Tax incentives are always designed to increase a firm’s profitability by decreasing its overall tax burden in various ways. Some of these ways are:

  • Tax exemptions fully excuse firms from paying certain liabilities.
  • Tax reductions partially offset the amount a firm is obligated to pay in taxes.
  • Tax refunds and rebates repay a portion of the taxes a firm has already paid.
  • Tax credits are more flexible, they allow a firm to offset a portion of its tax obligation, and they can often be carried forward to subsequent tax years.

To receive tax incentives, companies must meet certain requirements from the government. These vary depending on the tax incentive, but common ones include:

  • belonging to certain industries
  • investing so many funds in a particular project
  • creating a particular number of jobs
  • reaching a minimum payroll threshold

The qualifications often depend on the tax incentive’s purpose, which might be creating new jobs, stimulating private investment, or increasing research and development.

 

Below are some of the tax incentives available to SMMEs:
Section 12I Allowance/Incentive

Section 12I Tax Incentive is designed to support Greenfield investments, as well as Brownfield investments. The Greenfield investments are meant for new industrial projects that utilise only new and unused manufacturing assets and the Brownfield investments are meant for expansions or upgrades of existing industrial projects. These incentives offer support for both capital investment and training.

Objectives of S12I

The objectives of the incentive programme are to support investment in manufacturing assets, to improve the productivity of the South African manufacturing sector; and training of personnel, to improve labour productivity and the skills profile of the labour force.

 

Offerings of S12I

Investment Allowance
  • 55% of qualifying assets or a maximum of R900 million investment allowance in the case of any Greenfield project with a preferred status (100% if located in a Special Economic Zone or “SEZ”)
  • 35% of qualifying assets or a maximum R550 million investment allowance in the case of any other Greenfield project (75% if located in a Special Economic Zone or “SEZ”);
  • 55% of qualifying assets or a maximum of R550 million investment allowance in the case of any Brownfield project with a preferred status;
  • 35% of qualifying assets or a maximum of R350 million investment allowance in the case of any other Brownfield project.
  • Qualifying assets are defined as new and unused buildings and new and unused plant & machinery contracted for and acquired after the date of approval and brought into use within 4 years from the date of approval (implementation period).
  • The investment allowance may be deducted from taxable income in the financial year when assets are brought into use (start of production).
  • The compliance period is the period during which the company must comply with all the approved criteria and is defined as the period commencing at the beginning of the year of assessment following the year of assessment in which assets are first brought into use and ending at the end of the year of assessment three years after the year of assessment in which assets are first brought into use. The compliance period is therefore three full financial years after the year in which assets are brought into use.
  • Progress reports in the prescribed format must, in terms of section 12I (11), be submitted within 12 months after the financial year covered by the report and must be submitted annually thereafter until the end of the Compliance Period. The first Progress Report must cover the financial year during which approval is granted.
Training Allowance
  • An additional training allowance of the lesser of R36 000 per full time employee or total training expenses may be deducted from taxable income for every financial year after the date of approval of the application (but not earlier than the financial year prior to the year during which assets are brought into use) until the end of the compliance period.
  • A maximum total additional training allowance per project, amounting to R20 million, in the case of a qualifying project, and R30 million in the case of a preferred project is applicable.
  • According to the point system, an Industrial Policy project will achieve ‘qualifying status’ if it achieves at least 4 (four) of the total 8 points, and ‘preferred status’ if it achieves at least 7 (seven) of the total 8 points
Targeted Beneficiaries of S12I

The investment must be:

  • Greenfield project (new project). Minimum investment in qualifying assets of R50 million is required; or
  • Brownfield project (expansion or upgrade). A minimum additional investment in qualifying assets of R30 million is required; and
  • Classified under, “Section C: Manufacturing” in version 7 of the Standard Industrial Classification Code (“SIC Code”)

The project should:

  • Upgrade an industry within South Africa (via an innovative process, cleaner production technology);
  • Utilising new technology that results in improved Energy Efficiency;
  • Provide general business linkages within South Africa;
  • Acquire goods and services from small, medium, and micro-sized enterprises (SMMEs);
  • Provide skills development in South Africa.
The Income Tax Act (Section 12H)

Section 12H provides for a learnership allowance to employers in respect of qualifying 'registered learnership agreement'(s) entered between the employer and employee. The purpose of the allowance is to provide an incentive for employers to train employees in a structured environment to encourage skills development and job creation.

The allowance consists of an annual allowance as well as a completion allowance. The annual allowance is available in respect of each year of assessment in respect of which the learner is a party to a registered learnership agreement and a completion allowance is a once-off allowance available in the year of assessment in respect of which the learner successfully completes the registered learnership agreement.

The venture capital company (Section 12J)

Section 12J was introduced as a tax incentive to encourage equity investment through Venture Capital Companies’ in small and medium-sized businesses and junior mining companies. An approved VCC creates a fund in which all the money invested in the VCC’s shares by investors is held. This money is generally known as capital or venture capital. The money received from the investors is then invested in qualifying companies.

Important Definitions

 

  • Impermissible trade means trade-in:
    • Immovable property other than trade as a hotelkeeper
    • Carried on by a bank as defined in the Banks Act
    • Financial or advisory services
    • Gambling
    • Liquor, tobacco, arms, or ammunition
  • Junior Mining Company: any company solely carrying on a trade of mining exploration or production which is either an unlisted company as defined in section 41 of the Act or listed on the alternative exchange division of the JSE Limited.
  • Venture capital share - An equity share issued by a venture capital company and must not be a hybrid debt instrument or constitute a third-party backed share.Venture Capital Company - a company that has been approved by the Commissioner in terms of section 12J. A company must meet all of the following preliminary requirements to qualify for an approved VCC status for each year of assessment:
  •  Qualifying Company
    • A resident company that is not controlled by a group company in relation to a group of companies connected to a venture capital company;
    •  Tax compliant as confirmed by SARS;
    • The unlisted company as defined in section 41 of the Act or junior mining;
    • Company is not carrying on an impermissible trade;
    • During any year of assessment of that company that ends after the expiry of a period of 36 months commencing on the first date on which that company issued any share to a venture capital company-
      • the sum of the “Investment Income” as defined in section 12E (4) (c), derived by that company does not exceed an amount equal to 20 percent of the gross income of that company for that year; and
      • not more than 50 percent of the aggregate amount received by or that accrued to that company from the carrying on of any trade was derived, directly or indirectly, from a person—who holds a share in that venture capital company; or who is a connected person in relation to a person who holds a share in that venture capital company;
    • No person who holds a share in a venture capital company to which that company has issued any share holds, directly or indirectly and whether alone or together with any connected person in relation to that person, more than 50 per cent of the participation rights, as defined in section 9D (1), or of the voting rights in that company; and

    • That company does not carry on any trade in relation to a venture, business or undertaking or part thereof that was acquired by that company, directly or indirectly, from a person—
      • who holds a share in a venture capital company to which that company has issued any share; or
      • who is a connected person in relation to a person who holds a share in that venture capital
Process of S12J

An approved VCC creates a fund in which all the money invested in the VCC’s shares by investors is held. This money is generally known as capital or venture capital. The money received from the investors is then invested in qualifying companies.

A qualifying share is a specific share that has been issued by a qualifying company to a VCC and does not include a share in a qualifying company that was purchased by the VCC from a third party.

Section 12J(2) allows a taxpayer, subject to certain conditions, to claim a deduction for expenditure actually incurred by that taxpayer in acquiring any venture capital share issued to that taxpayer by a VCC subject to certain terms and conditions. Only costs directly connected with the acquisition of the venture capital shares are deductible.

The deduction is limited where the taxpayer used a loan to finance the acquisition to the amount that the taxpayer could lose where no income is received or accrued from any future disposal of the VCC shares.

Any taxpayer qualifies to invest in an approved VCC.

The approved VCC must issue investor certificates to its investors which contains the amounts invested in that company and stating that company has been approved by the Commissioner as a VCC.

The section 12J deduction is limited to:

  • R5 million if the taxpayer is a company; and
  • R2,5 million if the taxpayer is a person other than a company.

No deduction will be allowed if at the end of any year of assessment, after the expiry of a period of 36 months commencing on the first date of the issue of venture capital shares, a taxpayer is a connected person to the VCC. If corrective steps acceptable to the Commissioner are not taken by the company, the Commissioner will withdraw the approval of that company, and an amount equal to 125 percent of the expenditure incurred by that investor to acquire shares in the VCC will be included in the income of that VCC in the year of assessment in which such approval has been withdrawn.

Where the venture capital shares are disposed of by the taxpayer within five years of initial acquisition, the section 12J deduction is recouped (recovered) under the general recoupment rules of section 8(4) of the Act.

Low-cost residential units

Section 13sept provides for a deduction for the sale of low-cost residential units by an employer to its employee through an interest-free loan.

  • The deduction is limited to 10% of the amount owing by the employee or associate employee of the taxpayer.
  • Where the taxpayer operates a mine, section 13sept must be applied subject to section 36 of the income tax Act.
  • It is important to note that the deduction is not applicable where
    • Employees are required to pay interest on the outstanding loan
    • The low-cost units were sold to employees at a value higher than the actual cost of the land and building costs for the unit.
  • Amounts claimed in terms of 13sept(2), and subsequently paid by the employee to the employer are deemed to be recovered or recouped by the taxpayer. The amount that is deemed to be recovered or recouped is the lesser of the amount actually paid by the employee or the amount allowed as a deduction in the taxpayer’s tax computation in the current or previous years of assessment.
Section 12T

This section of the Income Tax Act is applicable to individuals. The section provides that amounts received by or accrued to a natural person from a tax-free investment will be exempt from normal tax.

A natural person may contribute R33 000 per tax year to such funds and lifetime contributions are capped at R500 000.

Section 12R

Income tax concessions are available to qualifying companies, as defined in section 12R of the Income Tax Act. In short, this would be a company incorporated and effectively managed in South Africa that carries on business from a fixed place situated in a (Special Economic Zones) SEZ.

The income tax concession available is a reduced tax rate of 15%, as opposed to the normal 28%, that will apply to the qualifying company. This concession is however only available to qualifying companies that do not incur more than 20% of deductible expenditure or do not receive more than 20% of their income from connected persons who are residents or permanent establishments in South Africa of non-resident connected persons.

Section 12P

Amounts received or accrued in respect of government grants are effectively exempted from tax in accordance with section 12P of the Income Tax Act.

Section 12P exempts a government grant where that grant is one that is listed in the Eleventh Schedule to the Income Tax Act or is specifically identified by the Minister of Finance by notice in the Gazette.

Corporate tax at a reduced rate (SBCs)
  • Corporates in South Africa pay taxes at a flat rate of 28%. However, small business corporations (SBCs) can benefit from reduced tax liability if their taxable income does not exceed R550 000 in any year of assessment. A qualifying SBC with a year of assessments ending on or after 1 April 2019 will not pay tax on the first R79 000 taxable income.
  • For any amount exceeding R79 000, the SBC will pay tax at a progressive rate starting at 7%, 21% of taxable income exceeding R365 000, and 28% on taxable income exceeding R550 000.
  • In addition, SBCs may also qualify for accelerated depreciation/wear and tear allowances against taxable income. Where an SBC purchase an asset during a year of assessment, an SBC may choose to reduce its taxable income by 50% of the cost of the asset in the first year of assessment during which the asset is first brought into use, 30% of the cost in the second year, and 20% in the third year.
  • It should be noted that not all business qualifies as SBCs. Entities that may qualify as an SBC are, close corporation, a co-operative, a private company and a personal liability company, if at all times, during the year of assessment, all of the shareholders or members of that entity were natural persons. For additional requirements refer to section 12E of the Income Tax Act

 

Turnover Tax (Micro Business)

What is turnover tax?

The turnover tax system allows qualifying micro-businesses to register for and pay a single tax known as turnover tax in place of paying the various other taxes.

The turnover tax substitutes income tax (including provisional taxes and capital gains tax) and to some extent dividends tax. However, a micro business is still required to withhold and pay employee taxes and VAT i.e. if a business is voluntarily registered as a VAT vendor.

How to register for turnover tax

Registered micro-businesses may take advantage of a simplified tax system called Turnover Tax.

Turnover turn is registered by completing the TT01 form which is completed manually or online.

How is turnover tax calculated?

Turnover tax is calculated by applying the relevant turnover tax rates to the taxable turnover of the micro business as determined. For any year of assessment commencing on or after 1 March 2019, a registered micro business will not pay turnover tax on a taxable turnover not exceeding R335 000. A turnover tax will be 1% of the taxable turnover exceeding R335 000, 2% of the taxable turnover exceeding R500 000, and 3% of the taxable turnover exceeding R750 000.

Part 2 of the Sixth Schedule to the Income Tax Act states that for a person to qualify as a micro business if that person meets inter alia, the following qualifying requirements:

  • a natural person or the deceased or insolvent estate of a natural person that was a registered micro business at the time of death or insolvency); or
  • a company where the qualifying turnover of that person for the year of assessment does not exceed an amount of R1 million.