Small Business Corporation (SBC): A Quick Guide for Accountants
What is a Small Business Corporation (SCB)?
Section 12E of the South African Income Tax Act offers beneficial tax treatment to qualifying Small Business Corporations (SBCs). These benefits include lower tax rates and faster asset write-offs. However, not every small business qualifies. Understanding the rules is essential to helping businesses save on taxes. Understanding the criteria for qualifying as an SBC is vital for tax practitioners and business owners. Below, we look at the requirements to qualify as an SBC, which are illustrated through a practical example.
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The Tax Advantages of SBCs
Qualifying as a Small Business Corporation (SBC) in South Africa provides several tax benefits under section 12E of the Income Tax Act. These benefits include reduced tax rates and favourable asset write-offs to support the growth of small businesses. The main benefits are explained below.
Lower Tax Rates
SBCs benefit from reduced income tax rates compared to the standard corporate tax rate of 27%. The tax rates (2024/2025 financial years) are tiered, encouraging growth:
0% on taxable income up to R95,750.
7% on taxable income between R95,751 and R365,000.
R18,848 + 21% of taxable income above R365,000, up to R550,000.
R57,698 + 27% of taxable income above R550,000.
These rates significantly reduce the tax burden for smaller businesses. Starting a business can benefit significantly in its initial stages, helping it establish and grow with minimal tax obligations.
Accelerated Depreciation on Assets
SBCs can benefit from faster write-offs on qualifying assets:
100% Write-Off: Plant and machinery used in manufacturing or similar processes can be fully deducted in the year they are first used.
50/30/20 Depreciation: Other qualifying assets can be written off over three years (50% in the first year, 30% in the second, and 20% in the third).
This allows businesses to recover the cost of their investments more quickly, boosting cash flow.
The Requirements to Qualify as an SBC?
For a business entity to qualify as an SBC, it must meet ALL criteria listed below annually:
The entity must be a registered legal entity, i.e. close corporation, cooperative, private company, or personal liability company, as defined by the Companies Act, 71 of 2008.
All shareholders or members must be natural persons.
Gross income for the relevant financial year of assessment must not exceed R20 million.
Shareholders or members must not hold shares in other companies, except for certain permissible holdings such as shares in listed companies.
Provision of Personal Services:
Investment income and income from personal services must not exceed 20% of total receipts, accruals (excluding capital receipts), and capital gains.
A personal service is defined as income derived from certain professional services listed in section 12E(4)(d), such as in the fields of accounting, actuarial science, architecture, auditing, broadcasting, consulting, education, engineering, journalism, legal, medical, and IT services.
The service must be personally performed by a shareholder or member of the entity or a connected person (e.g., a relative or spouse). This rule prevents businesses operated solely by owners from gaining SBC benefits when the income is derived primarily from personal effort or expertise.
An entity is exempted from being classified as a personal service provider if it employs at least three full-time, unconnected employees who are actively involved in the core business of rendering the service.
Failure to meet any of these criteria disqualifies the entity from SBC benefits.
The Case Study of Elite Designs CC
Elite Designs CC is a close corporation run by two members, Alex and Jamie. It specialises in graphic design, branding, and website development. The business generated a turnover of R15 million in the tax year. Both members actively rendered services, and no other employees were hired during the year. The company holds no shares or interests in any other entity.
Does Elite Designs CC Qualify as SBC?
Legal Entity: Elite Designs CC is a close corporation and meets this requirement.
Ownership by Natural Persons: Alex and Jamie are natural persons fulfilling this condition.
Gross Income: The R15 million turnover is below the R20 million threshold.
Shareholding in Other Entities: Neither member holds shares in any other company, satisfying this criterion.
Business Activity Restrictions:
The income derived predominantly constitutes personal services (graphic design and branding fall under consulting and broadcasting fields). The gross income qualifying for personal services exceeds the 20% threshold.
The entity does not qualify for the exemption from the "personal service provider" classification due to its lack of unconnected employees.
In conclusion, based on the above analysis, Elite Designs CC does not qualify as an SBC.
Practical Guidance for Business Owners
To optimise tax efficiency under SBC provisions:
Plan staffing strategically to employ at least three full-time, unconnected staff members to avoid disqualification due to personal service income.
Monitor shareholdings and avoid holding impermissible shares in other entities to maintain SBC eligibility.
Diversify income streams to minimise reliance on investment or personal service income to meet the 20% threshold requirement.
Read more about the SBC benefits and how to qualify in the SARS's Interpretation Note 9.
