Many small business owners are unaware that they may qualify for a more favorable tax rate with the application of small business corporation tax. This mistake could be costing you a bundle in overpaid tax!
Instead of paying the usual 28% from the first rand earned, qualifying taxpayers are taxed according to a sliding scale with the first R87 300 profit carrying 0% tax. However, this will depend on whether you a qualify per S12E of the Income Tax Act.
To qualify for the SBC rates, the following requirements need to be met:
- The taxpayer must be a juristic person and may not be a ‘personal service provider’, as defined;
- The members or shareholders must be natural persons and they may not hold shares in any other company, except for certain exclusions;
- Gross annual turnover must be less than R20 million;
- No more than 20% of gross income may consist of investment income and income from the rendering of a personal service.
If all the requirements have been met for the full financial year, the taxpayer will qualify as an SBC and will enjoy the tax benefits that come with it, including possible accelerated deprecation rates.
As an example, ABC (Pty) Ltd is a qualifying taxpayer and earned a net profit of R550 000 for the 2022 financial year. At the 28% company rate, there would be R154 000 tax payable for the period. However, as the company is a qualifying taxpayer, they will only pay R58 289. A tax saving of R95 711!
Per the above, it is clear that there is a huge potential tax saving for small businesses when applied correctly.