Tax benefits of a Small Company.

Connie Bruwer, from PC Bruwer and Partners, gives advice on this important topic.

Question:  We recently discussed the tax benefits of a Small Company. It has provoked considerable reaction from readers, and therefore in this blog we are giving more attention to this matter.

Connie:  Firstly, I want to clarify that a Small Company is not a separate legal entity such as a company or close corporation (CC).

The idea of a Small Company was created in section 12 of the Income Tax Act, which only determines how the enterprise may be taxed in certain circumstances.

The concept is simply that where a company or CC is normally taxed at 27%, your company, if it qualifies as Small Company, will be taxed at a rate ranging from 0% (under R95750 taxable income) to 7% (to R365 000 taxable income), then 21% to R550 000 from R550 001 to 27%.

Money taken from the company by way of dividends, is in all cases subject to a dividend tax at 20%.

Question:  How can a business qualify as a Small Company?

Connie:  It is also clear that your company needs to be registered as a company or CC if you want to qualify as a Small Company.

A sole proprietorship and partnership cannot qualify as a Small Company. In a sole proprietorship or partnership, you are taxed as an individual, which in any case gives you the benefit of lower tax rates, at least as far as your marginal  threshold exceeds the tax rate of 27% for the company or CC.

Thereafter, you can of course be charged up to 45% and it is then time that you obtain expert advice. The taxman needs to be paid his due, but to feed him until he is fat, is quite another.

Question:  Where is the problem then?

Connie:  The problem lies that those who render personal services are considered by the South African Revenue Service (SARS) as a personal services company.

Such an undertaking, either as a company or CC and not meeting all the other requirements, will not see the benefits of a Small Company.

A personal-services company, according to the tax man, is any company (or CC) where you provide personal services to another company and you are treated as an employee, in other words where the services are mainly provided on the premises of the client and you work under supervision and you receive more than 80% of your income from this one source.

If your company falls within this guideline, you will only have disadvantages from a tax standpoint.

Question:  Why is it so, Connie?

Connie:  Firstly, you are taxed at 27%, which is much higher than you would have been taxed for a company or CC. Your tax deductions are also very limited and will not be much more than that of any salary earner.

If you run your enterprise through a trust, something I personally feel is not a good thing,  and the SAID tax you as a personal services trust (same as above, but only considered in a trust), then the disadvantages are even worse.

You are then not taxed at the 27% of personal-services companies, but at the fixed 45% against trusts.

Question:  When should you rather stay away from a trust?

Connie:  If you think there is a risk that SAID will judge you as a personal-services company, you should rather stay away from a trust.

To be excluded from the definition of personal services company or -trust you can, in addition to the features that I have highlighted, convince SAID that during the year of assessment you also have employed at least three full-time employees, that are not related to you.