Draft Tax Exemption Guide for Small Business Funding Entities

A major challenge in the growth of small, medium and micro enterprises is access to funding due to their inherent risk and lack of collateral together with the fact that they often lack the necessary training and commercial skills to manage and develop the business.

Several funding entities are engaged in activities that support small, medium and micro enterprises, for example, the provision of developmental funding, business support and training. Relief was previously afforded to funders of small, medium and micro enterprises only if monies were invested through a venture capital company, or if approved by the Commissioner as a Public Benefit Organisation. Any activity provided to small, medium and micro enterprises that did not fall under the venture capital company regime or Public Benefit Organisation legislation therefore did not qualify for relief under the Income Tax Act.

To assist in the development of and to encourage support to small, micro and medium enterprises, the following were introduced specifically for Small Business Funding Entities:

• Definitions in section 1(1) of the terms “small business funding entity” and “small, medium or micro-sized enterprise”.
• Section 30C setting out the prescribed requirements an entity must comply with to qualify for and retain approval as an Small Business Funding Entity so as to enjoy partial taxation.
• Section 10(1)(cQ) providing for the exemption from income tax of certain receipts and accruals of Small Business Funding Entities and the taxation of receipts and accruals falling outside the permissible business undertaking or trading activity categories provided in that section at a rate of tax of 28% of its taxable income.

An entity will enjoy preferential tax treatment under section 10(1)(cQ) only after it has been granted approval by the Commissioner under section 30C(1) and continues to comply with the relevant prescribed requirements as set out in the Income Tax Act.

On 16 September 2021, SARS published the Draft Tax Exemption Guide for Small Business Funding Entities, for public comment. The draft Guide addresses the above and provide guidance from a tax perspective. The due date for public comment is 19 November 2021. The draft guide can be accessed here.

28/09/2021