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Taxation for Small Businesses

xBlog-Taxation-for-Small-Businesses

Small Business can be taxed at more favourable rates if they meet the specific requirements.

 

What are the requirements ?

  • Annual Turnover to be less than R20million.
  • Investment income must not exceed 20% of total income : This will include, but not limited to, rental income, interest & dividends, etc.
  • All shareholders are to be natural persons : No trusts nor any company to hold shares in the company.
  • Shareholders not to hold shares in any other companies (Private, Close Corporations, Personal Liability Companies) excluding Public Companies.
  • Directors are not be directors in any other business – The rules get quite sticky as it mentions that even if persons related to directors hold business interests, the company will be disqualified.
  • Personal services companies are disqualified as well : A personal services company gets taxed at 34% and is a company who received more than 80% of remuneration from one source.
  • Specific industries are also limited and can only start qualifying after having at least 3 employees, excluding the directors.

Although SARS does not ask all of these questions on the tax return; it should be abided by. Ok, so your company qualifies, what now? What tax benefits are there? The most important one, is that the company gets favourable tax rates, similar to individuals.

For the tax year 1 April 2023 to 31 March 2024, the tax rates are as follows:

  • R0 to R95,750 : Tax at 0%
  • R95,751 to R365,000 : Tax at 7% for the amount over R95,750 (meaning the first R95,750 of profit is tax-free and the profit to be taxed at 7% is calculated by deducting R95,750 from the profit.
  • R365,001 to R550,000 : Taxed at 21% on the amount over R365,000 plus R18,848 (which is the highest tax for the previous bracket)
  • R550,001 and above is taxed at 28% for the amount above R550,000 plus R57,698.
  • R550,001 and above is taxed at 28% for the amount above R550,000 plus R58,583.

Example

Profit (taxable income if you want to be very specific) for the year : R400,000.

We will calculate the tax as follows : R400,000 less R365,000 = R35,000. This difference is then multiplied by the tax rate : R35,000 x 21% = R7,350, but we still have to add the maximum tax from the previous bracket to get our taxation payable. So, R7,350 + R18,848 = R26,198 will be our total tax payable on a profit of R400,000.

For the technical inclined: profit and taxable income are not always the same, as there could be expenditures which are allowed for accounting purposes, but not for taxation purposes. Example : SARS interest and penalties, fines, change in depreciation rates, etc.

Are there any other benefits?

Yes, there are. Mainly on the depreciation of assets. Consult with your accountant regarding the accounting implications as there might be a difference between you can claim for accounting purposes and for tax purposes.

A Small Business Corporation may choose to use the following rates for movable assets brought into use for the first time by the SBC:

  • Assets used directly in a process of manufacture or similar process: 100% of the cost in the year of assessment in which the asset is first brought into use.
  • Other qualifying assets: 50% of the cost in the year of assessment in which the asset is first brought into use, 30% in the first succeeding year, and 20% in the second succeeding year.

The Company (which includes Close Corporations and Personal Liability Companies) can also choose the normal rates (20% on machinery over 5years as an example).

– Salim Khan

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