Trevor Manual, in his Budget Speech of 2002, stated that Government is very conscious of the needs of the small business sector and in the unfolding tax reform programme recognises this sector's strategic role in economic growth and employment. His statement is really a continuation of the commitment first shown to development of small businesses in 2000, when special tax rates were first introduced for small business corporations.

Currently, a small business corporation is described in the Income Tax Act as being a close corporation or private company (other than an employment company) where its gross income does not exceed R1 million, the entire shareholding or membership of which is held by natural persons. Further none of the shareholders or members, may at any time during the year of assessment hold shares in any other company (other than listed companies). In addition, not more than 20% of the gross income consists collectively of investment income and the rendering of any personal service by members or shareholders.

In Manual's Budget Speech of 2002, he set out that Government proposes increasing the existing threshold of the first R100 000 of taxable income, which attracts a 15% graduated company tax rate to R150 000. (i.e. a small business will only be liable for 15% tax on the first R150 000 of taxable income, with any excess taxed at the normal company rate of 30%). Furthermore, the qualification threshold of R1 million annual turnover, has been increased to R3 million for companies with years of assessment ending on or after 1 April 2002.

Further, Government recognises that tax and regulatory compliance are burdens which adversely impact on small businesses. South African Revenue Services (SARS) have undertaken to review, with the aim of simplifying tax compliance, existing administrative procedures and existing penalty provisions. Consequently, SARS aims to reduce the penalty burden for first time offenders, simplify tax forms and reduce the number of returns that must be filed.

In addition, SARS will be investigating the merits of introducing a VAT retail method to simplify the VAT obligations for small food retailers who provide both zero-rated and fully taxable supplies. The method would likely provide a formula to calculate the ratio of zero-rated sales to fully taxable sales.

Furthermore, Section 12E of the Income Tax Act, allows a 100% deduction of the cost of plant and machinery brought into use by small businesses on or after 1 April 2001. The plant or machinery must have been brought in for the purpose of the taxpayers trade (other than mining or farming) and used directly by the taxpayer in a process of manufacture carried on by the taxpayer. Costs of moving assets, which may qualify for an allowance under this section, from one location to another are allowed in full.

By introducing tax breaks for small business corporations in 2000, Government recognised this as an area of the economy where encouragement of entrepreneurs may result in great potential economic growth. In this year's budget, Government continues to promote this area of the South African economy by encouraging investment through increased thresholds and a commitment to review certain previously mentioned, cumbersome procedures and provisions.

Disclaimer:
The information contained in this note is intended to provide general guidance. It is not intended to replace the specific advice which should be sought from an appropriate professional advisor before taking any particular course of action

Michelle is a Tax Consultant at Ernst & Young. Visit Ernst & Young's website at www.ey.co.za

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