/ 24 February 2012

Not much for the little guy to celebrate

Few South African small businesses are grinning about what could now pass for an April Fool’s joke. The much anticipated youth wage subsidy, which was to kick in on April 1 this year, is bogged down at the National Economic Development and Labour Council (Nedlac).

The subsidy, which would have been a huge relief for small businesses, is strongly opposed by labour federation Cosatu, which fears that it would lead to businesses replacing senior workers with temporary young employees. But small businesses mainly employ inexperienced, untrained job seekers because, unlike corporates, they struggle to afford qualified staff.

The scheme would have subsidised the wages of previously unemployed youths by as much as 50%, and would have helped to change the cost-benefit ratio for small businesses of employing unskilled youths, who cost them more in time and energy in on-the-job training than on wages.

In his budget speech, Finance Minister Pravin Gordhan voiced his frustration about the youth subsidy scheme’s failure to materialise. “We would all like to see greater urgency in resolving this matter,” he said of the scheme’s delay at Nedlac, “where the labour constituency has expressed reservations”.

He did not present much by way of consolation to small businesses in the rest of the budget.

Although the small business corporation tax break is significantly expanded, the advantage is largely cancelled out by the introduction of the dividend tax at 15%.

Companies with annual turnovers of R14m to now pay tax
Up till now, registered companies with annual turnovers of less than R14-million did not pay income tax on their first R59 750 profit, and only 10% on profit between R59 750 and R300 000. But the tax break only really means anything if a business owner is able to pay it out as dividends, which until now was taxed through secondary tax on companies at 10%. In the new budget, the untaxed portion of a small business’s profit rises slightly to R63 556. The next tier of small-business profit moves from R300 000 to R350 000, and this tier is only taxed at 7%, down from 10%. But the increased income tax break is largely eaten up by the new 15% dividend tax.

Treasury officials insist that the new thresholds represent a substantial increase in the tax break if a company reinvests its profits instead of paying it out as dividends. But in reality small businesses don’t structure their finances to show a profit if they don’t intend to pay out a dividend.

Gordhan announced a further strengthening of the underutilised turnover-tax regime for micro businesses by allowing businesses registered under the tax to pay VAT, employees’ tax and the turnover tax itself twice a year, which up till now had to be paid in as many as 18 tranches throughout the year.

The tax was introduced a few years ago to allow informal businesses that don’t keep books, such as spaza shops and taxi operators, to join the tax net by allowing them to pay a very small percentage of tax on their turnover, instead of the more substantial income tax on their profit.

Low no. of businesses registered for turnover tax
Only about 10 000 businesses have registered for turnover tax so far. It is plausible that part of the failure of the scheme had to do with the paperwork associated with employees tax, which is now considerably reduced.

But the allowance on VAT payments to twice a year will probably not make much difference, because businesses with turnovers of less than R1-million — exactly those who may register for turnover tax — do not have to register for VAT.

Treasury has tried to mitigate the announced increase of capital gains tax on retiring small business owners by doubling the exclusion amount on the sale of a small business when the owner is older than 55 from R900 000 to R1.8-million. Many small business owners use the value realised on the sale of their business as their retirement nest egg. For the purposes of this break, a small business is now defined as one with a market value of less than R10-million, doubled from the current R5-million.

Unlike last year, the budget did not contain any specific allocation increases to the government’s small business development agencies. But the Budget Review has named the government’s new small-business finance agency that is being forged out of an amalgamation of the outgoing Khula Enterprise Finance Agency, the Apex micro-loans fund and the small-business unit of the Industrial Development Corporation (IDC). It will be called the Small Business Finance Entity, a wholly-owned subsidiary of the IDC, and it will be launched on April 1 this year — but hopefully not as another April Fool’s joke.