Tax Guide for Small Businesses

SARS published an updated guide in 2022. It contains information about tax laws and some other statutory obligations applying to small businesses. It describes some of the forms of business entities in South Africa, namely sole proprietorships, partnerships, CCs, and private companies.

This article discusses a handful of tax-related information only. The SARS guide is 105 pages in total.

PROHIBITED DEDUCTIONS

Specified deductions are prohibited by section 23. Some of the prohibited deductions are mentioned below:

(a) Domestic or private expenses [section 23(a) and (b)]

A taxpayer is prohibited from deducting any of the following expenses and payments:

  • The cost incurred in the maintenance of the taxpayer, the taxpayer’s family, or the establishment.
  • Domestic or private expenses, including rent, cost of repairs, or expenses in connection with any premises not occupied for purposes of trade or any dwelling-house or domestic premises, except on those parts as may be occupied for the purpose of trade.

(b) Bribes, fines or penalties [section 23(o)(i) and (ii)]

Payment of a bribe, fine, or penalty will not be allowed as a deduction for income tax purposes if:

  • the payment, agreement, or offer to make that payment constitutes an activity contemplated in Chapter 2 of the Prevention and Combating of Corrupt Activities Act 12 of 2004; or
  • the payment is a fine charged or penalty imposed as a result of carrying out an unlawful activity in South Africa or in another country if the activity would be unlawful had it been carried out in South Africa.

(c) Other prohibited deductions [section 23(d), (e) and (g)]

Other prohibited deductions include:

  • income carried to any reserve fund or capitalised in any way;
  • money not laid out or expended for purposes of trade; and
  • taxes imposed under the Act and interest or penalties imposed under other Acts administered by the Commissioner.

TAX RELIEF MEASURES FOR MICRO BUSINESSES (TURNOVER TAX) (SECTIONS 48 TO 48C AND THE SIXTH SCHEDULE)

A person will qualify as a micro business if that person is a:

  • natural person (or the deceased or insolvent estate of a natural person which was a registered micro business at the time of death or insolvency); or
  • company, and the “qualifying turnover”, as defined in paragraph 1 of the Sixth Schedule, of that person for the year of assessment does not exceed R1 million.

If that person carries on a business during a year of assessment for a period of fewer than 12 months, the qualifying turnover of R1 million is reduced proportionally by taking into account the number of full months that the person carried on business during that year.

Microbusinesses have a simplified tax system (turnover tax) and serve as an alternative to income tax, provisional tax, and CGT. A micro business may, however, be registered for VAT whilst registered under the tax regime for micro businesses.

TAX RELIEF MEASURES FOR SMALL BUSINESS CORPORATIONS (SECTION 12E)

The SBC tax legislation allows for two major concessions to companies (private companies, CCs, co-operatives, and personal liability companies) that comply with all of the following requirements:

  • All the holders of shares in the company or members of the CC, co-operative, or personal liability company must at all times during a year of assessment be natural persons.
  • No holders of shares or members should hold any shares or have any interest in the equity of any other company, other than companies as specified in the definition of “small business corporation” in section 12E(4).
  • The gross income of the entity for the year of assessment may not exceed R20 million.
  • Not more than 20% of the total of all receipts and accruals (other than those of a capital nature) and all the capital gains of the entity may consist collectively of “investment income” as defined in section 12E(4) and income from rendering a “personal service” as defined in section 12E(4).
  • The company may not be a “personal service provider” as defined in the Fourth Schedule.

The first concession is that the company will be taxed at a progressive rate.

The second concession is the immediate write-off of all plant or machinery brought into use for the first time by the company for purpose of its trade (other than mining or farming) and used by the company directly in a process of manufacture or similar process in the year of assessment. Furthermore, the company can elect under section 12E(1A) to claim depreciation on its depreciable assets (other than manufacturing assets) acquired on or after 1 April 2005 at either:

  • a wear and tear allowance as calculated in 3.2.16(a) [section 12E(1A)(a) read with section 11(e)]; or
  • an accelerated write-off allowance [section 12E(1A)(b)] at:
     50% of the cost of the asset in the year of assessment during which it was first brought into use;
     30% in the first succeeding year of assessment; and

TAX RELIEF MEASURES FOR QUALIFYING COMPANIES WITHIN A SPECIAL ECONOMIC ZONE (SECTIONS 12R AND 12S)

Various incentives applicable to SEZs were developed to attract investors to the SEZs. The tax incentives are provided by Government to ensure SEZs’ growth, revenue generation, creation of jobs, the attraction of foreign direct investment, and international competitiveness, which include income tax, VAT, and customs-related incentives.

Section 12S provides that a qualifying company may claim an accelerated allowance equal to 10% of the cost to the qualifying company of:

  • any new and unused building owned by the qualifying company, or
  • any new and unused improvement to any building owned by the qualifying company, if that building or improvement is wholly or mainly used by the qualifying company during the year of assessment for purposes of producing income within an SEZ, in the course of the taxpayer’s trade, other than the provision of residential accommodation.

If a qualifying company completes an improvement as contemplated in section 12N, the expenditure incurred by the qualifying company to complete the improvement must be deemed to be the cost to the qualifying company of any new and unused building or any new and unused improvement to a building.

The depreciable cost of the asset is the lesser of:

  • the actual cost to the taxpayer; or
  • the arm’s length cash price at the time of acquisition, erection, or improvement.

No deduction under section 12S will be allowed if the building has been disposed of by the qualifying company during any previous year of assessment. No deduction will be allowed under another section in respect of the cost of a building or improvement if any of that cost has qualified or will qualify for a deduction under section 12S.

If a company falls within the definition of “qualifying company” in section 12R(1), such a company will be able to apply the reduced corporate tax rate of 15%, provided all the requirements under the Act are met.

A company operating through a fixed place of business within a designated SEZ will also be entitled to claim ETI for qualifying employees (irrespective of their age) rendering services to that company mainly within that SEZ provided that all of the requirements under the ETI Act are met.

For more information on the tax incentives available to companies carrying on business within an SEZ see the Brochure on the Simplified Overview of Special Economic Zones Tax and Customs Incentives available on the Department of Trade, Industry and Competition’s website www.thedtic.gov.za.

Deduction of home office expenditure [section 11(a) read with section 23(b)] Subject to specified requirements and limitations, home office expenses (expenses which relate to that part of a dwelling-house or domestic premises used for purposes of trade) will be allowed as a deduction in determining taxable income.

DEDUCTIONS IN RESPECT OF EXPENDITURE AND LOSSES INCURRED BEFORE COMMENCEMENT OF TRADE (SECTION 11A)

Pre-trade expenditure and losses qualify as a deduction against the income from the trade to which they relate subject to the following requirements contained in section 11A(1):

  • First, the trade, in respect of which the pre-trade expenditure or loss was incurred, must have been commenced by the taxpayer.
  • Secondly, the pre-trade expenditure or loss must have been actually incurred before the commencement of and in preparation for carrying on that trade.
  • Thirdly, had the pre-trade expenditure or loss been incurred after the commencement of the trade to which it relates, it would have been allowed as a deduction under section 11 [other than section 11(x)], 11D, or 24J.
  • Fourthly, the pre-trade expenditure or loss must not have been allowed as a deduction in that year or any previous year of assessment.

Once these requirements have been met, the pre-trade expense will be allowed as a deduction under section 11A(1) in the year of assessment in which the trade to which it relates commences, subject to the ring-fencing requirements of section 11A(2).

As indicated above, for any pre-trade expenditure and losses to qualify as a deduction under section 11A(1), they must pass a “post-trade” test under one of a number of specified sections, namely:

  • section 11 (general deduction), excluding section 11(x);
  • section 11D (deduction for R&D); or
  • section 24J (incurred and accrual of interest).

RING-FENCING OF ASSESSED LOSSES OF CERTAIN TRADES (SECTION 20A)

The term “trade” is widely defined in section 1(1). Whether a specific activity amounts to the carrying on of a trade, is a question of law that depends on the facts and circumstances of the specific case. In considering whether or not an activity constitutes a trade, the intention of the person to carry on a trade profitably is of decisive importance, this being a subjective test.

While objective factors are not relevant to determine whether a trade is being carried on, they remain relevant in the objective testing of the taxpayer’s stated intention. The intention of the person will therefore be weighed against the probabilities and inferences which can be drawn from the facts of a matter.

Ring-fencing under section 20A is a measure under which the expenditure incurred in conducting a trade is limited to the income from that trade if specified criteria are met. Any excess expenditure (assessed loss from a trade) is carried forward and set off only against any income derived from that trade in a subsequent year of assessment.

A second article will deal with allowable deductions for the purpose of lowering tax obligations.

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