Chapter 3 - Business Entities Flashcards Preview

Fundamentals Of South african Tax > Chapter 3 - Business Entities > Flashcards

Flashcards in Chapter 3 - Business Entities Deck (71):

The trade shall not be considered independent

If it has to be performed mainly at the premises of the person from who payment is received and is subject to his/her supervision either as to the way in which the work is performed or to the number of hours that are worked


Supervision and control are only factors indicating employment if

The person is supervised or controlled mainly at the premises of the employer


The control as to the manner of work usually means

A close managing of the employee's time


Where a person has three or more full time employees who are not connected to him

He is deemed to carry on an independent trade


What test is used by SARS to determine the extent to which a person is under an employer's control?

The Dominant Impression test grid


Does the control have to come directly from the employer?

No , an employer can hire a consultant for the specific purpose of providing supervision or control.


The reference to being engaged on a full time basis in rendering the service to means

That the employee must spend all his/her time on that part of the business of the company of rendering the services.


Why is it important to distinguish between an employee and a independent contractor?

Because it doesn't only affect the payer's responsibilities to deduct employee's tax , but the payee may also be stopped from deducting most of his operating expenses from his income if he is a common law employee


The various taxpayers are

1. Sole traders
2. Partnerships
3. Companies
4. Trusts
5. Farmers


Sole trader

Is not a separate legal entity and is therefore not a separate taxpayer.


Once a sole trader's taxable income has been determined

His/her tax liability is calculated using the tax table ( used for individuals) and thereafter the REBATES are deducted


Sole traders pay tax on their profits

In terms of the provisional tax collection method


A partnership is not a separate legal entity therefore

Not a separate taxpayer


The partnership is not assessed as a taxpayer

But the individual partners are


The partners in a partnership pay tax on the partnership profits according to

The provisional tax collection method


Companies include

1. Small business corporations
2. Close corporations


Definition of company

1. South African companies
2. SA public entities-universities
3. Foreign companies
4. Co-operatives
5. SA charities
6. Foreign collective investment schemes
7. A collective investment scheme
8. Close corporations


A company's year of assessment is the same as its

Financial year


Unlike individuals and trusts , a company's year end

Need not end on the last day of February


New tax rates announced in the budget speech take affect immediately for companies with year ends falling

Within a period from 1 April of that year to 31 March the next year.


The amendments to the Act are generally only effective for year ends

From 1Jan to 31 December of the following year, unless provided otherwise in the Act


All companies which are not PUBLIC Companies

Will be regarded as PRIVATE COMPANIES. A CC is regarded as a Private company


The profits of the company are distributed to shareholders by means of a



Specified date

This is the last day of the year of assessment of the company


Equity shares are

1. Shares in a company
- excluding any share that doesn't carry the right to participate beyond a specified amount in a distribution


A member's interest in a close corporation is

An "equity share"


Preference shares issued will only be equity shared if

1. They participate in profits to a unlimited extent
2. They participate in the distribution on liquidation.


Companies automatically classified as public companies

1. PBO
2. Co-op
3. Insurance
4. Any public utility company
5. Gold and diamond mining
6. Non resident ships and aircraft companies


Dividends tax is levied at a rate of

15% of the amount of 'any dividend paid by any company other than a HQ company '


Dividends tax is a withholding tax that is

Withheld by the company before paying the net amount ( dividend declared- dividends tax ) over to the shareholder


Because the def of a company and the def of share includes a member's interest in a CC . Any distribution of profits by a CC

Will be subject to dividends tax



1. Any CC , Co-op or private company
2. All shareholders are Natural persons ( for the entire year of assessment)
3. The GI does not exceed R20 mil
4. None of the SH or Members at any time during the YOA holds any shares/any interest in the equity of any other company


Permitted shareholding for SBC shareholders are

1. A listed company
2. Any portfolio of a collective investment scheme
3. <5% social/consumer co-op
4.<5% primary savings co-op
5. Venture capital company
6. Friendly society
7. Any company
- hasn't ever owned assets >R5000
8. Any company liquidate, windup and deregister


Investment income of a SBC CAN NOT EXCEED

20% x ( revenue receipts &accrual + capital gains)


Investment income is defined as

1. Dividends, royalties, rental from immovable properties, annuities etc
2. Proceeds derived from investment/ trading in financial instruments, marketable securities or immovable property


Personal service is defined as

Any service in the field of accounting, actuarial science, architecture, auctioneering , auditing ,etc


SBC also qualifies for

1. 100% allowance- manufacturing plant and machinery
2. Normal wear and tear allowance
3. 50:30:20 write off (i.e. Over 3 years ) in respect of other assets


There are 2 mayor benefits of being a SBC

1. The tax rate of a SBC is considerably lower than that of a normal company.
2. The immediate write off(100%) of all plants and machinery used in manufacturing in the year of assessment in which it is brought into use for the first time .
3. Accelerated write off allowance (50:30:20)


Close Corporations

-body corporate
- close corporations act
- separate legal entity
-1-10 members
- membership restricted to Natural persons and trusts


A CC can be classed as a



For tax purposes, a micro business

Is a special type of enterprise.

MB can be companies or sole traders


Turnover tax

Available only to all entities that qualify as MB


Substitute for income tax, capital gains, VAT , dividends tax



Why was turnover tax introduced?

Mainly to reduce the tax compliance burden of small businesses


Benefit for being micro business

The profits are not subject to NORMAL TAX.
--This means that it is not necessary to record trading stock at the year end .
-- not necessary to keep records of expenses
-- taxed on receipt basis , not accruals.


Section 48 C of the income tax act , regarding MB includes the following provisions

1. If a amount is received and included in a reg MB's taxable turnover, it can not b taxed again.
2. If an amount accrues to a reg MB , +would've been included. But the. Business is no longer reg only 10% will be included
3. When deregistered - trading stock on that date is included as opening stock at the beginning of that year of assessment, since it didn't receive the deduction upon purchase


Can trusts qualify as MB?

No they can not


Main requirement for MB

The qualifying turnover for the YOA must not exceed R1 mil


Qualifying turnover for MB is defined as

1 total receipts
2. From carrying on business activities
3. Excl. any # of a capital nature
4. Excl. any # exempt from tax
- small business funding
- # received/ accrued from
GOV grants


If , for example a capital receipt pushes the person's receipts over 1 million

It does not affect his registration as a MB


The turnover limit for qualifying turnover is proportionately reduced

If the person carries on business for less than 12 mnths in the year.

This is done by taking into account the number of full months that business was NOT carried on.


Once the entity qualified as a MB , the next step is

To calculate the taxable turnover


Exclusions for taxable turnover for MB

1. For NP - investment income
2. Small business funding
3. Government grants
4. Amount previously subjected to the normal provisions of the income tax act
5. Refunds


Investment income includes

1. Rental on immovable property. Rental on movable is not included.
2. Dividends and interest
3. Proceeds from the disposal of financial instruments
4. Royalties, annuities and similar income


A micro business pays tax called

Turnover tax on its taxable turnover.


Other taxpayer's tax is calculated on

Taxable income


Micro businesses do not pay according to the provisional tax collection method. They are however

Subject to interim payments, and pay tax twice a year


Why are trusts established?

As a vehicle for tax and estate planning purposes


What a trust does with assets or profits depends on what is found in the

Trust deed


The trust deed is a

Legal doc that is drawn up by the original donor to the trust and it contains the set of rules that governs the trust.


Trusts have also been used to limit a taxpayer's tax liability but for this reason

Certain provisions in the Act have been created to ensure that tax avoidance does not occur.


A trust is a separate legal entity and

Is therefore a separate taxpayer


The profit earned by a trust

Can either be held in the trust OR
be distributed to the beneficiaries of the trust.


A trust is taxed at a flat rate of



The Income distributed by a trust to a beneficiary ( if the beneficiary is an individual)

Will be taxed as taxable income of the beneficiary using the tax tables



Special provisions relating to the calculation of taxable income and tax payable.


Because of the importance of farming

Special tax provisions apply to apply


Salaried taxpayers make provision for their annual tax liability by

Paying employees tax on their salary on a monthly basis


Does employees tax differ from income tax ?

No , it is merely a method used by SARS to collect the tax that is due to them


In case of employee tax who is responsible for deducting, collecting and paying over the tax

The employer is responsible


Provisional tax is not another tax but rather

A method of collecting taxes