TAXATION OF COMPANIES 1

1TAXATION OF COMPANIES

TAXATION OF COMPANIES

Prepared by: Mahomed Kamdar & Rashied Small

Content

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• Companies

• Small Business Corporations (SBCs)

• Micro business – Turnover Tax

• Personal Service providers

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TAXATION OF COMPANIES

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"

TAXATION OF COMPANIES

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

TAXATION OF COMPANIES

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

TAXATION OF COMPANIES

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

TAXATION OF COMPANIES

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

TAXATION OF COMPANIES

Small Business Corporations (SBCs)

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The taxpayer must meet all the following requirements in order to qualifyfor 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 assessmentmust not exceed R20 million,

What happens to the R20m threshold if the financial year is less than 12-month?

TAXATION OF COMPANIES

Small Business Corporations (SBCs)

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There will be an apportionment of the R20m threshold based on thenumber 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 thethreshold amount although the number of months in a financial year hasincreased.

TAXATION OF COMPANIES

Small Business Corporations (SBCs)

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4) None of the shareholders or members of the SBC at any time during theyear of assessment holds any shares or has any interest in the equity ofany other company other than certain `permitted’ shareholdings (forexample shares in a listed company)

5) Investment income and income from a `personal service’ do not exceed20% X (revenue receipts & accruals plus capital gains), and

6) The company must not be a PSP as defined in the Fourth Schedule ofthe ITA.

TAXATION OF COMPANIES

Small Business Corporations (SBCs)

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However, if the company hires three or more persons in the core functionof the business, that are not `connected’ to a shareholder, or member of aCC, and

Hires the employees for the full duration of a tax year, then the PSP couldescape this hurdle

TAXATION OF COMPANIES

Small Business Corporations (SBCs)

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Please Note the following:The taxpayer must undertake this `test’ annually, at the end of eachfinancial 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, butagain in year 3. Hence this test must be conducted annually – at the end ofeach tax year!

TAXATION OF COMPANIES

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 - thetax 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 purposesii) If the plant or machine is not used in the process ofmanufacture

TAXATION OF COMPANIES

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

TAXATION OF COMPANIES

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).

TAXATION OF COMPANIES

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 aboveallowance will continue because the entity was a SBC when the plant wasfirst brought into use.

So what happens if the entity was not a SBC when the plant was firstbrought into use?

The capital allowance will be 40% (year 1) and 20% (in succeeding threeyears) – if the plant was brand new.

TAXATION OF COMPANIES

Small Business Corporations (SBCs)

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If the plant was second-hand when it was first brought into use, then theallowance will be 20% per year for five years. Always view the status of theentity when the plant or machine was first brought into use. If the entity wasnot a SBC, then these allowances rate will continue in the later tax-years eventhough the entity will be a SBC in one or more of the later years.

TAXATION OF COMPANIES

Small Business Corporations (SBCs)

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In order to claim an allowance (50% /30%/ 20%), the qualifying entitymust be an SBC in both the year of assessment in which the asset isacquired and the year of assessment when it is first brought into use.

Date acquired vs Date brought into use: The election between the twoalternative methods for calculating the amount of the deduction is madewhen the asset is first brought into use. For example, if a qualifying entityqualifies as an SBC in year one when the asset was acquired but does notqualify in year two when the asset is first brought into use, then the 50%/30%/ 20%), allowance is not available to it.

TAXATION OF COMPANIES

Small Business Corporations (SBCs)

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Taxpayer can elect between the three-year (as per in item 3 above) or thewear and tear allowance section 11 ( e) of the Income Tax Act

An SBC may elect to calculate the amount of the deduction allowable overthree years (50% /30%/ 20%), or according to the provisions of section11(e) - the wear and tear allowance. If the wear and tear allowanceprovide a more favourable allowance than the three-year spread, then thetaxpayer may elect the s11(e) wear and tear.

TAXATION OF COMPANIES

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 isacquired at a cost of less than R7 000 may be written off in full undersection 11(e) in the year of assessment in which it is acquired and broughtinto use.

A SBC is required to deduct the allowance over a three-year spread (thatis, 50% /30%/ 20% ) but may elect to write-in off in year 1 using the wearand tear provisions under the section 11 (e). The election must be madeon asset-by-asset basis.

TAXATION OF COMPANIES

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

TAXATION OF COMPANIES

Micro business – Turnover tax

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Elective

Incorporated and unincorporated enterprises (soleproprietors / partnerships)

◦ Certain limitationsAnnual qualifying turnover up to R1million p.a.

Implementation: Years of assessment commencing on orafter 1 March 2009

TAXATION OF COMPANIES

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 accruedto 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 naturalpersons are not exempt from normal tax but do not qualify for theturnover tax regime

TAXATION OF COMPANIES

Micro business – Turnover tax

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a shareholder in a registered micro business is only partially exemptfrom dividends tax – total dividend paid does not exceed R200 000

TAXATION OF COMPANIES

Micro business – Turnover tax

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Exclusion from CGT when assets sold by a registered micro businessAssets 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.

TAXATION OF COMPANIES

Micro business – Turnover tax

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If Year of assessment less than a period of 12 monthsthen qualifying taxable turnover to be apportioned - R1m divided bythe number of months

NB:1) qualifying receipts and not accruals2) a business cannot be split into smaller businesses in order to

ensure that each business is within the R1m qualifying turnoverlimit.

TAXATION OF COMPANIES

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

TAXATION OF COMPANIES

Micro business – Turnover tax

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- Including: 50% of proceeds on sale of a capital asset: please becareful – 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 incomeGovernment subsidies); and

TAXATION OF COMPANIES

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 inqualifying turnover.

TAXATION OF COMPANIES

Micro business – Turnover tax

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Amounts refunded to customers by a micro business – that is when itsell goods or render services – receipt – included in taxable turnover.

However, when later refunded as a result of a faulty good or poorservices, then such refunds to customers can be deducted in thecalculation of taxable turnover.

TAXATION OF COMPANIES

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 cantherefore not elect to pay turnover

TAXATION OF COMPANIES

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 ashare 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;

TAXATION OF COMPANIES

Micro business – Turnover tax

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(e) that constitutes less than 5 per cent of the interest in a social orconsumer co-operative or a co-operative burial society

(f) in any friendly society

TAXATION OF COMPANIES

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 thatyear of assessment consists of:(i) where that person is a natural person income from the renderingof a professional service; and(ii) where that person is a company, investment income and incomefrom the rendering of a professional service;(c) at any time during that year of assessment that person isa personal service provider or a labour broker,;

TAXATION OF COMPANIES

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 disposalof:(i) immovable property used mainly for business purposes; and(ii) any other asset of a capital nature used mainly for businesspurposes, other than any financial instrument,exceeds R1,5 million over a period of three years comprising thecurrent year of assessment and the immediately preceding two yearsof assessment, or such shorter period during which that person wasa registered micro business;

TAXATION OF COMPANIES

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

TAXATION OF COMPANIES

Micro business – Turnover tax Person that do qualify

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Provided that the provisions of this item do not apply to the holdingof any shares in or interest in the equity of a company, if thecompany:(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

TAXATION OF COMPANIES

Micro business – Turnover taxPerson that do qualify

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in the case of a person that is a partner in a partnership during thatyear 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 timeduring that year of assessment; or(iii) the qualifying turnover of that partnership for that year ofassessment exceeds R1m.

TAXATION OF COMPANIES

Micro business – Turnover taxRegistration

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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.

TAXATION OF COMPANIES

Micro business – Turnover taxRegistration:

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A person that elected to be registered must be registered with effectfrom the beginning of that year of assessment.

A person that is deregistered (voluntary or compulsory) may notagain be registered as a micro business.

TAXATION OF COMPANIES

Micro business – Turnover taxInterim 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.

TAXATION OF COMPANIES

Micro business – Turnover taxInterim 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 thesix calendar months to the earlier of the date on which the shortfallis received and the last day of the year of assessment

TAXATION OF COMPANIES

Micro business – Turnover taxInterim payments

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A registered micro business must, by the last day of the year ofassessment:(a) estimate the taxable turnover for the year of assessment;(b) calculate the amount of tax payable on the estimated taxableturnover; and(c) pay an amount equal to the amount of tax so calculated less theamount paid in first period.

Skills Development Levies (SDL) ,Unemployment Insurance (UIF) canbe paid biannually

TAXATION OF COMPANIES

Micro business – Turnover taxRecord 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 priceof more than R10 000; and(d) each liability of that registered micro business as at the end of ayear of assessment that exceeded R10 000.

TAXATION OF COMPANIES

Micro business – Turnover taxTax Table:

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See SAIPA 2019/20 Annual Tax Guide page 14

TAXATION OF COMPANIES

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

TAXATION OF COMPANIES

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

TAXATION OF COMPANIES

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)

TAXATION OF COMPANIES

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))

TAXATION OF COMPANIES

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, repairsand, fuel and maintenance.

The above expenses may only be claimed if the assets were used whollyand exclusively for the purpose of trade.

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

TAXATION OF COMPANIES