It is important for smalls businesses to know if they qualify for preferential small business tax rates. This can have a huge impact on tax payable, as illustrated below:
Terry’s Tailors earns an annual taxable income of R385 000. As a company or CC they would be taxed at a flat rate of 28% resulting in tax payable of R107 800 (R385 000 X 28%). As a small business corporation they would taxed according to the SBC tax rate table, resulting in tax payable of R24 800. That’s a difference of R83 000!!!
Small business corporation tax is calculated as follows:
20 601 +21% of taxable income above 365 000
R385 000 – R365 001 = R19 999
R19 999 X 21% = R 4 199
R20 601 + R4 199 = R24 800
Applicable tax rates for small business corporations:
| SBC tax rates for financial years ending on any date between 1 April 2014 and 31 March 2015: | |
| 0 – 70 700 | 0% of taxable income |
| 70 701 – 365 000 | 7% of taxable income above 70 700 |
| 365 001 – 550 000 | 20 601 +21% of taxable income above 365 000 |
| 550 001 and above | 59 451 +28% of the amount above 550 000 |
In order to qualify as a small business corporation the following requirements need to be met:
- All the shares in the business are held by natural persons.
- None of the shareholders or members hold shares in any other company (excluding listed shares, unit trusts and shares in certain tax exempt entities) or member’s interest in any other closed corporation.
- The gross income does not exceed R20 million for the year of assessment.
- Not more than 20% of the sum of gross income and capital gains consists of investment income and income form the provision of personal services.
- If engaged in the provision of personal services, maintains at least three full –time employees (none of whom may be a shareholder or a connected person in relation to the shareholder) for core operations in a full financial year.