Refundable compliance rebate – revision of small business corporation tax relief

On 17 July 2014, the National Treasury released the draft Taxation Laws Amendment Bill (TLAB) which aims to give effect to the various tax proposals announced in the 2014 budget.

One of the important proposals relates to the revision of the Small Business Corporation (SBC) tax regime. An SBC is defined in s12E(4)(a) of the Income Tax Act, No 58 of 1962 as any close corporation or cooperative or any private company as defined in the Companies Act, No 71 of 2008 (thus excluding trusts,
sole proprietors and partnerships), all shareholders of which are at all times during the year of assessment natural persons, where the gross income for the year of assessment does not exceed R20 million per annum. A number of other limitations with regard to shareholding and professional service businesses are included in the definition.

An enterprise which complies with the abovementioned requirements, amongst others, can opt for the SBC tax regime to apply to their enterprise. SBCs are not taxed at the fl at company rate of 28%. Instead a progressive tax rate is applied. Enterprises with an annual turnover of less than R1 million can opt for a turnover tax regime to apply to their enterprise, in terms of which such enterprise is taxed on their turnover rather than taxable income. According to the Draft Explanatory Memorandum on the TLAB, this is meant to minimise compliance costs and
to make it easier for enterprises to calculate their tax liability.

Having regard to the above, the Davis Tax Committee released an Interim Report on Small and Medium Enterprises: Taxation Considerations (Report) on 14 July 2014, which provides that the current lower tax rates for SBC’s are not effective and do little to support the objective of small business growth. According to the Report, the current regime is:

• not beneficial to SBCs with no taxable income despite such SBCs having the same tax compliance burden as profitable SBCs; and
• provides relief to only 50,000 enterprises and in some instances enterprises which were not originally intended as beneficiaries.

The Report further contends that over 50% of SBCs have an annual turnover of less than R1 million. Therefore, it seems that the turnover tax regime is a more suitable regime for these enterprises.

In order to mitigate the concerns raised in the Report, the TLAB proposes to replace the reduced rate SBC regime with an annual refundable compliance rebate (RCR). SBCs will be taxed at 28% and not according to the progressive rate. Enterprises with a turnover of between R1 million and R20 million that are tax-compliant, with regard to tax returns and liabilities, will be entitled to receive an annual refundable tax rebate of R15,000. As this rebate is refundable, enterprises in a tax loss position are also eligible to receive it.

Based on our understanding, the SBC incentive regime was introduced to create a more enabling environment for entrepreneurial businesses to grow and expand their operations by employing more people. Amongst other issues, SBCs have indicated that tax compliance costs remain a major problem. In light of the aforementioned, the introduction of the RCR as a means of rewarding
tax-compliant SBCs and compensating them for the additional costs incurred in achieving tax-compliant status will assist SBCs.

However, the fixed amount of R15,000 may be inadequate, having regard to the costs actually incurred by profitable SBCs in striving to achieve tax compliance.
This is illustrated by an example in the Draft Explanatory Memorandum on the TLAB which provides:

Example 2:
Small business corporation B has a taxable income of R750,000.

Outcome 1:
Under the current SBC regime (R750,000 – R550,000) x 28% + R59,702
Tax liability = R115,702

Outcome 2:
Under the proposed RCR regime R750,000 x 28% - R15,000
Tax Liability = R195,000

The proposed amendments will come into operation on 1 January 2016 and will apply in respect of years of assessment commencing on or after that date.