A qualifying company pays income tax at reduced graduated rates rather than the flat company rate, and writes off certain assets faster. This page is about deciding whether the relief is worth structuring for, and how it compares to the alternatives.
The comparison matters because the qualifying conditions constrain what shareholders may own, and that constraint has a cost of its own.
Business Requirements at a Glance
The broad section 12E conditions, under the Income Tax Act 58 of 1962.
- A close corporation, co-operative or private company
- Gross income below the prescribed threshold for the year of assessment
- All shareholders or members natural persons throughout the year
- No shareholder holding shares or interests in another company, subject to the exceptions the section allows
- Investment income and personal service income within the prescribed proportion of receipts
- Not a personal service provider as defined
- Conditions met throughout the year of assessment
- The claim made in the annual income tax return
Registration and Legal Requirements
Confirm the current threshold, rates and conditions with SARS, since they are set in section 12E and revised.
The relief is graduated. Rates step up with taxable income to the point where the company rate applies, which means the benefit is largest for a company with modest profits and tapers as profits grow. Work out what it is actually worth at your profit level before structuring around it.
The asset write-off is often the bigger benefit. Manufacturing plant and machinery can be written off immediately, and other depreciable assets over a shorter period than the ordinary allowance. In a year of investment that timing difference is worth real money.
The shareholding restriction has a cost. A shareholder who cannot hold interests in another company is constrained in their own affairs. For a founder who may want to start another venture, or invest in one, that is a genuine trade-off against the tax saving.
Compare the three options honestly: normal company tax with no restriction, section 12E with reduced rates and restrictions, and the turnover tax regime with maximum simplicity and tax on turnover rather than profit. Run the numbers on your actual figures rather than choosing on description.
Documents and Ownership Information Required
What is needed to support the 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
- Annual written confirmations from shareholders regarding other company interests
- An analysis of receipts distinguishing investment and personal service income
- A fixed asset register identifying assets by write-off treatment
- The annual income tax return with the section 12E claim made
Tax, Licence and Compliance Requirements
Distributions are taxed again. Reduced company rates apply to the company’s profit; taking that profit out as a dividend attracts dividends tax, and taking it as salary attracts PAYE at individual rates. Compare the total tax on money in your hand, not the company rate alone.
Salary versus dividend is a real decision with different consequences for the company’s deduction, the individual’s tax, retirement contributions and UIF. Take advice on the mix rather than defaulting.
The personal service provider rules are aimed at arrangements that are employment in substance, and they carry consequences well beyond losing section 12E, including a higher tax rate and restricted deductions. If your company provides one person’s services to one client, take advice.
Employment taxes are unaffected by section 12E. PAYE, UIF, SDL and COIDA registration all apply where the company employs anyone, including a director on a salary.
VAT is unaffected and is assessed on its own thresholds.
Keep records for the prescribed period under the Tax Administration Act 28 of 2011. A section 12E claim and an accelerated write-off are exactly the items SARS verifies.
Test the conditions before year end. Once the year closes, a breach cannot be undone. Before it closes, a shareholding can sometimes be dealt with.
Process, Deadlines and Ongoing Obligations
Work out what the relief is worth at your actual profit level, weigh it against the shareholding restriction, and compare all three regimes on your own figures before structuring anything.
Ask shareholders in writing every year about other company interests, keep a fixed asset register, and confirm eligibility with a registered tax practitioner before the return is filed.
- Calculate what the graduated rates are worth at your profit level
- Value the accelerated asset write-off separately — it is often larger
- Weigh the shareholding restriction as a real cost to shareholders
- Compare normal company tax, section 12E and turnover tax on your figures
- Compare total tax on money in hand, not the company rate alone
- Take advice on the salary versus dividend mix
- Check whether the personal service provider rules could apply
- Keep a fixed asset register and shareholder confirmations
- Test the conditions before year end while a breach can still be fixed
- Confirm eligibility with a registered tax practitioner before filing
Frequently Asked Questions
How much is the relief worth?
It depends on your profit level, because the rates are graduated and taper to the company rate. Calculate it on your actual figures rather than assuming.
Which part is more valuable?
Often the accelerated asset write-off rather than the rate relief, particularly in a year when the company invests in plant, machinery or equipment.
What does the shareholding restriction cost?
It constrains shareholders from holding interests in other companies, which is a genuine trade-off for a founder who may want to start or invest in another venture.
Does it reduce tax on money I take out?
No. Reduced rates apply to company profit; dividends attract dividends tax and salary attracts PAYE. Compare total tax on money in hand.
Qualifying conditions, thresholds, rates and write-off provisions are set in the Income Tax Act and by SARS and are revised. Confirm current requirements with SARS or a registered tax practitioner before structuring around them.