South Africa: Two New Types Of Entity Receive Special Tax Treatment

Last Updated: 1 April 2009
Article by Peter Surtees

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.

Micro businesses

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 business entrepreneur.

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 vendors.

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 company.

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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