Small businesses. Picture: KOPANO TLAPE
Small businesses. Picture: KOPANO TLAPE

TREASURY has partially acceded to demands for the retrospective extension of small business corporations’ tax benefits to personal liability companies.

However, it has agreed to backdate the application of the benefit only from the 2013 tax year, instead of the 2011 tax year which tax experts wanted.

The concession, announced by Treasury chief director of tax design Cecil Morden at a briefing to Parliament’s two finance committees on Wednesday, will have significant tax benefits for personal liability companies which have been taxed at the normal flat corporate tax rate of 28% since 2011.

These companies include architects, lawyers, accountants and a host of other enterprises which should have paid the lower tax rates enjoyed by small businesses.

Their exclusion was a mistake which arose when the Income Tax Act was aligned in 2011 with the new Companies Act which specifically excluded personal liability companies from the definition of a small business corporation.

The draft Tax Laws Amendment Bill initially proposed to correct this error for years of assessment ending on or after March 1 2016 by expressly including personal liability companies in the definition of small business corporation but tax experts complained that this was unfair as personal liability companies had had to pay tax rates higher than they ought to have since 2011 and therefore the measure should be made retrospective to 2011.

Morden conceded that there was no policy basis for the exclusion of these companies from small business tax benefits.

"The effective date will be changed from 1 March 2016 to 1 March 2013. As such personal liability companies will benefit from the favourable small business tax regime in respect of years of assessment commencing on or after 1 March 2013. This date is proposed as years of assessment prior to the 2013 year of assessment would have prescribed," Morden said.

He did not anticipate that the South African Revenue Service would have to pay back large amounts in refunds to personal liability companies that had paid tax at the corporate tax rate as he understood that most had continued to assume that they were beneficiaries of the small business tax regime. These companies would however be freed of penalties and interest for their "underpayment".

PricewaterhouseCoopersSA tax partner Kyle Mandy partly welcomed the concession but said it did not go far enough as it should be extended to 2011.