Two recent amendments to the Income Tax Act reflect a policy of
encouraging the development of small enterprises. The first of
these is aimed at reducing the compliance burden of micro
enterprises and the second encourages venture capital investments
in small enterprises.
The Sixth Schedule to the Income Tax Act has been introduced to
regulate a turnover tax available to micro businesses instead of
the tax on taxable income with all the administrative and record
keeping, not to mention expense, that this involves. A micro
business may be a natural person, a company or a close corporation,
but not a trust, and its annual turnover may not exceed R1 million.
The taxpayer, if a natural person, may not have shares or a
member's interest in any company or close corporation other
than listed companies, unit trusts, sectional title bodies
corporate or share block companies; or be a personal service
provider; or render a professional service; or earn investment
income greater than 10% of total receipts from the business and
investments. In other words, the target market is the small
In the case of a company, the taxpayer may not have a year end
other than February, which is the year end for individuals; or have
as shareholders or members persons are not natural persons; or be a
tax exempt public benefit organisation or recreational club.
Registration or deregistration may not be reversed for three
years except where, in the case of registration, the taxpayer
ceases to qualify, in which case the Revenue authorities must be
notified within 21 days. Micro businesses may not register as VAT
Tax is based on turnover on a sliding scale ranging from 0% to
7% of turnover.
The decision whether or not to register as a micro business
should not be taken lightly, as not all very small businesses would
benefit. In general, the greater the proportion of expenses to
income, the less attractive it will be to register.
Venture capital investments
Section 12J will come into operation on 1 July 2009 and will
regulate the taxation of venture capital investments. 100% of the
cost of shares in a venture capital company may be deducted. The
venture capital company will not trade, but will merely hold equity
investments in small and medium sized companies, which are known as
qualifying companies. The deduction is limited to natural persons,
listed companies and companies within a listed group. The maximum
amount deductible by a natural person is R750 000 per annum to a
maximum of R2.25 million. Companies do not have this limit, but may
not hold more than 10% of the equity of the venture capital
A venture capital company must be a resident, have its tax
affairs in order, must be unlisted (unless it is a junior mining
company) and may not invest more than 15% of its total capital in
any one company. A qualifying company must also be a resident, with
its tax affairs in order. Its investment income is limited to 20%
of its gross income and it must spend the capital raised from its
share issue within 18 months on tax deductible expenditure.
Qualifying companies are prohibited from carrying on certain
trades: in respect of immovable property (other than hotel
keeping); banking, insurance, money lending or hire-purchase
financing; financial or advisory services, legal, tax,
stockbroking, management consulting, auditing or accounting
services; gambling; liquor, tobacco, arms or ammunition; any trade
as franchisee; or any trade carried on mainly outside South Africa.
Apart from the obvious pro-health discrimination against liquor,
tobacco and gambling, it is clear that the target beneficiaries are
larger versions of the micro enterprise provisions.
It is likely that experience will show that the limits have been
set too low and that not enough enterprises will qualify under
either of these two initiatives. We can probably expect extensions
to these in the short term.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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In response to information provided by FIRS, NSE has sent letters to publicly listed companies, who were purportedly identified by FIRS as non-compliant.
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