The sun sets on the Small Business Corporation tax regime
06 August 2014
Posted by: Author: Lesedi Seforo
Author: Lesedi Seforo (SAIT Technical)
In our previous newsletters we have spoken at length about the Small Business Corporation (SBC) tax regime, which is available for businesses with a turnover below R20 million. In our analyses, we showed the significant tax savings enjoyed by businesses which meet the requirements of this regime. These savings are due to the fact that lower tax rates are available to the SBC, coupled with accelerated write-off clauses for machinery.
No more preferential tax rates for Small Business Corporations
In the latest draft Taxation Laws Amendment Bill (TLAB), however, Treasury has proposed that the lower tax rates be made a thing of the past and that SBCs ought to be subject to the same 28% income tax rate that bigger companies are subject to. The rationale for this?
The Davis Tax Committee (DTC)
You may be aware of the ever-present dialogue within the country concerning the importance of small businesses in our nation’s quest to fully optimise economic growth and development. This, combined with several other factors, led to the formation of the Davis Tax Committee (DTC) for the purpose of investigating how the tax laws could be improved, and how tax policy can be used to provide a helping hand to SMMEs.
The DTC released its Small and Medium Enterprises: Taxation Considerations, Interim Report during July 2014, presenting both its findings and recommendations to the public. One of its recommendations was incorporated by Treasury into the draft TLAB.
Have the low tax rates applicable to SBCs worked?
Treasury found that:
"The Tax Review Committee concluded that the lower tax rates for small business corporations are not effective, do little to support the objective of small business growth and do not address tax compliance costs. The current regime provides tax relief to only 50 000 businesses…
In addition businesses in a tax loss position don’t benefit from the current SBC regime, despite having the same tax compliance burden as profit making enterprises.”
In response to these findings, Treasury has proposed that from tax years starting on or after 1 January 2016, SBCs will pay income tax at the 28% rate. All hope is not lost though.
The refundable tax compliance rebate
The DTC also found that SMMEs spend considerable amounts in tax compliance costs. Bearing that in mind, it has been proposed that some tax relief be provided to assist SMMEs in bearing this compliance burden.
The assistance will be in the form of an annual refundable tax compliance rebate (RCR) amounting to R15 000. In essence, it is like government giving SBCs R15 000 to help pay whoever does their taxes. The caveat is that the SBC must be compliant in terms of its tax returns and liabilities. If the SBC’s tax liability for the year exceeds R15 000, then the rebate will be used to reduce that tax liability.
Where a SBC has a tax loss for the particular year, there will be no tax liability for the year. However, SARS will pay the rebate into the SBC’s account; much in the same way that VAT vendors receive VAT refunds from SARS where their input VAT is greater than output VAT.
Will you better or worse off under the RCR regime as opposed to the SBC regime?
SBCs making losses will have a zero tax liability for the particular year. They receive the R15 000 rebate as cash, assuming they are fully tax compliant. Under the SBC tax regime, they would only have had a zero tax liability. Loss-making SBCs are thus better off under the new rebate system. Other winners include those SBCs whose taxable income will result in a tax liability below R15 000, because they will receive refunds from SARS. R53 571 is the level of taxable income that will result in an income tax liability of R15 000.
A taxable income of R50 000, for instance, subject to a tax rate of 28% will result in a tax liability of R14 000. That amount will be set off against the R15 000 rebate and R1 000 will be refunded to the SBC. Under the SBC regime, such small business corporations would only benefit by paying zero tax. There would be no refund.
Other than the above-mentioned groups, all other SBCs will pay more tax under the RCR regime.
A SAIT registered tax practitioner should be consulted for more information concerning the proposed refundable tax compliance rebate.