PROJECT ACHIEVER

TAXATION OF COMPANIES

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Content

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Companies

Small Business Corporations

(SBCs)

Micro business – Turnover

Tax

Personal Service providers

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What is a company?

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- any association,

- Corporation or company,

(incorporated or incorporated

associations, corporations or

companies, a body corporate, a

co-operatives AND a close

corporation (CC) a REIT

- "foreign company" any company

which is not a "resident"

History of Tax Legislation

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- Before income tax legislation - tax

levies were charged on public

railway services /custom duties /

Postal services / telegraphs

- Democracy/ Bill of Rights/ law

defines who are taxpayers

- Competent courts/ Office of the

Public Protector/Constitution

Courts / South African Human

Rights Commission

Tax Liability of a company

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• Normal tax rate @ 28% of taxable

income

• Tax payable from the first rand of

taxable income

• No primary / secondary rebate

• No interest exemption (s10(1) (i)]

• No tax free saving exemption s12T

Companies Tax Framework

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Gross Income XXX s1

Less: Exempt income XXX

Income XXX s1

Less: Deductions/Allowances XXX S11 – 17 & s21 - 24

Less: Assessed loss XXX S20

Sub-total XXX

Add: Capital gain XXX s26

Sub-total XXX

Less: Donations XXX s18A

Taxable income XXX

Companies tax (cont)

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Company is a provisional

taxpayer

Assessed loss from previous

year can be brought forward

Appoint a Public Officer

Small Business Corporations (SBCs)

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The taxpayer must meet all the following requirements in order

to qualify for the SBC status.

1) The taxpayer must be a company as defined in the

Companies Act,

2) All shareholders of the company must be natural person,

3) The `gross income’ as defined by the ITA, for the year of

assessment must not exceed R20 million,

What happens to the R20m threshold if the financial year is less

than 12-month?

Small Business Corporations (SBCs)

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There will be an apportionment of the R20m threshold based on

the number of months in the financial year.

What happens to the R20m threshold if the financial year is

more than 12-month?

The R20m thresholds remains intact – there will not be an

increase in the threshold amount although the number of

months in a financial year has increased.

Small Business Corporations (SBCs)

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4) None of the shareholders or members of the SBC at any time

during the year of assessment holds any shares or has any

interest in the equity of any other company other than certain

`permitted’ shareholdings (for example shares in a listed

company)

5) Investment income and income from a `personal service’ do

not exceed 20% X (revenue receipts & accruals plus capital

gains), and

6) The company must not be a PSP as defined in the Fourth

Schedule of the ITA.

Small Business Corporations (SBCs)

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However, if the company hires three or more persons in the

core function of the business, that are not `connected’ to a

shareholder, or member of a CC, and

Hires the employees for the full duration of a tax year, then the

PSP could escape this hurdle

Small Business Corporations (SBCs)

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Please Note the following:

The taxpayer must undertake this `test’ annually, at the end of

each financial year, to check if the SBC requirements are met.

It can be that the entity will qualify as a SBC in year 1 but not in

year 2, but again in year 3. Hence this test must be conducted

annually – at the end of each tax year!

Small Business Corporations (SBCs)

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What are the benefits of being an SBC?

1) See the tax rates in SAIPA Annual Tax Guide – 2019 /20 –

page 8 - the tax liability is less when compared with a

normal company

2) SBCs – eligible for accelerated allowances (depreciation)

i) if plant or machine used 100% for manufacturing

purposes

ii) If the plant or machine is not used in the process of

manufacture

Small Business Corporations (SBCs)

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Plant and machinery used 100% for manufacturing purposes:

A SBC may deduct 100% of the cost of any plant or machinery

used directly in a process of manufacture, or any other process

which is of a similar nature, carried on by that SBC in the year of

assessment in which the SBC brings the plant or machinery into

use, provided it is –

• brought into use for the first time by that SBC on or after 1

April 2001;

• brought into use for the purposes of the taxpayer’s trade

(other than a trade of mining or farming); and

• owned by the SBC or the SBC acquired the plant or

machinery as purchaser under "instalment credit

Small Business Corporations (SBCs)

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If the plant or machine is not used in the process of

manufacture, then the following formula must be used to

calculate the allowances:

3)An amount over three years of assessment calculated at the

following rates with apportionment not being required for assets

used for part of a year of assessment:

50% of the cost in the year of assessment in which the asset

was first brought into use (first year).

30% of the cost in the first succeeding year (second year).

20% of the cost in the second succeeding (third year).

Small Business Corporations (SBCs)

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Change in tax status of the company

So, what happens if the entity is not a SBC in the 2nd year? The

above allowance will continue because the entity was a SBC

when the plant was first brought into use.

So what happens if the entity was not a SBC when the plant was

first brought into use?

The capital allowance will be 40% (year 1) and 20% (in

succeeding three years) – if the plant was brand new.

Small Business Corporations (SBCs)

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If the plant was second-hand when it was first brought into use,

then the allowance will be 20% per year for five years. Always

view the status of the entity when the plant or machine was first

brought into use. If the entity was not a SBC, then these

allowances rate will continue in the later tax-years even though

the entity will be a SBC in one or more of the later years.

Small Business Corporations (SBCs)

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In order to claim an allowance (50% /30%/ 20%), the qualifying

entity must be an SBC in both the year of assessment in which

the asset is acquired and the year of assessment when it is first

brought into use.

Date acquired vs Date brought into use: The election between

the two alternative methods for calculating the amount of the

deduction is made when the asset is first brought into use. For

example, if a qualifying entity qualifies as an SBC in year one

when the asset was acquired but does not qualify in year two

when the asset is first brought into use, then the 50% /30%/

20%), allowance is not available to it.

Small Business Corporations (SBCs)

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Taxpayer can elect between the three-year (as per in item 3

above) or the wear and tear allowance section 11 ( e) of the

Income Tax Act

An SBC may elect to calculate the amount of the deduction

allowable over three years (50% /30%/ 20%), or according to

the provisions of section 11(e) - the wear and tear allowance. If

the wear and tear allowance provide a more favourable

allowance than the three-year spread, then the taxpayer may

elect the s11(e) wear and tear.

Small Business Corporations (SBCs)

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An example is required:

For example, a “small” item which does not form part of a set

and which is acquired at a cost of less than R7 000 may be

written off in full under section 11(e) in the year of assessment in

which it is acquired and brought into use.

A SBC is required to deduct the allowance over a three-year

spread (that is, 50% /30%/ 20% ) but may elect to write-in off in

year 1 using the wear and tear provisions under the section 11

(e). The election must be made on asset-by-asset basis.

Micro business – Turnover tax

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Turnover-based tax system

To alleviate tax compliance costs for very small businesses

Turnover tax is calculated on the turnover(total receipts) of a

micro business, and

not on its profits

Micro business – Turnover tax

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Elective

Incorporated and unincorporated enterprises (sole

proprietors / partnerships)

◦ Certain limitations

Annual qualifying turnover up to R1million p.a.

Implementation: Years of assessment commencing on or

after 1 March 2009

Micro business – Turnover tax

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Not subject to both normal tax and the turnover tax

Section 10(1) – exempts from normal tax all income received

by or accrued to a registered micro business conducting

business in the Republic

Exclusions

– natural persons – investment income and remuneration

– business activities carried outside SA by both companies and

natural persons are not exempt from normal tax but do not

qualify for the turnover tax regime

Micro business – Turnover tax

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a shareholder in a registered micro business is only partially

exempt from dividends tax – total dividend paid does not

exceed R200 000

Micro business – Turnover tax

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Exclusion from CGT when assets sold by a registered micro

business

Assets must be used mainly for business purposes.

VAT – vendors can register for VAT – Which registration

category? Why would a microbusiness would want to

register for VAT?

PAYE,SDL and UIF normal rules apply but can apply to pay

biannually.

Micro business – Turnover tax

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If Year of assessment less than a period of 12 months

then qualifying taxable turnover to be apportioned - R1m

divided by the number of months

NB:

1) qualifying receipts and not accruals

2) a business cannot be split into smaller businesses in

order to ensure that each business is within the R1m

qualifying turnover limit.

Micro business – Turnover tax

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The tax for turnover tax is calculated on the qualifying

turnover.

The taxable turnover =

- all amounts that are not of a capital nature

- received by the micro business - cash basis

- during that year of assessment

- from the carrying on business activities in the Republic

- Expenses totalled ignored for this tax for the calculation of

this tax

Micro business – Turnover tax

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- Including: 50% of proceeds on sale of a capital asset:

please be careful – not capital gain but the proceeds

- Immovable property mainly used for business

- Includes business Investment income of a company / cc

(other than dividends and foreign dividends);

- But for a natural person – excludes investment income

Government subsidies); and

Micro business – Turnover tax

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Excludes:

- Amounts accrued before registration as a micro business

AND was subject to tax – why?

- For normal tax, taxed on earlier of receipt and accrual.

Amount accrued already included in previous year gross

income.

- Amounts refunded by suppliers to a micro business –

these amounts are refunds of expenses and should not

be included in qualifying turnover.

Micro business – Turnover tax

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Amounts refunded to customers by a micro business – that

is when it sell goods or render services – receipt – included

in taxable turnover.

However, when later refunded as a result of a faulty good

or poor services, then such refunds to customers can be

deducted in the calculation of taxable turnover.

Micro business – Turnover tax

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Persons that qualify as micro business

- Company

- natural persons

Trust not included in the definition of micro business and

can therefore not elect to pay turnover

Micro business – Turnover tax

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Persons that do not qualify as micro business

(a) that person at any time during that year of assessment

holds any shares or has any interest in the equity of a

company other than a share or interest describe below;

a) in a listed company;

(b) in a portfolio in a collective investment scheme,

(c) Body Corporates established in terms of Sectional title

Act;

(d) in a venture capital company;

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(e) that constitutes less than 5 per cent of the interest in a

social or consumer co-operative or a co-operative burial

society

(f) in any friendly society

Micro business – Turnover tax –

Persons that do not qualify (cont)

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(b) more than 20 per cent of that person’s total receipts

during that year of assessment consists of:

(i) where that person is a natural person income from the

rendering of a professional service; and

(ii) where that person is a company, investment income

and income from the rendering of a professional service;

(c) at any time during that year of assessment that person

is a personal service provider or a labour broker,;

Micro business – Turnover tax

Person that do not qualify (cont)

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(d)the total of all amounts received by that person from the

disposal of:

(i) immovable property used mainly for business purposes;

and

(ii) any other asset of a capital nature used mainly for

business purposes, other than any financial instrument,

exceeds R1,5 million over a period of three years

comprising the current year of assessment and the

immediately preceding two years of assessment, or such

shorter period during which that person was a registered

micro business;

Micro business – Turnover tax

Person that do not qualify (cont)

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(f) in the case of a company:

(i) its year of assessment ends on a date other than the last

day of February;

(ii) at any time during its year of assessment, any holder of

shares in that micro business is a person other than a

natural person;

(iii) at any time during its year of assessment, any holder of

shares in that micro business holds any shares or has any

interest in the equity of any other company other than

explained above

Micro business – Turnover tax

Person that do qualify

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Provided that the provisions of this item do not apply to the

holding of any shares in or interest in the equity of a

company, if the company:

(aa) has not during any year of assessment:

(A) carried on any trade; and

(B) owned assets, the total market value of which exceeds

R5 000

Micro business – Turnover tax

Person that do qualify

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in the case of a person that is a partner in a partnership

during that year of assessment:

(i) any of the partners in that partnership is not a natural

person;

(ii) that person is a partner in more than one partnership at

any time during that year of assessment; or

(iii) the qualifying turnover of that partnership for that year

of assessment exceeds R1m.

Micro business – Turnover tax

Registration

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If the requirements are met - may elect to be registered

as a micro business:

(a) before the beginning of a year of assessment or such

later date during that year of assessment as SARS may

prescribe by notice in the Gazette;or

(b) in the case of a person that commenced business

activities during a year of assessment, within two months

from the date of commencement of business activities.

Micro business – Turnover tax

Registration:

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A person that elected to be registered must be registered

with effect from the beginning of that year of assessment.

A person that is deregistered (voluntary or compulsory)

may not again be registered as a micro business.

Micro business – Turnover tax

Interim Payments

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A registered micro business must, within six calendar

months from the first day of the year of assessment:

(a) estimate the taxable turnover for the year of

assessment;

(b) calculate the amount of tax payable on the estimated

taxable turnover; and

(c) pay an amount equal to 50 per cent of the amount of

tax so calculated.

Micro business – Turnover tax

Interim payments

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Where full payment of the amount is not received by SARS

within six calendar months from the first day of the year of

assessment,

interest at the prescribed rate is payable from the first day

after the six calendar months to the earlier of the date on

which the shortfall is received and the last day of the year

of assessment

Micro business – Turnover tax

Interim payments

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A registered micro business must, by the last day of the

year of assessment:

(a) estimate the taxable turnover for the year of

assessment;

(b) calculate the amount of tax payable on the estimated

taxable turnover; and

(c) pay an amount equal to the amount of tax so

calculated less the amount paid in first period.

Skills Development Levies (SDL) ,Unemployment Insurance

(UIF) can be paid biannually

Micro business – Turnover tax

Record keeping:

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a registered micro business must only retain a record of:

(a)amounts received during the year of assessment ;

(b) dividends declared during a year of assessment;

(c) each asset as at the end of a year of assessment with a

cost price of more than R10 000; and

(d) each liability of that registered micro business as at the

end of a year of assessment that exceeded R10 000.

Micro business – Turnover tax

Tax Table:

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See SAIPA 2019/20 Annual Tax Guide page 14

Personal Service Providers (PSP)

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Means any company or trust

Service is rendered on behalf of a company or a trust but is

rendered personally by any person who is connected to the

company or a trust , and

a) such person would be regarded as an employee (NB) of

such client if such service was rendered by such person directly

to such client, other than on behalf of such company or trust; or

Personal Service Providers (PSP)

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(b) where those duties must be performed mainly at the

premises of the client, such person or such company or trust is

subject to the control or supervision of such client as to the

manner in which the duties are performed or are to be

performed in rendering such service; or

(c) where more than 80 per cent of the income of such

company or trust during the year of assessment, from services

rendered, consists of or is likely to consist of amounts received

directly or indirectly from any one client of such company or

trust,

But ….see next slide

Personal Service Providers (PSP)

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But a PSP has an exit strategy – that is `get out of’ PSP

classification – why would an entity want to do this?

How to exit from PSP?

-) must throughout the year of assessment employs three or

more full-time employees who are on a full-time basis

-) must be engaged in the core functions as an employee -

must not be a holder of a share in the company or beneficiary

of the trust or

-) or must not be connected person in relation shareholder

(spouse of a shareholder)

Personal Service Providers (PSP)

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Why would an entity want to be excluded from the definition

of a PSP?

A PSP is allowed to deduct the following expenses in terms of

s23(k) of the ITA. S 23(k) deductible expenses of PSP are –

Amount paid / payable to an employee of the PSP

Legal expenses (s 11(c))

Bad debts (s 11(i))

Contributions to pension fund, provident fund & medical aid

schemes (s 11(l))

Refunds of salary, etc (s 11(nA))

Personal Service Providers (PSP)

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Refunds of restraint of trade payments (s 11(nB))

Plus expenses in respect of premises, finance charges,

insurance, repairs and, fuel and maintenance.

The above expenses may only be claimed if the assets were

used wholly and exclusively for the purpose of trade.

NB! More importantly, a PSP cannot claim capital allowances.