A small business corporation is a company that qualifies for reduced tax rates and accelerated asset write-offs under section 12E of the Income Tax Act 58 of 1962. The relief is meaningful and the qualifying conditions are strict.
Most companies that could qualify never claim it, usually because one of the conditions was breached without anyone noticing. This page sets out what those conditions are.
Business Requirements at a Glance
Broadly, the section 12E qualifying conditions.
- The entity must be a close corporation, co-operative or private company
- Gross income for the year of assessment must not exceed the prescribed threshold
- All shareholders or members must be natural persons throughout the year of assessment
- No shareholder or member may hold shares or interests in any other company, subject to the exceptions the section allows
- Not more than the prescribed proportion of receipts may consist of investment income and income from rendering a personal service
- The entity must not be a personal service provider as defined
- The conditions must be met throughout the year of assessment, not only at year end
- The claim is made in the annual income tax return
Registration and Legal Requirements
Confirm the current threshold, rates and conditions with SARS. They are set in section 12E and revised, and the definitions — particularly of investment income and personal service — are specific.
The shareholding condition is the one that trips companies up. If any shareholder holds shares in another company, the qualification is generally lost, subject to the exceptions the section allows. Shareholders acquiring an interest in another business, sometimes a dormant one, break it without realising.
It must hold throughout the year. A condition breached for part of the year disqualifies the whole year. That means a shareholding acquired in month three costs the relief for that entire year of assessment.
Ask shareholders annually whether they hold interests in any other company. That single question, asked before year end, preserves the relief.
The personal service provider exclusion is aimed at arrangements that are employment in substance. If your company provides the services of one person to one client in circumstances resembling employment, take advice — the consequences extend beyond losing section 12E.
Documents and Ownership Information Required
What is needed to claim.
- CIPC registration documents and a current company profile
- Certified ID copies for every director, member or partner
- Beneficial ownership information as filed with the CIPC
- A SARS tax reference number for the entity
- A business bank account in the entity’s name
- Annual financial statements and management accounts
- Records of all income and expenses with supporting invoices
- Payroll records, where the business employs anyone
- A shareholders’ or members’ register showing natural persons only
- Written confirmation from each shareholder of any other company interests
- Analysis of receipts distinguishing investment income and personal service income
- Fixed asset register supporting accelerated write-off claims
- The annual income tax return with the claim made
Tax, Licence and Compliance Requirements
The relief has two parts. Reduced income tax rates on a graduated basis, and accelerated write-off of certain assets — manufacturing plant and machinery on an immediate basis, and other depreciable assets over a shorter period than usual. The asset write-off is frequently worth more than the rate relief in a year of investment.
Keep a fixed asset register that identifies which assets qualify for which treatment. Claiming accelerated write-offs without a register is not defensible on audit.
Analyse your receipts. The limits on investment income and personal service income are tested against total receipts, so a company with a significant interest or rental component needs to know where it stands before year end rather than after.
Compare against the turnover tax regime if the business is very small. Turnover tax is simpler and is charged on turnover rather than profit; section 12E taxes profit at reduced rates and is generally better where the business has real expenses. Run both calculations.
Records must be retained for the period the Tax Administration Act 28 of 2011 prescribes, and a section 12E claim is exactly the kind of item SARS verifies.
Take advice. The conditions are technical and the definitions matter. A registered tax practitioner can confirm eligibility before the return is filed, which is far better than defending a claim afterwards.
Process, Deadlines and Ongoing Obligations
Check the conditions against your company before year end, not at filing time. The shareholding and receipts tests can still be managed before the year closes; afterwards they cannot.
Ask every shareholder in writing, annually, whether they hold an interest in any other company, and keep the answers on file.
- Confirm the current threshold, rates and conditions with SARS
- Check that all shareholders are natural persons throughout the year
- Ask shareholders annually about interests in other companies, in writing
- Test the conditions before year end, while they can still be managed
- Analyse receipts for investment and personal service income limits
- Establish whether the personal service provider exclusion could apply
- Keep a fixed asset register supporting accelerated write-offs
- Compare section 12E against the turnover tax regime
- Retain records — the claim is routinely verified
- Take advice from a registered tax practitioner before filing
Frequently Asked Questions
What does small business corporation status give?
Reduced graduated income tax rates and accelerated write-off of certain assets. In a year of investment the asset write-off is often worth more than the rate relief.
What is the most common disqualifier?
A shareholder holding shares in another company. Shareholders acquire interests, sometimes in dormant companies, without realising it breaks the qualification.
Does a breach mid-year matter?
Yes. The conditions must hold throughout the year of assessment, so a shareholding acquired in month three costs the relief for that entire year.
Is it better than turnover tax?
Generally, where the business has real expenses, because section 12E taxes profit at reduced rates while turnover tax is charged on turnover. Run both calculations.
Qualifying conditions, thresholds, rates and write-off provisions are set in section 12E of the Income Tax Act and by SARS, and are revised. Confirm current requirements with SARS or a registered tax practitioner before claiming.