Tax relief favours small business
"We are dying here. It's very hard for a small business to get funding or deal with the red tape," one desperate small business owner said at a small, medium and micro enterprise (SMME) conference in Sandton a month ago — a plea that was heard by the government in the latest budget.
Based on early recommendations by the Judge Dennis Davis committee looking into the present tax regime, efforts have been made to reduce the tax burden on micro enterprises and to reduce the complexity of compliance.
A great deal of Finance Minister Pravin Gordhan's budget is about encouraging much-needed growth, and nowhere is this more evident than when it comes to the government's 2014 tax policy.
The tax proposals for 2014 are expected to reduce total tax revenue by R5.6-billion.
On the issue of personal income tax, Gordhan said in the budget review that the present economic environment meant existing personal income tax brackets are "reducing purchasing power", something he wishes to avoid at all costs.
So the government has adjusted tax thresholds and rebates to provide R9.3-billion in personal income tax relief, which is bound to make the man and woman on the street very happy.
Tax relief will be extended to everyone earning up to R670 000 per year, which is good news, as some experts were concerned that the minister, stuck between a rock and hard place when it came to finding money for projects that drive growth, might look to the welathier taxpayer.
The 154,000 taxpayers with taxable income above R1-million will however, still be paying 30.7% of personal income tax.
Gordhan said the tax relief proposals were aided by an increase in money collected, with tax revenue now revised to R899-billion.
Income from corporate tax and customs duty is also higher, and has been revised up for 2014-2015 by R7.1-billion. Mineral resources are expected to generate R6.5-billion, about R600-million above the estimate.
Although personal tax reductions are good news, a recent study by PwC suggests that South Africa relies too much on corporate taxes.
"Though South Africa has reduced its company tax rate significantly over the past 20 years, it has not kept up with global trends in this regard and its tax rate is still relatively high compared to its main trade partners," said Kyle Mandy, a tax expert at PwC. This discourages investors, who like to see evidence of growth.
Preventing a drop in consumer spending
For a cash-strapped and increasingly militant public, the budget offered a number of tax breaks that might prevent a drop in consumer spending, predicted on the basis of existing government tax and policy.
Gordhan also offered a number of incentives to encourage small business development and announced that the youth wage subsidy was implemented a month ago.
Analysts who predicted tax increases such as sin taxes, the closure of tax loopholes and partial adjustments to personal income tax rates to accommodate fiscal drag were proved correct.
A new addition, apart from increases in fuel and excise taxes and a new mechanism, to be discussed with the mines for addressing acid mine drainage, will be a tax on offshore investments.
The tax-free portion on lump-sum retirement payments has been increased from 315 000 to 500 000, which has been welcomed.
Retirement fund taxation will be deductible for both employee and employer, up to a limit, to encourage saving, Gordhan said. The formula for this will be released this year.
Carbon tax to be implemented
A carbon tax, opposed by many companies, is now expected to be implemented by 2016, following consultation between the finance and environment departments.
In line with the government's promise to encourage entrepreneurship, Gordhan said the state would work on policies to assist the small business sector.
"Red tape and bureaucracy are hindrances to some businesses doing business, especially small and medium-sized firms," he said.
"Government plans to streamline the regulatory regime. Proposed reforms would reduce compliance costs and facilitate access to equity finance."
He said the Davis committee had suggested that companies with a turnover of up to R335 000 a year should not be taxed (a zero tax rate) and the maximum tax rate should be reduced from the current 6% to 5%.
The committee also proposed making the grants received by small and medium-sized enterprises tax exempt, regardless of the source of the funds.
Inconsistencies in the tax system
But Gordhan said "the nature of such concessions will be considered, while taking care to prevent abuse and [to] avoid inconsistencies in the tax system".
Other suggestions include doing away with biannual tax returns in favour of annual returns, and the simplification of the tax regime currently applied to businesses with an annual turnover of up to R1-million.
Frustration and growing animosity between the South African Revenue Service and small and medium business people over the amount of red tape they are required to navigate had prompted the creation of a tax ombudsman to mediate between the two groups.
Aware that funding for small companies has been slow to take off, Gordhan is offering a rebate to encourage equity investment in small, medium and micro enterprises.
"Funders investing through a venture capital company can claim a tax reduction on their investment," he said.
In addition, entities that provide assistance to micro enterprises can also obtain rebates.
Proposals to encourage investment
Grants to small and medium-sized businesses will be exempt from tax, and there will be proposals to encourage investment in small business and junior mining companies.
The latter includes waiving capital gains tax on disposal of assets and increasing the total asset limit for companies requesting investment assistance from R20-million to R50-million and, in the case of junior miners, from R300-million to R500-million.
The tax review committee concluded that lower tax rates for small business operations were not effective and did not lead to growth or address tax compliance costs.
The committee has suggested replacing the tax regime with an annual refundable tax compliance rebate. This decision would need to be subject to public consultation.
Subsidies are being awarded for biofuel production, and this is expected to take place in the second half of the year.
Motorists, already feeling the pinch, will not be pleased to hear that the fuel levy will be increased to 12c a litre, and the Road Accident Fund levy will go up by 8c.
With fraud and corruption receiving increased attention from the government, Gordhan has proposed a VAT amendment intended to reduce the use of illegally obtained gold in jewellery.
Buyers of second-hand products made from precious metals will no longer be allowed to receive a VAT rebate.