Page 216 - SAIT Compendium 2016 Volume2

IN 9 (5) Income Tax acT: InTeRPReTaTIon noTes IN 9 (5)
The services rendered by the close corporation do not fall within the de nition of a ‘personal service’ as the close corporation employed three full-time employees (excluding the members or connected persons to the members) throughout the year of assessment to render the consulting services. Any income attributable to services rendered by the members is therefore not subject to the 20% limitation. The 20% limitation must, however, be applied to all investment income received or accrued.
The total of all receipts and accruals and capital gain for the purposes of calculating the 20% limitation is R4 953 000 (R5 903 000 – R950 000).
The investment income (royalties) expressed as a percentage of the total of all receipts and accruals (including the capital gain) is R1 113 000/R4 953 000 3 100 = 22.47%.
The investment income exceeds the 20% limitation for the relevant year of assessment and the close corporation will not qualify as an SBC, despite the fact that the services rendered do not constitute the rendering of a personal service and the ownership and gross income requirements have been met.
4.6 The company may not be a personal service provider
Section 12E (4) (a) (iv) effectively excludes a ‘personal service provider’, as de ned in paragraph 1 of the Fourth Schedule, from the SBC de nition. However, such a company* may still qualify as an SBC if the company, throughout the year of assessment, employs three or more full-time employees who are engaged on a full-time basis in the business of the company of rendering the relevant service.
The terms ‘personal service’ and ‘personal service provider’ are both de ned in the Act and therefore have different meanings. A ‘personal service’ is de ned in section 12E (4) (d) and concerns a speci c category of activities that are performed by the shareholders of the company.
De nition of a ‘personal service provider’ — paragraph 1 of the Fourth Schedule
‘personal service provider’ means any company or trust, where any service rendered on behalf of such company or trust to a client of such company or trust is rendered personally by any person who is a connected person in relation to such company or trust, and—
(a) such person would be regarded as an employee of such client if such service was rendered by such person directly
to such client, other than on behalf of such company or trust; or
(b) where those duties must be performed mainly at the premises of the client, such person or such company or trust
is subject to the control or supervision of such client as to the manner in which the duties are performed or are to
be performed in rendering such service; or
(c) where more than 80 per cent of the income of such company or trust during the year of assessment, from services
rendered, consists of or is likely to consist of amounts received directly or indirectly from any one client of such company or trust, or any associated institution as de ned in the Seventh Schedule to this Act, in relation to such client
A company that falls within the above de nition of a ‘personal service provider’ will, therefore, not qualify as an SBC. Should that company, however, employ three or more full-time employees (excluding shareholders or any persons connected to the shareholders) throughout the year of assessment and these employees are engaged in the business of the company in rendering the speci c service, that company may qualify as an SBC.
5. SBC assets — sections 12E (1) and (1A)
(1) Where any plant or machinery (hereinafter referred to as an asset) owned by a taxpayer which quali es as a small business corporation or acquired by such a taxpayer as purchaser in terms of an agreement contemplated in paragraph (a) of an ‘instalment credit agreement’ as de ned in section 1 of the Value-Added Tax Act, 1991 (Act 89 of 1991)—
(a) is brought into use for the rst time by that taxpayer on or after 1 April 2001 for the purpose of that taxpayer’s trade (other than mining or farming); and
(b) is used by that taxpayer directly in a process of manufacture (or any other process which in the opinion of the Commissioner is of a similar nature) carried on by that taxpayer,
a deduction equal to the cost of such asset shall be allowed in the year that such asset is so brought into use.
(1A) Subject to subsection (1), where any machinery, plant, implement, utensil, article, aircraft or ship in respect of which a deduction is allowable under section 11 (e) (‘the asset’) is acquired by a small business corporation under an agreement formally and nally signed by every party to the agreement on or after 1 April 2005, the amount allowed to be deducted in respect of the asset must, at the election of the small business corporation and subject to the provisions
of that section, be either—
(a) the amount allowable in terms of and subject to that section; or
(b) an amount equal to 50 per cent of the cost of the asset in the year of assessment during which it was rst brought
into use, 30 per cent in the rst succeeding year and 20 per cent in the second succeeding year.
* Although the de nition of a ‘personal service provider’ refers to companies and trusts, for purposes of SBCs, trusts are ignored.
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