|Does your business qualify for SME tax concessions?|
Whether a business is classified as a small business, or not, is a highly relevant issue from a South African tax perspective, because special taxation concessions are available specifically for small businesses, however no single definition of “small business” is contained in any of the tax statutes administered by SARS. In fact, some of the various tax statues dealing with these concessions do not refer to the term “small business” at all. It is therefore imperative that the term “SME” or “SMME” (Small, Medium and Micro-Enterprise) be clearly defined in South Africa from a tax perspective.
The only statute in South Africa that deals specifically with the classification of small businesses is the National Small Enterprise Act, No. 102 of 1996. This Act classifies businesses into micro, very small, small or medium enterprises, using a complex set of thresholds. These thresholds are summarised in Table 1 below.
Table 1: Summary of classification thresholds for small enterprisesSource: Adapted from South Africa(1996:17)
Three criteria are thus prescribed in the National Small Enterprise Act to be classified as an SMME; namely the business’s number of employees, annual turnover, and gross asset value. These categories are further defined per industry in which a business operates. Taking into consideration all these thresholds, it is clear that the terms small business, SME and SMME can have various meanings, depending on the classification criteria used, and the industry in which a business operates.
Despite this complexity, the National Small Enterprise Act is a helpful starting point. But unfortunately, determining whether a business qualifies for the small business tax concessions still requires a review of each tax statute (eg. Income Tax, Capital Gains Tax, Provisional Tax, Value-Added Tax, Skills Development Levy etc.), and the corresponding criteria to qualify as a small business. For instance, one of the small business tax concessions – the small business corporation regime – is available to a “qualifying” small business for income tax purposes, but this doesn’t automatically mean that this business will be eligible for the other small business VAT concessions. Thus each tax concession needs to be reviewed in isolation before being able to determine whether a business qualifies for that tax’s concession.
The concept of a “medium” sized company is even more difficult to define as the taxation statutes are silent on this matter. Interestingly, National Treasury has introduced tax concessions that specifically relate to small businesses, but there are no tax concessions specifically applicable to medium businesses only. Certain medium businesses may, however, qualify for certain of the small business concessions.
“Micro” businesses are, however, catered for in the Income Tax Act as SARS has introduced a specific tax regime – the Turnover Tax regime – to assist these particular businesses.