project achiever taxation of companies
TRANSCRIPT
Content
TAX FRAMEWORK
2
Companies
Small Business Corporations
(SBCs)
Micro business – Turnover
Tax
Personal Service providers
2
What is a company?
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- any association,
- Corporation or company,
(incorporated or incorporated
associations, corporations or
companies, a body corporate, a
co-operatives AND a close
corporation (CC) a REIT
- "foreign company" any company
which is not a "resident"
History of Tax Legislation
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- Before income tax legislation - tax
levies were charged on public
railway services /custom duties /
Postal services / telegraphs
- Democracy/ Bill of Rights/ law
defines who are taxpayers
- Competent courts/ Office of the
Public Protector/Constitution
Courts / South African Human
Rights Commission
Tax Liability of a company
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• Normal tax rate @ 28% of taxable
income
• Tax payable from the first rand of
taxable income
• No primary / secondary rebate
• No interest exemption (s10(1) (i)]
• No tax free saving exemption s12T
Companies Tax Framework
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Gross Income XXX s1
Less: Exempt income XXX
Income XXX s1
Less: Deductions/Allowances XXX S11 – 17 & s21 - 24
Less: Assessed loss XXX S20
Sub-total XXX
Add: Capital gain XXX s26
Sub-total XXX
Less: Donations XXX s18A
Taxable income XXX
Companies tax (cont)
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Company is a provisional
taxpayer
Assessed loss from previous
year can be brought forward
Appoint a Public Officer
Small Business Corporations (SBCs)
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The taxpayer must meet all the following requirements in order
to qualify for the SBC status.
1) The taxpayer must be a company as defined in the
Companies Act,
2) All shareholders of the company must be natural person,
3) The `gross income’ as defined by the ITA, for the year of
assessment must not exceed R20 million,
What happens to the R20m threshold if the financial year is less
than 12-month?
Small Business Corporations (SBCs)
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There will be an apportionment of the R20m threshold based on
the number of months in the financial year.
What happens to the R20m threshold if the financial year is
more than 12-month?
The R20m thresholds remains intact – there will not be an
increase in the threshold amount although the number of
months in a financial year has increased.
Small Business Corporations (SBCs)
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4) None of the shareholders or members of the SBC at any time
during the year of assessment holds any shares or has any
interest in the equity of any other company other than certain
`permitted’ shareholdings (for example shares in a listed
company)
5) Investment income and income from a `personal service’ do
not exceed 20% X (revenue receipts & accruals plus capital
gains), and
6) The company must not be a PSP as defined in the Fourth
Schedule of the ITA.
Small Business Corporations (SBCs)
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However, if the company hires three or more persons in the
core function of the business, that are not `connected’ to a
shareholder, or member of a CC, and
Hires the employees for the full duration of a tax year, then the
PSP could escape this hurdle
Small Business Corporations (SBCs)
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Please Note the following:
The taxpayer must undertake this `test’ annually, at the end of
each financial year, to check if the SBC requirements are met.
It can be that the entity will qualify as a SBC in year 1 but not in
year 2, but again in year 3. Hence this test must be conducted
annually – at the end of each tax year!
Small Business Corporations (SBCs)
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What are the benefits of being an SBC?
1) See the tax rates in SAIPA Annual Tax Guide – 2019 /20 –
page 8 - the tax liability is less when compared with a
normal company
2) SBCs – eligible for accelerated allowances (depreciation)
i) if plant or machine used 100% for manufacturing
purposes
ii) If the plant or machine is not used in the process of
manufacture
Small Business Corporations (SBCs)
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Plant and machinery used 100% for manufacturing purposes:
A SBC may deduct 100% of the cost of any plant or machinery
used directly in a process of manufacture, or any other process
which is of a similar nature, carried on by that SBC in the year of
assessment in which the SBC brings the plant or machinery into
use, provided it is –
• brought into use for the first time by that SBC on or after 1
April 2001;
• brought into use for the purposes of the taxpayer’s trade
(other than a trade of mining or farming); and
• owned by the SBC or the SBC acquired the plant or
machinery as purchaser under "instalment credit
Small Business Corporations (SBCs)
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If the plant or machine is not used in the process of
manufacture, then the following formula must be used to
calculate the allowances:
3)An amount over three years of assessment calculated at the
following rates with apportionment not being required for assets
used for part of a year of assessment:
50% of the cost in the year of assessment in which the asset
was first brought into use (first year).
30% of the cost in the first succeeding year (second year).
20% of the cost in the second succeeding (third year).
Small Business Corporations (SBCs)
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Change in tax status of the company
So, what happens if the entity is not a SBC in the 2nd year? The
above allowance will continue because the entity was a SBC
when the plant was first brought into use.
So what happens if the entity was not a SBC when the plant was
first brought into use?
The capital allowance will be 40% (year 1) and 20% (in
succeeding three years) – if the plant was brand new.
Small Business Corporations (SBCs)
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If the plant was second-hand when it was first brought into use,
then the allowance will be 20% per year for five years. Always
view the status of the entity when the plant or machine was first
brought into use. If the entity was not a SBC, then these
allowances rate will continue in the later tax-years even though
the entity will be a SBC in one or more of the later years.
Small Business Corporations (SBCs)
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In order to claim an allowance (50% /30%/ 20%), the qualifying
entity must be an SBC in both the year of assessment in which
the asset is acquired and the year of assessment when it is first
brought into use.
Date acquired vs Date brought into use: The election between
the two alternative methods for calculating the amount of the
deduction is made when the asset is first brought into use. For
example, if a qualifying entity qualifies as an SBC in year one
when the asset was acquired but does not qualify in year two
when the asset is first brought into use, then the 50% /30%/
20%), allowance is not available to it.
Small Business Corporations (SBCs)
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Taxpayer can elect between the three-year (as per in item 3
above) or the wear and tear allowance section 11 ( e) of the
Income Tax Act
An SBC may elect to calculate the amount of the deduction
allowable over three years (50% /30%/ 20%), or according to
the provisions of section 11(e) - the wear and tear allowance. If
the wear and tear allowance provide a more favourable
allowance than the three-year spread, then the taxpayer may
elect the s11(e) wear and tear.
Small Business Corporations (SBCs)
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An example is required:
For example, a “small” item which does not form part of a set
and which is acquired at a cost of less than R7 000 may be
written off in full under section 11(e) in the year of assessment in
which it is acquired and brought into use.
A SBC is required to deduct the allowance over a three-year
spread (that is, 50% /30%/ 20% ) but may elect to write-in off in
year 1 using the wear and tear provisions under the section 11
(e). The election must be made on asset-by-asset basis.
Micro business – Turnover tax
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Turnover-based tax system
To alleviate tax compliance costs for very small businesses
Turnover tax is calculated on the turnover(total receipts) of a
micro business, and
not on its profits
Micro business – Turnover tax
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Elective
Incorporated and unincorporated enterprises (sole
proprietors / partnerships)
◦ Certain limitations
Annual qualifying turnover up to R1million p.a.
Implementation: Years of assessment commencing on or
after 1 March 2009
Micro business – Turnover tax
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Not subject to both normal tax and the turnover tax
Section 10(1) – exempts from normal tax all income received
by or accrued to a registered micro business conducting
business in the Republic
Exclusions
– natural persons – investment income and remuneration
– business activities carried outside SA by both companies and
natural persons are not exempt from normal tax but do not
qualify for the turnover tax regime
Micro business – Turnover tax
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a shareholder in a registered micro business is only partially
exempt from dividends tax – total dividend paid does not
exceed R200 000
Micro business – Turnover tax
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Exclusion from CGT when assets sold by a registered micro
business
Assets must be used mainly for business purposes.
VAT – vendors can register for VAT – Which registration
category? Why would a microbusiness would want to
register for VAT?
PAYE,SDL and UIF normal rules apply but can apply to pay
biannually.
Micro business – Turnover tax
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If Year of assessment less than a period of 12 months
then qualifying taxable turnover to be apportioned - R1m
divided by the number of months
NB:
1) qualifying receipts and not accruals
2) a business cannot be split into smaller businesses in
order to ensure that each business is within the R1m
qualifying turnover limit.
Micro business – Turnover tax
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The tax for turnover tax is calculated on the qualifying
turnover.
The taxable turnover =
- all amounts that are not of a capital nature
- received by the micro business - cash basis
- during that year of assessment
- from the carrying on business activities in the Republic
- Expenses totalled ignored for this tax for the calculation of
this tax
Micro business – Turnover tax
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- Including: 50% of proceeds on sale of a capital asset:
please be careful – not capital gain but the proceeds
- Immovable property mainly used for business
- Includes business Investment income of a company / cc
(other than dividends and foreign dividends);
- But for a natural person – excludes investment income
Government subsidies); and
Micro business – Turnover tax
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Excludes:
- Amounts accrued before registration as a micro business
AND was subject to tax – why?
- For normal tax, taxed on earlier of receipt and accrual.
Amount accrued already included in previous year gross
income.
- Amounts refunded by suppliers to a micro business –
these amounts are refunds of expenses and should not
be included in qualifying turnover.
Micro business – Turnover tax
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Amounts refunded to customers by a micro business – that
is when it sell goods or render services – receipt – included
in taxable turnover.
However, when later refunded as a result of a faulty good
or poor services, then such refunds to customers can be
deducted in the calculation of taxable turnover.
Micro business – Turnover tax
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Persons that qualify as micro business
- Company
- natural persons
Trust not included in the definition of micro business and
can therefore not elect to pay turnover
Micro business – Turnover tax
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Persons that do not qualify as micro business
(a) that person at any time during that year of assessment
holds any shares or has any interest in the equity of a
company other than a share or interest describe below;
a) in a listed company;
(b) in a portfolio in a collective investment scheme,
(c) Body Corporates established in terms of Sectional title
Act;
(d) in a venture capital company;
Micro business – Turnover tax
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(e) that constitutes less than 5 per cent of the interest in a
social or consumer co-operative or a co-operative burial
society
(f) in any friendly society
Micro business – Turnover tax –
Persons that do not qualify (cont)
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(b) more than 20 per cent of that person’s total receipts
during that year of assessment consists of:
(i) where that person is a natural person income from the
rendering of a professional service; and
(ii) where that person is a company, investment income
and income from the rendering of a professional service;
(c) at any time during that year of assessment that person
is a personal service provider or a labour broker,;
Micro business – Turnover tax
Person that do not qualify (cont)
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(d)the total of all amounts received by that person from the
disposal of:
(i) immovable property used mainly for business purposes;
and
(ii) any other asset of a capital nature used mainly for
business purposes, other than any financial instrument,
exceeds R1,5 million over a period of three years
comprising the current year of assessment and the
immediately preceding two years of assessment, or such
shorter period during which that person was a registered
micro business;
Micro business – Turnover tax
Person that do not qualify (cont)
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(f) in the case of a company:
(i) its year of assessment ends on a date other than the last
day of February;
(ii) at any time during its year of assessment, any holder of
shares in that micro business is a person other than a
natural person;
(iii) at any time during its year of assessment, any holder of
shares in that micro business holds any shares or has any
interest in the equity of any other company other than
explained above
Micro business – Turnover tax
Person that do qualify
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Provided that the provisions of this item do not apply to the
holding of any shares in or interest in the equity of a
company, if the company:
(aa) has not during any year of assessment:
(A) carried on any trade; and
(B) owned assets, the total market value of which exceeds
R5 000
Micro business – Turnover tax
Person that do qualify
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in the case of a person that is a partner in a partnership
during that year of assessment:
(i) any of the partners in that partnership is not a natural
person;
(ii) that person is a partner in more than one partnership at
any time during that year of assessment; or
(iii) the qualifying turnover of that partnership for that year
of assessment exceeds R1m.
Micro business – Turnover tax
Registration
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If the requirements are met - may elect to be registered
as a micro business:
(a) before the beginning of a year of assessment or such
later date during that year of assessment as SARS may
prescribe by notice in the Gazette;or
(b) in the case of a person that commenced business
activities during a year of assessment, within two months
from the date of commencement of business activities.
Micro business – Turnover tax
Registration:
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A person that elected to be registered must be registered
with effect from the beginning of that year of assessment.
A person that is deregistered (voluntary or compulsory)
may not again be registered as a micro business.
Micro business – Turnover tax
Interim Payments
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A registered micro business must, within six calendar
months from the first day of the year of assessment:
(a) estimate the taxable turnover for the year of
assessment;
(b) calculate the amount of tax payable on the estimated
taxable turnover; and
(c) pay an amount equal to 50 per cent of the amount of
tax so calculated.
Micro business – Turnover tax
Interim payments
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Where full payment of the amount is not received by SARS
within six calendar months from the first day of the year of
assessment,
interest at the prescribed rate is payable from the first day
after the six calendar months to the earlier of the date on
which the shortfall is received and the last day of the year
of assessment
Micro business – Turnover tax
Interim payments
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A registered micro business must, by the last day of the
year of assessment:
(a) estimate the taxable turnover for the year of
assessment;
(b) calculate the amount of tax payable on the estimated
taxable turnover; and
(c) pay an amount equal to the amount of tax so
calculated less the amount paid in first period.
Skills Development Levies (SDL) ,Unemployment Insurance
(UIF) can be paid biannually
Micro business – Turnover tax
Record keeping:
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a registered micro business must only retain a record of:
(a)amounts received during the year of assessment ;
(b) dividends declared during a year of assessment;
(c) each asset as at the end of a year of assessment with a
cost price of more than R10 000; and
(d) each liability of that registered micro business as at the
end of a year of assessment that exceeded R10 000.
Micro business – Turnover tax
Tax Table:
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See SAIPA 2019/20 Annual Tax Guide page 14
Personal Service Providers (PSP)
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Means any company or trust
Service is rendered on behalf of a company or a trust but is
rendered personally by any person who is connected to the
company or a trust , and
a) such person would be regarded as an employee (NB) of
such client if such service was rendered by such person directly
to such client, other than on behalf of such company or trust; or
Personal Service Providers (PSP)
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(b) where those duties must be performed mainly at the
premises of the client, such person or such company or trust is
subject to the control or supervision of such client as to the
manner in which the duties are performed or are to be
performed in rendering such service; or
(c) where more than 80 per cent of the income of such
company or trust during the year of assessment, from services
rendered, consists of or is likely to consist of amounts received
directly or indirectly from any one client of such company or
trust,
But ….see next slide
Personal Service Providers (PSP)
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But a PSP has an exit strategy – that is `get out of’ PSP
classification – why would an entity want to do this?
How to exit from PSP?
-) must throughout the year of assessment employs three or
more full-time employees who are on a full-time basis
-) must be engaged in the core functions as an employee -
must not be a holder of a share in the company or beneficiary
of the trust or
-) or must not be connected person in relation shareholder
(spouse of a shareholder)
Personal Service Providers (PSP)
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Why would an entity want to be excluded from the definition
of a PSP?
A PSP is allowed to deduct the following expenses in terms of
s23(k) of the ITA. S 23(k) deductible expenses of PSP are –
Amount paid / payable to an employee of the PSP
Legal expenses (s 11(c))
Bad debts (s 11(i))
Contributions to pension fund, provident fund & medical aid
schemes (s 11(l))
Refunds of salary, etc (s 11(nA))
Personal Service Providers (PSP)
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Refunds of restraint of trade payments (s 11(nB))
Plus expenses in respect of premises, finance charges,
insurance, repairs and, fuel and maintenance.
The above expenses may only be claimed if the assets were
used wholly and exclusively for the purpose of trade.
NB! More importantly, a PSP cannot claim capital allowances.