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How to manage your tax liability without going to jail

29 May 2014   (0 Comments)
Posted by: Author: Erich Bell
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Author: Erich Bell (SAIT Technical)

No one is keen on paying taxes.  This is even more so when you disagree with the spending thereof by government, or if your business has cash flow problems.  As a result, various persons liable to pay taxes just don’t declare their income and consequently evade taxes.  This however constitutes a criminal offence.  

South Africa’s population remains uninformed about how to manage the tax liability.  It is evident that evaders would normally choose not to determine if they may qualify to ‘avoid’ tax the legal way.  If you are one of them or if you own a small business and would simply like to pay less tax, then this article may be for you. 

The Small Business Corporation tax regime 

A company, close corporation or co-operative qualifying as a ‘small business corporation’ (‘SBC’) can legally pay much less tax than a business that is not a SBC.  At the end of the day, the goal of a business is to ensure that there is money in the bank and that it is maintaining a healthy net profit after tax.

In a recent study* it was found that 32% of small businesses in South Africa do not make use of the small business tax concessions they are eligible for.  The main reason is that the legislation is too complex to understand.

Lucky for you, there are numerous SAIT tax professionals in South Africa that do understand the legislation and that would most definitely be able to assist you in ensuring that you make use of these concessions.  This article will only investigate the possible tax savings for companies qualifying for and electing to use the SBC regime.

Allowances on manufacturing machinery and plant

Capital allowances on assets are available to taxpayers as a deduction from the taxpayer’s income to arrive at the amount which should be subject to tax.  The available allowance on plant and machinery available is:

  • 40% of the cost of the asset in the year when it is first brought into use.  For subsequent years the allowance is calculated at 20%. 
  • Second-hand plant and machinery used for manufacturing purposes is claimable at 20% over a 5 year period. 

However, lawmakers love small businesses!  If your business qualifies as a SBC, it would be entitled to deduct the full cost (note this is not a spelling error) of manufacturing plant and machinery owned by it in the tax year in which it is brought into use.   

A simple calculation to show you the tax effect is provided below.


Assume you have a private company earning income of R 1 000 000 a year which manufactures gloves.  It bought a new machine of R 500 000 to manufacture the gloves.  

Under the normal income tax allowance section above the company would pay tax on R 800 000 [R 1 000 000 – (R 500 000 x 40%)]. 

If the company constitutes a SBC it will pay tax on R 500 000 [R 1000 000 – R 500 000].  

Assuming both companies pay tax at 28 per cent, the tax saving would amount to R84 000 - without taking into account the lower tax rates available to SBCs.  Now that it money in the bank!

Allowances on non-manufacturing assets

For non-manufacturing assets the capital allowance is calculated on the value of the asset.  The number of years that you can claim the capital allowance is determined by the remaining useful life of the asset.  As indicated by SARS the periods over which the value of the assets must be written off varies between 1 and 25 years.  

SBCs have two options to choose from for non-manufacturing assets.  They can either elect an allowance that may be claimed over three years (50 per cent in the first year, 30 per cent in the second year and 20 per cent in the third year) or the normal allowance determined by the remaining useful life of the asset.

Therefore, should the normal allowance available allow for the asset to be written off in one year, the SBC may choose that option rather than choosing the three year write-off period as per the SBC allowance available in this regard.

Small independent items

The exception to the rule for non-manufacturing assets is when you buy small independent items (they do not form part of a set) with a cost price of less than R 7 000. These items may be written off in full in the year in which they are brought into use.  This deduction is available for both the SBC and normal companies. 

Tax rates applicable to SBCs 

In addition to the beneficial allowances available to SBCs, they are also taxed in accordance with the tax tables below and not the flat rate of 28% that is currently applicable to companies.  If the SBC’s financial year end is between 1 April 2014 and 31 March 2015, the company will only start paying tax when their income subject to tax exceeds R 70 700. 

That is right!  The SBC has an automatic tax saving of R19 796 (28% x 70 700).  SBCs will only start paying tax at 28% when their income subject to tax exceeds R550 000. Please see the tax table below for the tax rates applicable to SBCs:

Taxable income (R)​

Rates of Tax (R)​

0 - 70 700

0% of taxable income​

70 701 - 365 000​

7% of taxable income above 70 700

365 001 - 550 000​

20 601 + 21% of taxable income above 365 000​

550 001 and above​

59 451 + 28% of the amount above 550 000​

Savings from the SBC regime

By taking our example above about the company manufacturing gloves and taking into account the tax rates relevant to non-SBC companies and SBC companies, the tax payable would be equal to the following:

Type of company



Tax payable

800 000 x 28% = 224 000

20 601 + [21% x (500 000 – 365 000)] = 48 951


From the above it becomes apparent that the SBC company saved a total of R 175 049 (R224 000 – 48 951) in taxes just by having a smart owner/shareholder who engaged a tax professional to assist it in electing the SBC rules. 

Therefore, if you do not like money or if you like to pay more taxes than your fair share, then it is strongly advised that you consult a SAIT registered tax practitioner to make sure that this regime is not applied to you. 


* conducted by Sharon Smulders, Madeleine Stiglingh, Riel Franzsen and Lizelle Fletcher


Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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