How the Income Tax Act can help the Entrepreneur
30 April 2014
Posted by: Author: Grant Robson
Author: Grant Robson (Entrepreneur Magazine)
Section 12E of the Income
Tax Act was created specifically to encourage new business ventures and to
create jobs and this encouragement comes in the form of reduced taxation for
qualifying small businesses.
It is critical for the
entrepreneur and small business owner to understand how to structure his/her
business in order to qualify for this reduced
is an SBC?
services entities who maintain at least three full time employees for core
operations would qualify as an SBC. It is important to note what is defined as
a ‘personal service’.
first category includes professional or semi-professional activities that
require a particular qualification and in many cases a license, certificate or
membership of a professional body in order to practise. Examples here would
include accounting, architecture, education, engineering, law, health and real
second category comprises broadcasting, commercial arts, entertainment and
criteria for SBC
a Small Business Corporation (SBC) is defined in the Act as a close
corporation, co-operative or private company, where the gross income does not
exceed R20 million per annum and which complies with all of the following
the shareholder/members must, at all times during the year of assessment, be
natural persons (i.e. individuals and not other companies)
may not hold any shares/member’s interest in the equity of any other
Company/Close Corporation. A share/interest in a listed company, collective
investment scheme, friendly society and less than five percent holdings in
certain other corporations would be exempted from this clause.
more than 20% of the gross income and capital gains consists of investment
income and income from the provision of professional/personal services.
Investment Income would include interest, rental income, royalties, dividends
and trading in fixed property and marketable securities.
is the benefit?
rates of tax levied on an SBC for years ending between 1 April 2013 and 31
March 2014 are as follows:
we assume that your business makes taxable income of R600 000 for the 2014 tax
year the following tax would apply:
results in a tax saving of R232 800 less R84 757 = R148 043. This is a massive
saving for a new business that would typically be battling with cash flow
and above these normal income tax savings, SBCs also qualify for accelerated
wear and tear allowances as well as Capital Gains Tax relief.
is strongly advised that small business owners and entrepreneurs consult a tax
professional, experienced accountant, lawyer or Chartered Accountant that is
familiar with the Income Tax Act to help advise them on company structure in
order to take advantage of the tax benefits that are available to them.
may not be as daunting as it sounds as there are companies on the market that
offer this kind of service on a part time or project basis.