved in the marketing and distribution of gadgets and gizmos. the company has 2 shareholders. Mr P and the P Family Trust. ABC (Pty) Ltd will not qualify as a small business corporation because the P Family trust is not a natural person.
ABC (Pty) Ltd has 1 shareholder, Mr P. Mr P also has an interest in DEF CC which is actively involved in procuring the gadgets and gizmos mentioned in the previous example. ABC (Pty) Ltd will not qualify as a small business corporation, because the shareholder also has an interest in another CC, which is actively trading. If DEF CC was dormant, ABC (Pty) Ltd would qualify as a small business corporation.
GHI (Pty) Ltd has one shareholder, Mr B. Mr B is the sole shareholder of GHI (Pty) Ltd, and has an extensive investment portfolio consisting of listed shares and unit trusts. As the investment portfolio does not consist of other private companies or close corporations, GHI (Pty) Ltd could still qualify as a small business corporation of it complied with the other criteria.
Dr X is a medical doctor and is conducting business from a personal liability company (Inc). Dr X employs a cleaner, bookkeeper and a receptionist. Will Dr X's practice qualify as a small business corporation?
Unfortunately not. A medical service would include a personal service. The cleaner and bookkeeper are not involved in the core operations of the practice.
If the practice employed a receptionist who is involved in the making of appointments and receipt of medical supplies, as well as a nurse and a sonographer who is actively involved in assisting patients, it would not be a personal services company and would qualify as a small business corporation. If however, the nurse was Dr P's daughter, it would not qualify as a small business corporation, because one of the three employees is a connected person.
Dr X's practice had a gross income of R10 million. R1 million was dividends received from an Ivermectin manufacturer, and R2 million was received in the form of rentals for the practice's extra office space. Because more than 20% of turnover was investment income, the practice will not qualify as a small business corporation.
If your business complies with the requirements mentioned above, it qualifies as a small business corporation, and you could benefit from the favourable tax rates mentioned above. This will decrease your tax burden and will have a positive effect on your company's cash flow.
JM Bennett is a Chartered Accountant (SA), a Registered Auditor and a Registered Tax practitioner. He obtained an MBA from Wits Business School in 2020 and a Higher Diploma in Tax from the International Institute of Tax and Finance in 2016. He has almost 20 years of experience in accounting, auditing and tax of SMEs.