Is the Davis Tax Committee a saviour for small businesses? (Part 1&2)

Part 1

With the release of The Small and medium Enterprises (SME): Taxation Considerations, Interim report July 2014, the Davis Tax Committee (DTC) has made a bold move aimed at incentivising the establishment and development of the SME sector in South Africa.

Erich Bell, Tax Technical at the South African Institute of Tax Professionals (SAIT), believes the DTC report offers practical strategies that would help South Africa achieve the key objectives laid out in the National Development Plan. “The interim report has been widely welcomed by the tax fraternity, and Judge Dennis Davis, together with the other dedicated professionals in his team, should be commended for their insightful work performed in this regard,” adds Bell.

The proposals contained in the interim report should leave the small business owner with lots to smile about if newly appointed Finance Minister, Nhlanhla Nene, implements the recommendations in his 2015 Budget speech.

In the following two series article, Bell provides a broad overview of the key proposals in the DTC’s report, especially in their relation to small business development.

The proposed Refundable Compliance Rebate (RCR)

While the Income Tax Act currently provides incentives for Small Business Corporations (SBC), allowing a more favourable tax rate and an accelerated write-off period for assets used in the manufacture process, the DTC found that the current benefit afforded by this incentive is relatively small and has not been as effective as hoped in bringing more micro and small business into the tax fold.

The DTC report recommends that this current incentive is replaced with the Refundable Compliance Rebate (RCR) which would reward the tax compliance of SBC’s and subsidise part of the costs involved in being tax compliant.

The new incentive would be applicable to all SBC’s that have submitted income, VAT and employees’ tax returns within nine months of the end of year assessment, irrespective of whether the SBC is in an assessed loss position. If the business’ turnover is less than R335000, the DTC report suggests the taxpayer be exempt from tax, based on the turnover tax system.

The RCR proposed rebates in line with an SBC’s turnover, ranging from a R20000 rebate for turnover above R1million, R15000 for turnover between R500 000 and R1million, and R10000 rebate for turnover between R335 000 and R500 000.

However, according to a recent study conducted by SAIT, it can cost a small business up to R53 356 on internal tax compliance costs and R9 982 to obtain external tax compliance assistance. Many of SAIT’s members feel that the RCR could be even more generous with the rebate.

Turnover tax system overhaul

There are some welcome changes proposed from a turnover tax perspective, where natural persons or companies with turnover less than R1 million per annum have elected to be taxed in terms of the turnover tax regime.

In its current form, taxpayers who elected to make use of the turnover tax system are required to remain on the system for three years. The DTC, recommends that taxpayers may choose to leave the system whenever they like, but without the option to re-elect it.

Currently these entities start paying tax where their taxable turnover exceeds R 150 000 but the DTC recommends that this limit is increased to R335 000 per annum. It is further proposed that entities whose taxable turnover does not exceed R 335 000 would only have to submit an annual declaration setting out the taxpayer’s details, bank account numbers and a statement that its turnover has not exceeded R 335 000. It is also proposed that the maximum rate at which they pay tax be decreased from 6 per cent to 5 per cent.

Next article

In series two, Bell continues his focus on the SME sector and the DTC’s proposals relating specifically to the cost of compliance, the Employment Tax incentive, angel investors and incentives for education and skills development.

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 Part 2

The Davis Tax Committee (DTC) has made a bold opening move with the release of its first interim report: The Small and medium Enterprises (SME): Taxation Considerations, Interim report July 2014.

According to Erich Bell, Tax Technical at the South African Institute of Tax Professionals (SAIT), the DTC report contains a number of exciting proposals aimed at developing the SME sector through strategic tax reforms and thereby fulfilling the objectives laid out in the National Development Plan.

In the second series of his article, Bell continues to examine the most significant proposals that will come under Finance Minister Nhlanhla Nene’s careful consideration for the 2015 Budget speech.

Education

The DTC recognise that education and skills development are vital for the well-being of the economy. The DTC report proposes tax incentives that will assist and reward the employer for providing training and further education for their employees and their relatives. The report suggests that the employer pays no tax on the fringe benefit from bursaries or scholarships offered to their employees or relatives studying towards a qualification of NQF level 5 or higher.

Furthermore, in perhaps their most remarkable proposal, the DTC recommends that a training incentive of 150 percent is offered to encourage SME’s to offer further training for their employees and their families.

Good news for “Angel Investors”

Another proposal which SAIT hopes will see the light of day come 2015’s Budget Speech will make it easier for micro businesses to attract investors and outside capital. The proposed Bad Debt Allowance entitles investors to a full write-off of failed micro business investments where currently these investors are penalised with limited benefits only in the form of Capital Gains Tax relief for lost capital.

Cost compliance from a VAT perspective

The DTC proposes that Small Business Corporations (SBCs) - as defined in the Income Tax Act - be allowed to account for VAT on the payments basis, even though the total value of their taxable supplies may have exceeded R2.5 million per annum. At present vendors are required to account for VAT on the invoice or accrual basis, which places an additional compliance burden in the absence of a comprehensive accounting system.

It is further proposed that SBCs should be exempted from the requirement to estimate their taxable income for provisional tax purposes at year-end as often they do not have the internal resources to achieve an accurate measurement until after year-end.

The long lead time and delays by SARS to release VAT refunds contributes to the challenges faced by many SBC’s who rely on refunds to maintain a positive cash flow. The report calls for SARS to implement stringent time limits on the VAT refund process and to establish a help desk to assist small businesses with the refund process.

The Employment Tax Incentive (ETI)

In cases where the ETI refund exceeds the PAYE liability, the DTC report suggests that SARS prioritise the cash refund to assist small businesses with their cash flow.

Focus on Small Business Development

The DTC recommends that the Department of Trade and Industry and the Ministry of Small Business Development play a bigger role in the growth of the small business community. Large business and universities are also tasked to become more involved in the development of entrepreneurship through social investment initiatives. The report recommends that SARS provides deeper clarity on the tax treatment of these initiatives.

Conclusion

It has been nearly twenty years since the Katz Commission last reviewed the applicability of South Africa’s tax system in the global and local context. While the DTC report may read like a taxpayer “wish list”, SAIT will continue to engage with its members, the community and the government in order to simplify the impact of the tax system on the small business sector of the economy. Stiaan Klue, Chief Executive of SAIT is confident that the National Treasury will pay careful attention to the DTC proposals before announcing any reforms at the 2015 Budget Speech.