Small Business Corporation Qualification

[Amalia]

Hi there, this might be a stupid question but I would like to know if a small joinery business (installing kitchens, cupboards etc.) registered as a close corporation will qualify as a SBC? It is run by one person with one permanent employer with an annual taxable income of less than R14million. I am not sure what is meant by personal service provider.
thanks

[HR Solutions]

It is not a stupid question, but what would make it difficult to answer is the "R14million" .... perhaps you have to be a bit more clearer of the income, because "less" than R14million could be R13million or it could be R400 000.00 or it could be R50 000.00 because you say there is only one employee

[Amalia]

I would say the income is more or less R300 000 per year. sorry if I was a bit unclear...I used the R14 million since that is the cut off for qualifying for a SBC as far as I know. It seems to me that certain types of business do not qualify and I am not sure where a Joinery or Carpentry fits in.
I quote the following from a document I read regarding the qualifications of a Small Business Corporation;

"The change in definition of a Small Business Corporation extends to professional services
companies who may now qualify as a Small Business Corporation, provided the company employs
at least four non-connected full-time employees engaged in the business."

I am not quite sure what this all means. (I am very new to all of this!)

[CLIVE-TRIANGLE]

The R14m is total income, in other words turnover, interest and so on, but excluding capital income (sale of assets)

Without delving deep into your cc's affairs, it is doubtful that it could be classed as a personal service company. You fall foul of the 3 employee issue, but that is only one of the various criteria.

There is actually nothing more to do, other than answer the related questions when you submit the tax return. There is a question regarding the personal service company issue, and I believe you should be able to answer to the effect that you are not one.

[Greig Whitton]

Hi there, this might be a stupid question but I would like to know if a small joinery business (installing kitchens, cupboards etc.) registered as a close corporation will qualify as a SBC? It is run by one person with one permanent employer with an annual taxable income of less than R14million. I am not sure what is meant by personal service provider.

For the sake of completeness, there are several tests that your business needs to pass in order for it to qualify as a Small Business Corporation. They are, in order from simplest to most complex:

1. Is your business a close corporation, co-operative, or registered company?

[If "NO", then it won't qualify]

2. Does your business' gross income (including non-taxable income, but excluding taxable capital gains) exceed R14 million?

[If "YES", then it won't qualify]

3. Are all shareholders or members natural persons?

[If "NO", then it won't qualify]

4. Do any shareholders or members hold any shares or have any interest in the equity of any other companies that entitles them to any profits, income, or capital?

[If "YES", then it won't qualify]

[Note: There are a number of shareholding exceptions to this requirement, including listed companies, collective investment schemes, body corporates, share block companies, venture capital companies, and dormant or shelf companies.]

5. Does more than 20% of your business' gross income come from investment income and/or personal services?

[If "YES", then it won't qualify]

Investment income, broadly speaking, is any income derived from lending money or trading in financial instruments, securities, or immovable property. It includes dividends, royalties, property rental income, annuities, and interest.

Personal services are services performed personally by shareholders or members that fall within the following fields: accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftsmanship, education, engineering, entertainment, health, information technology, journalism, law, management, performing arts, real estate, research, secretarial services, sport, surveying, translation, valuation, or veterinary science.

[Note: The 20% gross income limitation with respect to income derived from personal services does not apply if:

(a) The personal services are not performed personally by shareholders or members;
(b) Your business employs three or more people who render the personal services on a full-time basis; and
(c) The people employed to render the personal services are not connected persons in relation to any shareholders or members.]

[Note to the note: Someone is a connected person in relation to a natural person if they are:

(a) A relative; or
(b) A trust that benefits the natural person in question.]

6. Is your business a personal service provider?

[If "YES", then it won't qualify]

A personal service provider is NOT the same thing as providing a personal service because "personal service provider" and "personal service" are separately defined.

A personal service provider is a company or trust where any services rendered to clients are rendered personally by anyone who is a connected person in relation to the company or trust, and:

(a) The person would be regarded as the client's employee if they were rendering it directly instead of on behalf of the company or trust; or
(b) If the services are performed mainly at client premises, the person rendering the services is subject to the client's supervision or control; or
(c) More than 80% of the company's or trust's income from services rendered is derived from a single client.

[Note: Someone is a connected person in relation to a trust if they are:

(a) A beneficiary of the trust; or
(b) A connected person in relation to a beneficiary of a trust.

The definition of a connected person in relation to a company or close corporation is a lot longer and more complex, but includes members and their relatives.]

[Additional note: The exclusion of personal service providers does not apply if a company employs three or more people (excluding shareholders and connected persons in relation to shareholders) who render the personal services on a full-time basis.]

[Amalia]

Up to no 5 the business still qualifies but I guess it falls out at no 6 because (1) the owner of the business personally installs the kitchens etc. (2) together with only one employee and of course (3) this will all happen at the client's premises. It is a pity though, a lot could have been saved on taxes.
Thanks again for all the replies.

[Greig Whitton]

Up to no 5 the business still qualifies but I guess it falls out at no 6 because (1) the owner of the business personally installs the kitchens etc. (2) together with only one employee and of course (3) this will all happen at the client's premises. It is a pity though, a lot could have been saved on taxes. Thanks again for all the replies.

Even if the owner personally installs the kitchens, only employs one person, and works at client premises, the business would still qualify if:

(1) The owner would not be regarded as a client's employee if he wasn't doing the work on behalf of his business; AND
(2) The owner is not subject to client supervision or control; AND
(3) No single client is responsible for 80% or more of the business' income.

I think that there is a pretty good chance that the business would qualify as a SBC, but I don't know enough about it to say for sure.

[CLIVE-TRIANGLE]

Amalia, Greig is right. You must read 6 carefully; the connected person issue and one of a,b or c.

(a) is clearly out, and I would imagine (b) too. (c) might apply, but very unlikely.

[Amalia]

Thank you Greig Whitton and Clive Triangle, it is a bit more clear to me now. So I guess there is a good chance to still qualify which would be really great (point no. c does not apply either). I am seeing a consultant/tax practitioner this afternoon so hopefully I will be able to sort everything out.