On 9 December 2015, one could not blame every entrepreneur for fearing for the future economic prosperity of South Africa, let alone his business. “Nenegate” and the turn in the United States interest rate cycle resulted in a rapid 15% weakening of the Rand from R14.6/$ to R16.8/$.
The strong US Dollar, slowing of the Chinese economy and the commodity dip, coupled with the devastating effects of El Nino makes economic growth in SA problematic, to say the least. In light of this, the International Monetary Fund expects SA to grow at a mere 0.7% and the ratings agencies put SA one notch above sub-investment grade status (i.e. “junk” status). Not surprisingly, the 2016 Budget Speech was one of Minister Gordhan’s toughest yet. His budget had to address multiple issues and balance the interests of various groups.
Without providing the much anticipated “killer-blow”, as Daniel Silke put it at the Annual Mazars Budget Breakfast on 25 February 2016, Minister Gordhan managed to deliver sound judgement in difficult times.
The most notable tax changes to effect entrepreneurs and their businesses are the capital gains tax (CGT) amendments, individual tax changes, fuel levy increase and other environmental taxes.
The increase to the individual and special trust inclusion rate from 33.3% to 40% and to the company and other trusts inclusion rate from 66.6% to 80% has resulted in capital gains being taxed at an effective rate of 16.4% for individuals and special trusts, 22.4% for corporates, and 32.8% for other trusts. This reduces the margin for arbitrage in the classification of receipts. Consequently, trying to classify receipts that are income in nature as capital in nature might not provide enough reward for the risk undertaken.
Contrary to the norm, a lack of amendments to the tax brackets will provide additional tax revenue to the fiscus. By using the effects of fiscal drag, the Minister expects to collect additional revenue to the tune of R 7.6 billion. In simple terms, the lack of adjustment to the tax brackets will result in any increase in taxable income (pursuant to salary adjustments) in the following year being effectively being taxed at a higher rate and thus contributing more to the National Treasury.
Fuel levy and other environmental taxes
In order to make the most of the current oil price Minister Gordhan took the opportunity to further increase the fuel levy. An increase of 30c/litre will be effective from 6 April 2016. Additionally, a new environmental tax will be implemented from 1 October 2016 on motor vehicle tyres. This tyre levy will be charged at a rate of R2.30/kg and is intended to reduce waste and encourage recycling. An environmental levy on incandescent light bulbs was introduced in 2009 to encourage the use of more efficient compact fluorescent bulbs and reduce electricity demand. This levy will be increased from R4 to R6 per globe, effective 1 April 2016.
Fortunately, it is not all doom and gloom
The South African government acknowledges that if the small business sector grows, the economy grows. However, in order to grow these entities funding and expertise must be provided.
It was therefore encouraging that the Budget Review took the financial situation of the small business sector into account by stating that: “Only 30% of registered small businesses have access to finance. To improve this situation, government plans to introduce a shared business credit infrastructure for small businesses.”
Furthermore, the Budget Review made a renewed call to support business development in South Africa and to reduce the tax compliance administration burden: “The South African Revenue Service (SARS) is working to reduce red tape for especially small businesses.”
In essence, the Budget Review is aligned with the thinking that as long as South Africa has entrepreneurs, there will be hope. As Minster Pravin Gordhan stated:
“…I know you will join me in acknowledging that the real champions of our development are the… entrepreneurs… who get on with the job, day by day, of managing programmes and running businesses, serving communities and meeting needs.”
For a full feature of budget highlights please follow this link.