02 - Taxation of Business Entities Flashcards
How are companies or CC’s taxed?
Companies and CC’s are taxed on the same scale.
Taxable income is calculated in the same way as for natural persons, i.e. gross income minus exemptions minus deductions.
Companies and CC’s pay normal tax at a flat rate of 28%.
The year of assessment for a company is the end of its financial year.
What is a Small Business Corporation?
An SBC is defined in ITA - sec 12E(4).
It is any CC, co- operative or a private company in terms of the Companies Act.
It must comply with all of the following requirements:
(1) All the shareholders/members of the SBC must at all times during the year of assessment be NATURAL PERSONS (individuals).
(2) Shareholders or members of the SBC may not hold any shares or interest in the equity of any other company but may hold a participatory interest in CIS, shares in body corporate (Sectional Titles Act) and shares in Share Block Company (Share Blocks Control Act 1980).
(3) The GROSS INCOME of the SBC for the tax year may not exceed R20 million.
(4) Not more than 20% of the gross income and all the capital gains consists collectively of
- - investment income, and
- - income from rendering a personal service.
(5) The SBC may not be an employment company
(i. e. a labour broker without an exemption certificate or a personal service company).
What tax benefits SBC’s get?
Different tax table that has progressive tax starting at 0%
The immediate write-off of all plant or machinery used in a process of manufacture or similar process in the tax year it is brought into use for the first time
AND
An accelerated write-off allowance for depreciable assets (other than manufacturing assets) acquired on or after 1 April 2005 is available at 50% of the cost of that asset in the tax year during which that asset was brought into use for the first time, 30% in the second year and 20% in the third year (50,30,20).
What is turnover tax?
Turnover tax is payable by a person who is a registered micro business calculated on its taxable turnover during that year of assessment (section 4A of the ITA).
The steps to register as a micro business are:
- Establish whether the business qualifies as a “micro business”?
- Register the micro business
What are the requirements for business to qualify as a micro business?
Part 2 of the Sixth Schedule
- Will the ‘qualifying turnover’ of the business be less than or equal to R1 million for the ‘year of assessment’?
- Does the business have a financial year that ends on the last day of February?
- Do you declare that the business has never previously been registered for turnover tax?
- Do you declare that income from ‘professional services’ is not expected to exceed 20% of the total receipts of the business for the year of assessment?
- Do you declare that the income from the disposal of assets used mainly for business purposes during the current year of assessment and the past two years of assessment is not expected to exceed R1.5 million in total?
- Do you declare that the business is not a ‘public benefit organisation’ or a ‘recreational club’?
- Do you declare that the business is not a ‘labour broker’ without a SARS exemption certificate?
- If the business is a partnership, do you declare that all the partners will be individuals throughout the year of assessment?
- Do you declare that the owner or any partner does not hold shares/interests in a close corporation, company, or cooperative other than the following exceptions:
- Interests in listed South African companies;
- Interests in collective investment schemes;
- Interests in body corporates and share block companies;
- Interests in venture capital companies;
- Interests of less than 5% in social or consumer co- operatives;
How is turnover tax calculated?
Turnover Tax is calculated by applying a tax rate to the “taxable turnover” of a business.
The taxable turnover of a business comprises:
- receipts during the year of assessment of a revenue nature;
- 50% of receipts of a capital nature arising from the sale of assets mainly used for business purposes (other than any financial instrument); and
- in the case of a company any investment (other than dividends and foreign dividends).
Turnover tax and Income tax
Section 10(1)(zJ) of the ITA exempts from income tax any receipt by or accruing to a micro business from the carrying on of a business in South Africa.
In the case of natural persons the receipt and accrual of any remuneration or investment income are exempted.
A natural person who receives remuneration or investment income is obliged to register for income tax purposes and submit an income tax return.
A company receiving income from outside of South Africa must disclose this income in a separate income tax return.
Turnover tax and Dividend tax
A dividend to a shareholder in a registered micro business is exempt from dividends tax to the extent that the total dividend paid by the micro business does not exceed R200 000 per annum (Section 64F(h) of the ITA).
Turnover tax and Capital Gains Tax
Paragraph 57A of the Eighth Schedule to the ITA provides for an exclusion of any amount received from the sale of assets used mainly for business purposes.
(For immovable property the exclusion is limited to the extent that the property was used for business purposes).
57A. Disposal of micro business assets.
A registered micro business as defined in terms of the Sixth Schedule must disregard any capital gain or capital loss in respect of the disposal by that business of
- (a) any asset which constitutes immovable property mainly used for business purposes; and
- (b) any asset (other than immovable property) used mainly for business purposes.
Be aware that the definition of taxable turnover is likely to include 50% of the proceeds from the sale of these assets.
Turnover Tax and VAT
A micro business may register as a VAT vendor if it is in its best interest. Before the 2013 year of assessment a micro business was not allowed to register as a VAT vendor.
This was because the original idea was to make it as simple as possible for micro businesses to comply in return for a low tax rate into which all taxes were factored in.
Turnover Tax and PAYE, UIF and SDL Contributions
Micro businesses must comply with all payroll levy requirements; but
May elect to pay their employees’ tax at twice-yearly intervals (paragraph 11(4A) of the Sixth Schedule).
What are the CGT implications on the sale of a small business?
Par 57 of 8th Schedule to the ITA
A natural person must when determining an aggregate capital gain or aggregate capital loss, disregard a capital gain determined in respect of the disposal of—
- (a) an active business asset of a small business owned by him as a sole proprietor; or
- (b) an interest in each of the active business assets of a business, which qualifies as a small business, owned by a partnership, upon his/her withdrawal from that partnership to the extent of his/her interest in that partnership; or
- (c) an entire direct interest in a company (which consists of at least 10 per cent of the equity of that company), to the extent that the interest relates to active business assets of the business, which qualifies as a small business, of that company
What is the definition of a small business?
small business” means a business of which the market value of all its assets, as at the date of the disposal of the asset or interest….., does not exceed R10 million
What is the definition of an active business asset?
active business asset” means—
- (a) an asset which constitutes immovable property, to
the extent that it is used for business purposes; or - (b) an asset (other than immovable property) used or held wholly and exclusively for business purposes, but excludes—
(i) a financial instrument; and
(ii) an asset held in the course of carrying on a business mainly to derive any income in the form of an annuity, rental income, a foreign exchange gain or royalty or any income of a similar nature;
What are the requirements for a person to be able to disregard a capital gain in the sale of a small business?
At the time of disposal he/she held the active business asset, interest in partnership, or interest in company
- for a continuous period of at least 5 years prior to the disposal
AND
- was substantially involved in the operations of that small business during that period
AND
- has attained the age of 55, or the disposal is in consequence of ill health, other infirmity, superannuation or death
