Trevor prepares for Budget Speech 13

When finance minister Trevor Manuel takes to the podium on 11 February 2009 he will present his thirteenth Budget Speech to Parliament. Earlier this week we attended a session with directors at Deloitte to find out what the 2009/2010 budget has in store. They conclude that Manuel has very little room to manoeuvre.

The good news is there’s still plenty of cash in the kitty for the 2008/2009 tax year. Treasury’s collection estimates are for R642bn, with R167bn from VAT, R158bn from corporate income tax and R201bn from income tax on individuals. Deloitte director of tax Billy Joubert notes that these categories, governed by the Income Tax Act and the VAT Act, contribute 84% to Treasury’s annual revenue budget. The bad news is revenue in 2009/2010 will fall behind the curve as the global recession bites. Corporate income tax collections will slide on the back of lower earnings, personal income tax collections will suffer as retrenchments take hold, and VAT collections will dwindle in line with a slower economy.

Very little ‘wriggle’ room

Over the last few years Manuel has progressively lowered the tax burden to both individual and corporate taxpayers. But now he’s stuck in the mud. He cannot continue the downward corporate tax momentum due to economic circumstances – nor can he afford to hike them for the same reason. He won’t hike the top marginal rate for personal income tax because 2009 is an election year and he doesn’t want to expand the gap between personal and corporate income tax further. And he cannot fiddle with VAT because of the administrative complications in introducing more VAT ratings. In their medium term budget, Treasury rules out the prospect of additional zero-rating of foodstuffs. They say “evidence suggests that existing VAT zero-ratings and exemptions, in almost all cases, confer substantially more benefits on middle- and higher-income groups than on lower-income groups.”

How will Manuel compensate for the likely revenue decline? He’s not going to get it from the taxpayer! The “low hanging fruit has all been harvested,” concludes Joubert, commenting on recent SARS efforts to extend the revenue collection net. He doesn’t see too much opportunity to further boost collections through administrative efforts. If SARS wants to collect more money in 2009/2010 and beyond they’re going to have to come down hard on individuals – so expect more rigorous enforcement in the future.

What this means is Manuel will probably rely on a budget deficit to carry some of the ruling party’s more ambitious social expenditure programmes.

Great news for micro-companies

The good news for small business owners is that the micro-business proposals take effect from 1 March 2009. Here’s how it works. Provided your company has a total turnover of less than R1 million per annum you can apply to be classified as a micro-company. Micro-companies will then pay an income tax based on their annual turnover. The initial rates indicated are 2% up to R300 000, climbing to 7.5% on turnovers above R750 000. These companies will not be subject to VAT to tie in with the raised VAT threshold (also R1 million) that also applies form March 2009.

These tax proposals are the logical ‘next step’ in the major amnesty drive launched by SARS two years ago, says Joubert. The amnesty allowed small business to come clean; but they were subsequently snowed under by income tax and VAT administration and compliance issues. The micro-business proposal will make it easier for these companies to comply. Joubert concludes the turnover tax system is “a greatly simplified way of paying taxes!” But it’s not the right move for everyone.

At the outset there will be strict anti-avoidance rules to ensure that only appropriate small businesses achieve this classification. Individuals rendering professional services are explicitly excluded, for example. Joubert suggests that small businesses do their homework thoroughly before choosing this tax route. He mentions the problem of making a loss in your small business. Traditional corporate taxpayers can declare this loss – not pay income tax – and absorb the loss in the following year. A company that registers for turnover tax will pay SARS regardless of its operating result.

Editor’s thoughts:
The introduction of a turnover tax for micro-business was probably what inspired the Registrar of Companies to request all registered companies to annually submit details of their turnover. But like every tax incentive the move is carefully assessed to ensure net benefit to SARS. Would you consider a turnover tax if SARS raised the R1 million turnover cap? Add your comments below, or send them to gareth@fanews.co.za