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Tax Incentives For Small Businesses – Give The Little Guy A (Tax) Break

Government has recognised that is unrealistic to expect small businesses to pay the same level of taxes as more established businesses. This led to the introduction of two favourable tax regimes available to certain small businesses.

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Entrepreneurs and small businesses play an important role in our economy, particularly to combat unemployment. Government has recognised that is unrealistic to expect small businesses to pay the same level of taxes as more established businesses. This led to the introduction of two favourable tax regimes available to certain small businesses. 

Small business corporations 

The more well-known of the two regimes is the “small business corporation” (commonly abbreviated as “SBC”) as defined in the Income Tax Act. An SBC benefits from a reduced income tax liability through reduced income tax rates and accelerated depreciation allowance for movable assets. 

Most companies pay income tax at a flat tax rate of 28% on their taxable income. SBCs, on the other hand, can benefit from a reduced tax liability if their taxable income does not exceed R550 000 in a year of assessment. For 1 April 2017 to 31 March 2018, qualifying SBCs will not pay tax on the first R75 750 taxable income. Thereafter, the SBC will pay tax at a progressive rate starting at 7%, 21% of taxable income exceeding R365 000 and 28% on taxable income exceeding R550 000. SBCs may also qualify for accelerated depreciation allowances against taxable income.

Related: 7 Top Tax Tips For SMEs

If a qualifying SBC owns plant or material and uses it directly in a process of manufacture or similar process, the SBC may reduce its taxable income by the full cost of the plant or machinery in the year of assessment in which it is brought into use for the first time.

An SBC may elect to apply accelerated deprecation rates to other movable assets, which would ordinarily have been regarded as wear and tear or depreciation. An SBC may choose to reduce its taxable income by 50% of the cost of the asset in the first year of assessment during which the asset is first brought into use, 30% of the cost in the second year, and 20% in the third year.

Not all small businesses qualify as SBCs. The following entities may qualify as an SBC: a close corporation, a co-operative, a private company and a personal liability company, if at all times during the year of assessment all of the shareholders or members of that entity were natural persons.

Additional requirements that must all be met to be regarded as a SBC, include:

  1. The entity’s gross income may not exceed R20 million for the year of assessment
  2. No member or shareholder of the entity may, at any time during the year of assessment, hold any shares or have any interest in the equity of another company, other than certain specific exceptions which include listed companies, collective investment schemes and others
  3. Not more than 20% of the total receipts or accruals and capital gains of the entity may consist collectively of “investment income” and income from the rendering of a “personal service”
  4. The entity may not constitute a “personal service provider” as defined for tax purposes.

The term “personal service”, for purposes of the SBC regime, is defined to include a wide array of professions, including:

  • any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, if
    • that service is performed personally by a person who holds an interest in the entity; and
    • that entity does not throughout the year of assessment employ three or more full-time employees (other than a shareholder or member or a connected person in relation to a shareholder or member) who are on a full-time basis involved in the business of the entity of rendering that service.

If an entity (in a year of assessment) employs three or more full-time employees (other than a shareholder or member or a connected person in relation to a shareholder or member) who are on a full-time basis involved in the business of the entity of rendering that service, it will not be regarded as rendering a “personal service” and will not be regarded as a “personal service provider”.

Related: What Should I Know About Dealing With Tax When It Comes To My Business?

A company, co-operative, close corporation or personal liability company should therefore carefully consider compliance with the requirements and, if so, take advantage of this favourable tax regime.   

Turnover tax payable by registered micro businesses

 turnover-tax

Businesses are not only burdened by their actual income tax liability, but also by their tax compliance obligations in this regard. This led to the introduction of an optional simplified tax system for registered micro businesses in terms of the Income Tax Act, known as the turnover tax regime.

The turnover tax regime allows qualifying micro businesses to register for and pay a single tax known as turnover tax instead of various other taxes. The turnover tax replaces income tax (including provisional taxes and capital gains tax) and to an extent dividends tax. A micro business is still required to withhold payroll taxes and VAT (if voluntarily registered as a VAT vendor). 

Turnover tax is calculated by applying the relevant turnover tax rates to the taxable turnover of the micro business as determined. For any year of assessment ending on or within the 12-month period before 28 February 2018, registered micro businesses will pay no turnover tax on a taxable turnover not exceeding R335 000.

A turnover tax will apply to 1% of the taxable turnover exceeding R335 000, 2% of the taxable turnover exceeding R500 000, and 3% of the taxable turnover exceeding R750 000. 

Registered micro businesses also benefit from reduced record-keeping requirements and only need to retain information relating to the following:

  1. Amounts received during a year of assessment;
  2. Dividends declared during a year of assessment;
  3. An asset with a cost of more than R10 000 at the end of a year of assessment; and
  4. A liability that exceeded R10 000 at the end of a year of assessment.

As with SBCs, micro businesses are subject to strict requirements of registration. The turnover tax is available to individuals (sole proprietors or partners in a partnership), close corporations, co-operatives or private companies, if their qualifying turnover (as determined) does not exceed R1 million in a year of assessment.

Related: Payroll Tax: 6 Things Small Business Owners Should Know

Certain persons are disqualified as micro businesses, including:

  1. Persons holding shares or having any interest in the equity of a company, other than certain specific exceptions which include listed companies, collective investment schemes and others;
  2. If more than 20% of the total receipts during a year of assessment consists of income from the rendering of a “professional service” (for natural persons) or the aggregate of “investment income” and income from the rendering of a “professional service” (for companies);
  3. If the proceeds from the sale of certain capital assets used mainly for business purposes exceed R1,5 million over a three-year period;
  4. Companies with a year-end other than the last day of February;
  5. If any of the partners, members or holders of shares are not natural persons in a year of assessment;
  6. Personal service providers and certain labour brokers;
  7. Public benefit organisations, recreational clubs, associations and small business funding entities; and
  8. Special rules apply to partnerships.

The term “professional service”, for purposes of turnover tax, includes the same array of professions as for the SBC regime, for example a service in the field of accounting, actuarial science, etc. However, for turnover tax, no exception applies for businesses rendering professional services that employ three or more full-time employees.

Businesses rendering professional services, although they will not qualify for turnover tax, may possibly qualify for the SBC regime, provided they employ three or more full-time employees in addition to meeting the other criteria of qualifying as a SBC.

The turnover tax regime does seem to significantly reduce the tax compliance burden of certain small businesses. It may not be the best option for every small business as it imposes tax on a turnover basis as opposed to a taxable income basis – thus affording lower tax rates but without taking into account exemptions or deductions that would otherwise have reduced taxable income.

We understand that very few businesses are registered as micro businesses on the turnover tax system. This could be ascribed to the determination of whether a business meets the registration requirements.

Author: Esther van Schalkwyk

Entrepreneur Magazine is South Africa's top read business publication with the highest readership per month according to AMPS. The title has won seven major publishing excellence awards since it's launch in 2006. Entrepreneur Magazine is the "how-to" handbook for growing companies. Find us on Google+ here.

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Global Guide For Entrepreneurs, Innovators Launches In Johannesburg

Startup Guide partners with SAP Next-Gen, Tshimologong Precinct to bring global guidebook to Johannesburg innovation ecosystem; calls for nominations.

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Calling all entrepreneurs, accelerators, innovators, co-working spaces and experts in the City of Gold: Startup Guide, the leading global guide for start-ups in high-growth innovation hubs in Europe, the US and Middle East, is open to nominations in Johannesburg.

Founded in 2014, Startup Guide is a creative content and publishing company that produces guidebooks and tools to help entrepreneurs to connect to communities and resources in the leading start-up cities around the world. Its global footprint covers some of the most innovative and thriving start-up ecosystems in the US, Europe and the Middle East, including those of London, New York, Berlin, Tel Aviv, and Stockholm. After launching in Cape Town earlier in the year, Startup Guide now moves to Johannesburg.

According to Sissel Hansen, Founder and CEO of Startup Guide, South Africa’s largest city is emerging as a key innovation hub for start-ups.

“Johannesburg has recently emerged as a growing ecosystem for start-ups and entrepreneurs in Africa, particularly in the tech industry. We’re thrilled to have the opportunity to create a comprehensive guide of resources for aspiring founders wanting to do business in South Africa’s largest city.”

Startup Guide Johannesburg was launched at Wits University’s Tshimologong Precinct, one of Johannesburg’s newest high-tech addresses in the vibrant inner-city district of Braamfontein. Tshimologong, which means “new beginnings” in Setswana, focuses on the incubation of digital entrepreneurs, commercialisation of research and the development of high-level digital skills for students, working professionals and unemployed youth. Lesley Williams, CEO of Tshimologong Precinct, says: “South Africa is fast-becoming a go-to source for innovation, especially in the tech sector. We believe the introduction of a dedicated resource for the startup ecosystem in Johannesburg will unlock significant opportunities for innovation hubs such as ours to more easily connect with entrepreneurs, experts and other roleplayers, ultimately providing a more supportive environment for growth.”

Related: Watch List: 50 Top SA Black Entrepreneurs To Watch

Startup Guide has partnered with SAP Next-Gen, a purpose driven innovation university and community for the SAP ecosystem enabling companies, partners and universities to connect and innovate with purpose linked to the UN Sustainable Goals for Development. Ann Rosenberg, Senior Vice President and Head of Global SAP Next-Gen says:

“We strive to connect digital innovators in an open innovation community to drive the future success and growth of industries through the use of technology. As we have witnessed in other high-innovation cities around the world, the introduction of knowledge resources – supported by opportunities for collaboration and partnership in an open ecosystem – enhances the overall success of entire start-up communities. Johannesburg’s world-famous energy and business acumen will greatly benefit from the launch of Startup Guide Johannesburg and the support of industry partners, including SAP Next-Gen and the Tshimologong Precinct.”

Cathy Smith, Managing Director of SAP Africa, adds that the partnership with Startup Guide aligns well with the company’s commitment to the UN Sustainable Development Goals. “As an organisation we are committed to achieving the high ambitions set out by the SDGs. However, it is virtually impossible to do so alone: the concept of partnership with likeminded purpose-driven organisations and initiatives is vital not only to realising the SDGs but to foster a greater and more inclusive innovation ecosystem in Johannesburg and across the African continent.”

Nominations for the Johannesburg edition of Startup Guide are now open. If you know a start-up, entrepreneur, programme, space, accelerator, or experts and would like to see them featured in the book, please visit https://startupguide.com/shop/startup-guide-johannesburg and submit your nomination.

Visit the SAP News Center. Follow SAP on Twitter at @sapnews.

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Aspirations For SMMEs In South Africa

Research released earlier this year, revealed that there are only 250 000 formal SMMEs in South Africa.

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Entrepreneurs who have started up a business over the past 10 years have done so in an environment that has been largely negative, with slow economic growth and an unstable political landscape. “So, all in all, a very difficult setting to launch, grow or even maintain a business,” says Bizmod MD, Anne-Marie Pretorius.

Pretorius says that many entrepreneurs who operate in South Africa can be forgiven for often wondering if the slog is worth it. Yet they continue – despite economic uncertainty, strikes, retrenchments and downscaling.  “It is this tenacity that sets entrepreneurs apart, and I often wonder how much more successful they would be in an easier and more supportive environment.”

Below, Pretorius shares her ideal pro-entrepreneur outlook for the future:

  • Greater policy certainty on all key government policies from land reform to regulations surrounding labour broking.
  • Being able to do away with bad policy faster. An example of where this did not happen was in the changes of visa requirements; leading to an unnecessary dent in our tourism industry, an industry that should be targeted for growth.
  • Lower compliance requirements for companies with a turnover under R50 million. The cost of compliance for smaller enterprises is significantly higher in comparison to their income and the cash they have available. Smaller companies need simpler frameworks where compliance is required. A portal similar to SARS e-filing, which makes compliance across various pieces of legislation clear and simple, would be ideal.
  • The Labour Relations Act is a key piece of legislation that has done a lot to protect the rights of the employee. It has attempted to balance the power relationship between employee and employer. Some innovation is however required in labour practices, allowing for mutually beneficial flexible working relationships that keep pace with the changing work environment.
  • Buy small, buy South African! A framework whereby large corporations and government would have to allocate a certain minimum percentage to buying from smaller local companies. There are encouraging signs that this is happening more, however this is still not an ingrained practice. In addition, consumers should be more informed on what items are South African produced, in order for them to be encouraged to purchase locally.
  • Easier access to funds enabling entrepreneurs to grow their businesses. There are currently a few options available, but all of the options require significant governance and red tape. Whilst this is understandable from the lenders perspective, it does hamper the agility and growth of companies.
  • Make good financial governance aspirational, attractive and easily accessible.
  • The process for tenders to be corruption free and fair, enabling more companies to add value.
  • Pay SMME’s on 30 days or less. Enormous pressure exists on smaller companies when not paid on time. They simply do not have the cash flow to carry a debtor’s book of 90 days and this inevitably hampers their growth.
  • Tax SMME’s at a lower tax rate. Profit tax should be lowered in order to drive entrepreneurship.
  • Creating a platform that makes it simpler to employ young individuals with potential and create support programmes for SMMEs to upskill them. There is a significant financial and time investment required to train a young person, which can make SMME’s sometimes wary to do so.

“If we are able to make only some of these ideals a reality, there is no doubt that we would see economic growth, entrepreneurial growth, and more employment opportunities,” concludes Pretorius.

Related: A – Z Easy Small Business Ideas

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South African Students Win R50 000 In The Universities Business Challenge

Students from Mangosuthu University of Technology beat 500 students from 13 different universities across South Africa.

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The Overlings from Mangosuthu University of Technology are the 2018 winners of Cognity Advisory’s Universities Business Challenge (UBC), sponsored by General Electric (GE). The winning team of four students are walking away with R50,000 to turn their business idea into reality.

Launched in July this year, the UBC has seen 500 students from 13 different universities across South Africa participate in a business simulation competition designed to develop entrepreneurship skills.

When the competition launched, all teams were challenged to form virtual companies and to virtually manufacture and sell bicycles.

The final 10 teams were from the University of Limpopo, Mangosuthu University of Technology, Vaal University of Technology, University of KwaZulu-Natal and North-West University.

During the two-day final, the teams played six rounds of simulations. Each simulation gave the teams a chance to re-evaluate their progress and better certain areas that needed improving. The winning team realised during one of their simulations that in order to maximise profits they would need to introduce two new products and market it differently from their initial product. They paid special attention to their customer’s needs. 

The aim of the UBC was designed to tackle South Africa’s high level of youth unemployment. Statistics South Africa (Stats SA) announced that South Africa’s official unemployment rate increased by 0.3 of a percentage point to 27.5% in the third quarter of 2018.

Nkosinathi Sokhulu from the winning team said, “Even though we didn’t have a great presentation we made the most profit. This experience taught us a lot about ourselves and business. Most of the decisions that we made came from serious debates. We learnt that market research is crucial when starting a business. We learnt that marketing starts and ends with the customer.”

Related: 20 South African Side-Hustles You Can Start This Weekend

“Based on this market research information we realised that it was important for us to introduce two new products and this, in addition to the main product we were selling, helped us to maximise profits. We saw an opportunity to add more products and it paid off” said Mbali Tshozi.

Tope Toogun, development advisor and CEO of Cognity Advisory said, “All the teams showed tremendous promise and I was very impressed by their levels of engagement with one another and their tenacity.”

“We really want to ensure that students are equipped with the necessary skills to not only start a business but to run it effectively. While we have selected one winner, our hope is that each team has benefitted by having learned the skills needed in the workplace.”

“The competition is designed to develop the ‘soft skills’ that are important for those wanting to set up their own business or simply be successful at work. With rising unemployment and ongoing talent shortages, having these skills is crucial for those wanting to get a job.”

The UBC, now in its second year in South Africa, will continue into its third year in 2019 and will run as the Africa Enterprise Challenge (AEC).

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