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How the 2011 Budget Speech Affects Your Business

Looking ahead, business owners can expect a number of improvements to the business environment.

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Minister of finance, Pravin Gordhan’s budget speech has, for the most part, been well received by the South African business sector.

The budget expands investment in modernising infrastructure and transport logistics, accelerating further education and skills development and supporting research, technology and industrial investment. Small businesses are promised targeted financial and enterprise development programmes and tax relief measures.

Small enterprise development initiatives are expected to be strengthened, including a focus on employment activation by the National Youth Development Agency.

Changes Affecting the Business Sector

Some of the most pertinent issues for the business sector include:

1. Income Tax:

  • Tax will be payable only on income above R59 750 for taxpayers below age 65, and R93 150 for those 65 and older.

2. Dividend Tax:

  • As indicated in previous years, a dividends tax will take effect on 1 April 2012, replacing the secondary tax on companies. Dividend schemes that undermine the tax base will be closed by treating the dividends at issue as ordinary revenue. These include dividend cessions, where taxpayers effectively purchase tax-free dividends without any stake in the underlying shares.

3. Venture Capital

  • Government introduced the concept of a venture capital company into the Income Tax Act in 2009, but the response has been poor. The approach will be refined so as to facilitate greater access to equity finance by small and medium businesses and junior mining companies.

4. Turnover Tax:

  • From March 2011, the turnover tax for micro businesses with annual turnover up to R1m will be adjusted so that tax will be payable only if turnover exceeds R150 000 a year. The rate structure will also be reviewed.
  • Also, from 1 March 2012, micro businesses that register for VAT will no longer be barred from registering for turnover tax.

5. Learnership Tax Incentive:

  • The learnership tax incentive, designed to support youth employment, will expire in September 2011. Government proposes to extend this for a further five years, subject to an analysis of its effectiveness with all stakeholders.
  • A youth employment subsidy is proposed. Subject to completion of consultations, it will take the form of a tax credit costing R5 billion over three years to be administered by the South African Revenue Service through the PAYE system.

6. Transfer Duty

  • The transfer duty exemption threshold will be increased from R500 000 to R600 000.

7. Levies

  • The general fuel levy will increase by 10 cents a litre on both petrol and diesel on 6 April 2011.
  • The Road Accident Fund levy will be increased by 8 cents to 80 cents a litre.
  • The levy on electricity generated from non-renewable and nuclear energy sources will increase by 0.5c/kWh to 2.5c/kWh from April 2011. According to Deloitte, some of this revenue will be set aside to fund the rehabilitation of roads damaged as a result of the haulage of coal for electricity generation. The increase should have no impact on electricity tariffs, as it has already been taken into account in the National Energy Regulator tariff structure.

8. Industrial Policy Action Plan

  • To support the objectives of the industrial policy action plan and the New Growth Path, certain investments qualify for tax relief (see below).

Support of Industrial & Economic Development

Additional allocations in support of industrial and economic development over the period ahead include:

  • R600m for enterprise investment incentives,
  • R735m for the Competition Commission and other economic regulatory agencies,
  • R250m to the Industrial Development Corporation to support agro-processing businesses,
  • R120m for the national tooling initiative,
  • R282m for the Micro-finance Apex Fund, and
  • R55m for Khula Enterprises to pilot a new approach to small business lending.

Employers Beware

Employers should also be aware of the following:

1. Contribution to Retirement Funds
The employer’s contribution to retirement funds on behalf of an employee is to be a taxable fringe benefit in the hands of the employee. Sumay Dippenaar, marketing specialist of Softline Pastel Payroll explains that individuals will be allowed to deduct up to 22,5% of the taxable income for contributions to pension, provident and retirement annuity funds, with a minimum annual deduction of R12 000 and an annual maximum of R200 000.

2. Employer Lump Sum Benefit
Another positive, says Dippenaar, were the changes to employer lump sum benefit taxation. From 1 March, retrenched workers receiving a lump sum will be subject to special rates for lump sums provided by an employer or funds withdrawn from pre-existing retirement funds up to the R315 000 exemption level, meaning they could obtain R345 000 tax free.

3. Company Cars
“A significant change is the manner in which the value of company cars will be determined,” said Grant Lloyd, managing director of Pastel Payroll, part of the Softline Group and Sage Plc Group. “In the new tax year the value will be the cost of the car, excluding finance and interest charges. This means that VAT and any maintenance plan purchased is included in the original cost and company car values will have to be re-calculated from 1 March.”

4. PAYE
There are also new tax reconciliation facilities for employers to assist in the reconciliation of PAYE transactions. One of the facilities is the Employer Statement of Account (EMPSA) and the other is the Reconciliation Assistant. Lloyd said EMPSA has the potential to help employers take control of their PAYE account at SARS. “It is structured for problem solving as problems occur, so there is no sudden panic at year end. Employers will no longer be able to submit an EMP501 on which the EMP201 liabilities, the EMP 201 payments or the tax totals from the tax certificates do not balance as has been possible in the past. The system will force employers to correct the areas that do not balance in the Reconciliation Assistant.

Gordhan reiterated that small businesses are an important source of jobs. Businesses that employ fewer than 50 workers account for 68% of private sector employment. “We need to get our small business sector growing,” he said.

Resources:

1)    For more information about the budget speech visit:

2) Tax calculator:

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Tax

Tax Refunds – What You Need To Know

You are able to object/dispute any SARS decision not to release the refund on efiling or through your tax practitioner.

Maselaelo Mphela

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Most taxpayers are not aware of the requirements for a tax refund to be facilitated and SARS very often will delay paying out the refund. In this article, we will look at the requirements taxpayers need to be aware of and the Tax Ombud’s report on the investigation into alleged delayed payment of refunds as a systemic and emerging issue in terms of section 16 (1) (b) of The Tax Administration Act No. 28 of 2011 (TAA).

What you need to know as a taxpayer:

  • The tax refund must be claimed within 5 years from date of submission of the return.
  • SARS has the right to withhold the refund as per section 190 (2) of TAA: “SARS need not authorise a refund as referred to in subsection (1) until such time that a verification, inspection or audit of the refund in accordance with Chapter 5 has been finalised.”
  • Authorisation of payment of refund done once SARS is satisfied with the acceptable security provided by the taxpayer in terms of section 190 (3) of TAA: “SARS must authorise the payment of a refund before the finalisation of the verification, inspection or audit if security in a form acceptable to a senior SARS official is provided by the taxpayer.”
  • As a taxpayer, you need to ensure that you verify your banking details with SARS and that there are no outstanding returns in order for your refund not to be delayed.
  • Any decision not to refund by SARS is subject to an objection and appeal by the taxpayer in terms of section 190 (6) of TAA.
  • Refunds less than R100 are not refunded but carried forward to the next tax period.
  • To view the status of your refund you can use the Refund Dashboard on efiling under the ‘Returns History’ tab for the tax period in question or contact the SARS call centre.
  • Interest starts accruing from 21 business days from the date on which the refund became due, i.e. verification/audit outcome finalised.

Related: Tax Basics For Business Owners

Tax Ombud’s Report

The Tax Ombud’s report identified various mechanisms used by SARS to defer or delay the payment of refunds due:

  • SARS failing to link submitted supporting documents at a SARS branch to the main file.
  • The use of special stoppers on taxpayers’ accounts and the delay in lifting the stoppers, e.g. being required to verify banking details in person at a SARS branch. Even after the verification is done, there is still a lengthy delay in paying the refund.
  • Using the filing of new returns as an excuse to block refunds. The system blocks already verified refunds the moment a subsequent return is submitted by the taxpayer.
  • Withholding of refunds for one period while an audit/verification is in progress on another period. This is contrary to section 190 of the TAA.
  • The use of historic returns suddenly reflecting as outstanding but these have never been shown as outstanding on the Tax Clearance Certificate or the Statement of Account.
  • The raising of assessments and passing of journals to absorb credits on taxpayers’ accounts, i.e. overpayments. In doing so, SARS creates fictious tax liabilities instead of making a decision on the refund.
  • Requesting further information during the audit to delay finalisation, thus delaying the time frame from when the interest accrues.
  • No turnaround time for assessments successfully disputed.
  • Obstacles regarding diesel refunds.
  • Raising of assessments prematurely before the 21 days to submit the supporting documents
  • Refunds for periods that have been verified automatically set-off against bad debts on other periods not withstanding a request for suspension or where there is the suspension of payment. SARS may not instate any collection steps from date of submission of request for suspension of payment until 10 days after decision to not grant the request has been communicated to the taxpayer in terms of section 164 (6).

You are able to object/dispute any SARS decision not to release the refund on efiling or through your tax practitioner.

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Reimagine The Use Of Technology

The phenomenon of ‘big data’ is rapidly catching up with the world of tax.

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As tax professionals we live in a new reality, fueled by the blinding pace of change. The digital revolution is here. Reimagine the future of the tax function through the lens of analytics.

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Invest And Save 100% Of Your Tax Payable To SARS With The 12J Fund

Section 12J funds were created in response to the South African Government offering tax incentives for private investors to support funds that support SME growth in South Africa. Three experts unpack the benefits of investing in 12J funds — particularly for high net worth individuals.

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What is a 12J Fund?

Clive Butkow: In 2009, the South African Government implemented a tax incentive for investors in enterprises through a Venture Capital Company (VCC) regime known as Section 12J.

These funds were set up to help early stage companies raise venture capital to stimulate economic growth and job creation. Section 12J was based on the Venture Capital Trusts (VCT) in the UK, which enable high net worth Individuals to save tax and rather invest in a VCT, which will then invest in start-ups. Individuals, trusts and companies can all invest in a Section 12J company and receive the respective tax deduction.

Neill Hobbs: The South African Revenue Services (SARS) has written Section 12J into the Tax Act, which offers taxpayers a 100% reduction in their taxable income in the year of investment for the amount they invest by way of a subscription for shares in a Section 12J VCC. The VCC then invests into small and medium-sized enterprises (SMEs) with the added intention of creating jobs and securing employment. The VCC must be approved by both SARS and the Financial Services Board.

Why is it tax deductible?

Gidon Novick: The legislation provides for a tax deduction providing the fund complies with the requirements of the Act.  The intent of the incentive is to stimulate certain critical areas of the South African economy (such as tourism and hospitality) through SME growth in the sector.

Neill: Section 12J advocates investment into SMEs and junior mining exploration to act as a catalyst for a positive shift in the economy. We know that SMEs are a significant source of employment in the economy and provide a plethora of job opportunities and income security for households. This ultimately creates a positive iterative loop in the economy.

Related: Budget 2018/9: 3 Key Tax Areas To Look Out For In The Speech

How do the tax deductions work?

Clive: The total amount invested can be deducted from the tax- payers’ taxable income. This results in a taxpayer (who is paying tax at the marginal rate of 45%), saving 45% of their investment by reducing their taxable income. For example, a taxpayer who has a taxable income of R1 million and would normally pay R450 000 to SARS will rather pay the R1 million to the Section 12J company and pay zero tax.

The caveat is that the taxpayer needs to hold their shares for five years in the relevant Section 12J fund, or SARS will recoup their tax saving. The tax is deductible to incentivise taxpayers to rather invest in a Section 12J company and promote the growth of the South African economy than pay tax on their taxable income.

This seems like a double benefit to investors? Is that correct and why?

Clive: There’s definitely a double benefit, as the taxpayer receives a once off deduction from SARS in the year they invest in the Section 12J company, as well as an added benefit based on the performance of the Section 12J company. Some companies are set up to invest their capital in higher risk ventures with others in lower risk ventures. The returns to investors range from 15% to 38% based on the nature of the fund and their investment strategy.

Gidon: The benefit to investors would be in the form of their tax deduction but importantly also their investment returns. Investors need to fully understand the nature of the investments the fund is making, the risks involved and their ability to cash out after the five-year minimum term, in other words, the liquidity of the investment.

Neill: Individual investors will get an immediate tax saving, up to 45% of the amount invested, in addition to any dividends and long-term capital growth. A Section 12J VCC provides self-interest value to the taxpayer in the tax saving and growth in investment, but in a broader sense, marries business value with societal value through the boost in the SME space.

What questions should investors who are interested in investing in a 12J fund be asking?

Clive: The most important question is of the experience and reputation within the management team. Money follows management in the venture capital asset class. The management team needs to have experience in the investment strategy of their Section 12J fund. At Kalon Venture Partners we only invest in disruptive digital technologies where the CEO and the board have significant experience in buying, building and selling technology companies. The CEO was the ex-COO of Accenture South Africa and prior to that led Accenture’s technology business. Another important consideration is how the Section 12J company creates liquidity for their investors as it’s important for the investor to understand how and when the Section 12J company will pay dividends of the profits and surpluses on the sale of assets. Lastly, investors must understand the governance and investment disciplines, systems and processes when making investments.

Gidon: What is the risk/return profile of the underlying investments? Who are the fund managers and what is their track record? What are the assets that underpin the investments? How will this fund make an impact on the South African economy and job creation? How will I get my money out after five years?

Neill: Confirm SARS and FSB approval. What is the VCC’s investment strategy? The VCC’s industry focus? What is the fund’s launch date? Track record? Capital raised? Targeted return? Number of investments made in qualifying companies? Annual financial statements published? Basis for valuing the underlying investment and the VCC’s dividend policy and history? Fee structure? Minimum investment?

Related: What Should I Know About Dealing With Tax When It Comes To My Business?

What are the pros and cons of a 12J fund versus more traditional investment portfolios?

Neill: The benefit for a deduction in respect of a retirement annuity contribution is limited to

R350 000 in a year, whereas the contribution and benefit of an investment into a Section 12J VCC is not capped and can be 100% of taxable income.

Many SMEs require capital and management support. With the support from the VCC team, stakeholder integration and interaction takes place on the factory floor, rather than just in the boardroom. The investor management team walks the walk with the SME.

A VCC investment should be viewed as a long-term investment. The proceeds on the sale of the VCC shares will be subject to full tax recoupment if the shares in the VCC are sold within five years from the date of investment.

If the shares are held for a period exceeding five years, the sales proceeds from the sale of the shares will only be subject to capital gains tax, albeit from a zero base.

Clive: A major pro for investors is the upfront tax advantage where there is no limit to the investment that you can make, unlike an RA, which is limited to a percentage of taxable income and capped. A second pro is the fact that investors can now diversify their portfolio with 12J investments and not only invest in the traditional capital markets.

What is the amount you can invest into a 12J fund?

Neill: CIPC requires that if a VCC does not have a prospectus, then the minimum amount that can be invested is R1 million. The intention with this is to make sure that any general person from the public, who might not understand the investment they are investing into, does not invest more than is appropriate for them.

Clive: Our recommendation at Kalon Venture Partners is that an investor should not invest more than 7,5% to 10% of their net wealth into a Section 12J due to the higher risk profile of a venture capital investment.

Is there a ‘right’ time to invest in a 12J fund with regards to tax exemptions?

Clive: There is no right time to invest, however with the current rand strength we see this as a vital time to diversify one’s portfolio. The most effective time to raise capital is at the tax year end on 28 February. An alternate time of the year that capital is raised is during the provisional tax season in August or September each year.

Gidon: An investor should only consider a 12J if they have the taxable income and don’t need access to the funds they have invested for at least five years. Investments must be made before the tax year-end (ie 28 February) to qualify for the deduction in that year.

Neill: Section 12J is particularly attractive to high income earners. It’s also attractive to those taxpayers who have made a capital gain, which will be subject to capital gains tax. For example, an individual who realises a capital gain of R5 million in the 2018 tax year, will only have to invest the inclusion amount of 40% (R2 million) into a VCC to avoid capital gains tax completely in the 2018 tax year.

A VCC investment is the only recognised manner in which a corporate employee, who is subject to PAYE on their salary, can receive a refund of PAYE deducted by the employer. Although there is no provision for a directive for the reduction of the PAYE amount, an employee who earns R2 million per annum, and makes a R2 million VCC investment, could receive a full refund of PAYE on the submission of their annual tax return.

The sunset clause is currently 30 June 2021. This means that funds invested before that date must remain in for the five-year period, but any funds invested into a 12J fund after that date will not enjoy the current tax benefits. This date could be re-assessed and extended.

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