Almost 13 years after it was adopted, Small Business Corporation (SBC) tax could be set for a radical overhaul and its graduated structure replaced by a rebate, if proposals by a tax review committee are adopted by Parliament.
The new proposals – which also include amendments to the turnover tax on micro businesses – follow the completion of a draft on its report on small and medium enterprises in January 2014 by a committee headed by Judge Dennis Davis.
The report, which was presented to the Minister of Finance Pravin Gordhan, has yet to be released to the public.
Currently businesses with an annual turnover of up to R20 million assessed as SBCs can qualify for tax cuts under the regime which provides for a graduated tax structure.
This allows, for example, a company with a taxable income of R600 000 to pay tax of just R73 701, rather than the R168 000 it would be liable for under the 28% company tax.
Only those enterprises assessed as SBCs can qualify. For example to qualify for the tax, business owners can’t have shares in more than one business, can’t derive more than 20% of their revenue from investments and the rendering of personal service and can’t be a personal service provider unless they employ three or more people.
This has likely resulted in many small businesses being excluded. South African Revenue Service (Sars) figures show that in the 2012 tax year just 86 354 enterprises were taxed as SBCs.
In its draft report the committee concluded that the government’s lower tax rates in SBC tax are not effective, do little to support the objective of small business growth and do not address tax compliance costs.
The committee has recommended replacing the reduced tax rate regime with an annual refundable tax compliance rebate, subject to certain conditions. The details have not been released, but it is likely to be similar to the primary, secondary and tertiary rebates offered to individual taxpayers.
Public consultations must still be held on the proposal.
The review committee has also proposed amendments to turnover tax on micro businesses.
Under the regime businesses with an annual turnover of up to R1 million are taxed on their sales, rather than on their profit.
But despite the generous reduced tax rate just a mere 8 493 micro firms were registered for the tax in the 2012 year.
To address this the committee has proposed the scrapping of one of the requirements to qualify for the tax – namely that of having to stay in the system for at least three years once signed up for the tax. It has also proposed a move to requiring annual, rather than biannual, tax returns.
The committee also proposes that turnover up to R335 000 should not be taxed (currently only those with sales of below R150 000 are not taxed under this regime) and the maximum tax rate should be reduced from the current 6% (which kicks in for those enterprises with an annual turnover of R750 000 to R1 million) to 5%.
Despite these proposals nothing was said of another serious drawback of the tax form: that businesses pay tax regardless of whether they make a profit or not, whereas under ordinary income tax they would at least be guaranteed a zero tax rate in the event of a loss.
The two key proposals will be backed by a plan to again tweak the venture capital tax incentive which as of August last year had benefited just one small firm, since its launch in 2008 – despite amendments in 2011. The incentive aims to boost venture capital investments in small businesses by allowing individuals to make upfront tax deductions if they invest in venture capital companies, which in turn invest in certain kinds of small enterprises.
This, and Sars plan to this year allow businesses to register for all taxes on one single form may go some way to improving small businesses current experience with paying taxes which still reaps many a complaint from business owners.
A quarter of the 500 business owners surveyed by small business researchers SBP in a report in February, cited inefficiencies at Sars as their biggest concern when dealing with red tape.
The question on many business owners’ minds is will these proposals, if given the green light, help them get the break they so badly need.
- Go to www.sars.gov.za for more information on tax regimes.