Section 12E of the Income Tax Act for small businesses was created specially to encourage new business ventures and to generate employment. Section 12E is an opportunity for small businesses to benefit from reduced rates of tax.
Section 12E of the Income Tax Act for small businesses requires that a small business is either a CC (Close Corporation), co-operative or private company with all shareholders being natural persons. The annual that is less than R 20Million.
No shareholder must have shares in any other company (there are a few exceptions). Less than 20% of the company’s income can come from investments or from providing a personal service.
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What is a personal service?
There are 2 categories of Personal services in section 12E(4)(d):
- Professional or semi-professional activities that require you to have a particular qualification and a license, certificate, or be a member of a professional body in order to practice
- The second category covers broadcasting, commercial arts, entertainment and sport
If you are a professional or qualified person offering advice or “consulting” then this is an activity that would fall outside of the requirements of section 12E.
An entity cannot qualify as an SBC if more than 20% of the total of all receipts (income) are generated from the rendering of a personal service.
To sum it up the typical personal service provider as defined in the Fourth Schedule of the Income Tax Act 58 of 1962, is prohibited from qualifying as a small business company.
You will qualify as a small business if you employ three or more full-time employees, the employees must be employed by you on a full-time basis.