‘Small Business’ Definition Changed
22 December 2009
Posted by: Author: Ansu Burger
‘Small Business’ Definition Changed
Now more businesses can get relief from SARS
In terms of the new Taxation Laws Amendment Act, 17 of 2009, companies will see some relaxation in the qualifying criteria in order to be classified as either a Small Business Corporation or a Micro Business.
Relief is granted to qualifying companies (and individuals), which fulfil all the necessary requirements in accordance with the Income Tax Act, 58 of 1962, and a special income tax dispensation also exists for companies that qualify as a small business corporation.
Currently, a small business corporation is defined in section12E(4) of the Income Tax Act 58 of1962 as a close corporation (CC), co-operative or a private company, where the gross income does not exceed R14 million and which complies with all of the following requirements:
•All the shareholders/members must, at all times during the year of assessment, be natural persons (individuals); and
•Shareholders / members may not hold any shares/member's interest in the equity (which means in relation to a company, its issued share capital and in relation to a CC, its member's interest) of any other company/CC.However a share or interest in the following entities are excluded from this requirement:
•a participatory interest in a collective investment scheme;
•a company contemplated in Section 10(1)(e) of the Act (body corporate);
•less than 5% of the interest in non-business co-operatives such as consumer buy-aids, social co-operatives (such as child nursery facilities) or burial societies;
•friendly societies; and
•less than 5% of the interest in a primary savings co-operative bank or a primary savings and loans co-operative bank as defined in the Co-operatives Bank Act, 2007.
In terms of Part II of the Sixth Schedule to the Act, the qualifying criteria for a micro business are set out as follows:
•a natural person (or the deceased or insolvent estate of a natural person that was a registered micro business at the time of death or insolvency); or
•a company, where the qualifying turnover of that person for the year of assessment does not exceed an amount of R1 million.
In addition, a person is disqualified as a micro business, where that person, at any time during that year of assessment, holds any shares or has any interest in the equity of another company. Similar exclusions for interest in certain companies exist for a micro business as mentioned above for small business corporations.
It is apparent, that in terms of the above a company or CC may not hold shares in another company, including any interest in a dormant or shelf company. Accordingly, this anti-multiple shareholding exclusion is aimed at preventing large businesses, which fall outside the scope of the qualifying criteria, from splitting their operations into multiple smaller companies in order to qualify for the special tax dispensation.
The reason for the changes that the Act introduces is that in theory, a shelf company should be able to take part in start-up operations, whilst still satisfying the prescribed requirements and qualifying for the relief contained in the Act. However, as the legislation presently reads, if a company holds any interest in a shelf company, it will result in the company not satisfying the qualifying requirements for a small business corporation or a micro business and as a result, such a company will not be able to utilize the relief available to such qualifying entities.
Accordingly, when a new owner currently purchases a shelf company, the selling owner of the shelf company would typically have shareholdings in other shelf companies (especially sellers that keep multiple dormant shelf companies on hand). This multiple shareholding by the seller will result in the newly transferred shelf company not satisfying the qualifying criteria for a small business corporation or micro business, for the year of assessment during which ownership of the shelf company is transferred.
In addition, this one-year prohibition will have the effect that a micro business shelf company will have to satisfy the normal compliance requirements that is placed on companies i.e. submit a normal income tax return for one year, before being able to utilize the turnover tax dispensation.
The new provision as contained in the Act is that the micro business and the small business corporation definitions be amended so that the anti-multiple shareholding prohibition does not apply during the initial dormant period (that is,the year in which ownership is transferred) of a company's existence. In other words, a company will still qualify for the relief contained in the Act, if it holds an interest in any dormant company, provided that the company does not trade or hold assets exceeding a value of R5 000.
The above amendments are deemed to come into operation as from the commencement of years of assessment ending on or after 1 January 2010.
Source: By Ansu Burger (Taxbreaks)