A main feature of Finance Minister Trevor Manuel’s newly unveiled budget has been to slash the red tape, and small businesses will be elated over some major changes in the tax legislation.
According to the Treasury’s tax team, the focus of this budget was to take the administrative burden of tax compliance off small companies.
”This seems to be part of a well-considered strategy of first bringing small and medium businesses through the small-business tax amnesty and then encouraging these taxpayers to remain compliant by simplifying the tax and VAT [value-added tax] system,” says Andrew Wellsted, of Deneys Reitz Tax Services.
Companies with a turnover of less than R1-million will no longer have to deal with onerous paperwork. These companies will be allowed to opt out of the normal income-tax reporting system and will be taxed on a presumptive basis based on turnover.
In other words, the tax rate will simply be based on turnover figures and not profit. This will remove the need for complicated tax calculations. For example, a company with a turnover of R100 000 or less will pay no tax. A company with an annual turnover of R300 001 will pay R4 000 tax. If the company’s turnover is R500 000, it will pay R25 750 in tax.
However, Wellsted says companies need to remember that if they elect to use the turnover-based presumptive tax system, they will have to remain in the system for a minimum of three years; if they opt out, they cannot return for five years. As such, this is a decision that requires some consideration.
The Treasury has excluded businesses that provide personal and professional services such as consultants. These businesses do not have high input costs and the bulk of the income received is taxed as income tax.
VAT paperwork also came under the spotlight, with the VAT threshold increasing from R300 000 to R1-million. According to the Treasury’s tax team, existing companies with turnover of less than R1-million can opt out of the VAT system.
Wellsted says companies that choose to opt out must remember that the VAT input credit will no longer be claimable in the future. In addition, the company will be deemed to have sold all its assets, which may generate a VAT exit charge upon deregistration. As such, this change to the VAT threshold will be of more benefit to new businesses than to existing ones.
These proposals to cut red tape are in addition to existing incentives for small businesses, including a lower preferential tax rate, shorter depreciation periods for assets, less onerous capital-gains tax provisions, and exception from the skills development levy.
In this budget, the Treasury clarified the depreciation of small assets under the value of R5 000. Companies will now be able to write off these assets over a one-year period. However, what will be disappointing for small companies was the decision not to offer a one-year tax write-off for generators or other emergency power sources due to power failures.
Manuel said that while the Treasury did consider the argument in favour of tax deductions for emergency power, it did not want to encourage fossil-fuel solutions, which would increase emissions. It will rather focus on incentives for moving to alternative and cleaner energy solutions such as solar power.
Small businesses also received generous tax incentives for start-up capital ventures and small, medium and micro enterprises.