Small business corporations and the Income Tax Act section 12E

"Section 12E of the Income Tax Act was created for the specific purpose of encouraging new ventures and employment creation and presents the opportunity for small businesses to benefit from reduced rates of taxation," explains Somaya Khaki, SAICA's project director at Tax Suite. "However, section 12E is not intended to benefit any professional person such as an architect or a lawyer who renders his/her service by means of a company or close corporation so in order to qualify you must know whether or not your business fits the requirements of what is known as a small business corporation. In particular, if you are a consultant, you must make sure you know where you stand so that you don't end up submitting incorrect tax returns."

Know where you stand

The nuts and bolts of the Act are that a small business corporation is defined as being either a CC, co-operative or private company with all shareholders being natural persons (that is, not other companies) and a yearly gross income that is less than R14m (although this limit may be increased soon to R20m). Also, none of the shareholders must have a shareholding in any other company (with a few exceptions) and not more than 20% of the company's income can come from investments or from rendering of a personal service.

"It is important to note what is defined as a 'personal service'," emphasises Khaki, "as this is where mistakes could easily be made." The fields of activity listed as personal services in section 12E(4)(d) fall into two categories. The first category includes professional or semi-professional activities that require a particular qualification and, in many cases, a license, certificate, or membership of a professional body in order to practise. Examples of these would be accounting, architecture, education, engineering, health, law and real estate. The second category comprises broadcasting, commercial arts, entertainment and sport.

A recent case that came before the South Gauteng Tax Court shed further light on what qualifies a company as a small business corporation in terms of the Act. In his judgement, Judge Mbha ruled that the term "consulting" must be regarded as the offering of advice by a professional or qualified person and therefore such an activity would fall outside of the requirements of section 12E.

"So while section 12E has potential benefits for small businesses," Khaki concludes, "it is very important to know where you stand and if you meet the relevant requirements."

For further information, go to www.taxsuite.co.za.