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#Budget2017: Where To From Here For The National Minimum Wage?

Rob Cooper, Tax Expert and Director of Legislation at Sage, gives his expert opinion on the matter of the National Minimum Wage, as the Deputy President signed a National Minimum Wage Agreement into existence on 8 February this year. Rob looks forward to what Minister Pravin Gordhan will have to say on the matter.

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Vital Stats

  • Event: South African Budget Speech 2017
  • Date: Wednesday, 22 February

We’ll be watching Finance Minister, Pravin Gordhan, closely this week in the run up to presenting his Budget for the 2017/8 tax year, on Wednesday, 22 February. One of the issues we hope the Minister will provide clarity on in his statement is the implementation of the National Minimum Wage. 

Deputy President Cyril Ramaphosa signed a National Minimum Wage Agreement into existence on 8 February this year – the culmination of years of debate between labour, business, government and economists. 

The arguments about whether a National Minimum Wage Agreement will close the wage gap and stimulate the economy or rather lead to job losses can be set aside. We should now focus on what needs to be done to ensure that it is a success for workers and businesses alike.

Related: Will Minimum Wage Increase Boost Economic Growth In South Africa?

With implementation set to begin in May 2018, government is proceeding with caution. Many details in the agreement still needs to be fleshed out as government creates draft legislation for the National Economic Development and Labour Council (Nedlac) discussions and public comment before promulgating an Act.

Minimum Wage Value

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The success of the National Minimum Wage will depend on setting the minimum wage at a high enough level to close the wage gap, yet not so high that businesses can’t afford it or decide to automate rather than hire. Government has taken a cautious stance, setting the initial National Minimum Wage at R20 per hour. 

This is a practical approach, aimed at limiting the potential economic damage of an unrealistically high minimum. It was not the intention (and it is not financially possible) to pay a minimum wage at the level of a ‘living wage’. The National Minimum Wage is not meant to be a wage that an individual can live on – it is designed to move people out of poverty and gradually close the ‘wage gap’. 

Specifying hourly rates as the base value is a pragmatic decision.  It is the only realistic way in which to monitor compliance since different industries have different ordinary hours of work and since working months vary between four and five weeks.

Minimum Working Hours

Parties to National Minimum Wage Agreement all accept that it should not be possible for employers to drastically reduce working hours to reduce the total wage cost. 

There appears to be general agreement that a minimum number of ordinary hours of work must be set, though labour and business differ about the minimum working hours.  

The panel favours a minimum of four hours per day; Cosatu wants a minimum of six hours which amounts to a minimum wage of R120 per day.  A morning-only job is five hours per day, so perhaps this could be a practical number to compromise on.

‘Casualisation’ is another matter for discussion.  To prevent permanent labour being replaced by casuals, premium rates of pay i.e. more than R20 per hour, and minimum working hours per day are on the table.

Related: #Budget2017: 5 Areas Where Businesses Are Seeking Clarity From The 2017 Budget Speech

Increases to the National Minimum Wage

Labour would like the National Minimum Wage to be increased substantially every year to overcome what it perceives to be a very low starting value, while business will argue for more moderate increases. The plan is to set a medium-term target, and then work progressively towards that.

Introduction of the National Minimum Wage

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When the National Minimum Wage is implemented from May 2018, businesses that are unable to afford the minimum wage will be able to apply for an exemption of up to 12 months. Farmworkers will phase in at 90% of the National Minimum Wage, and domestic workers at 75%.

All current wage regulating measures will have to be changed to bring their levels, if lower, up to the National Minimum Wage level by May 2018.  The National Minimum Wage will set the rock-bottom wage value across the length and breadth of the country, and across all industry sectors.

Employment Tax Incentive

To qualify for The Employment Tax Incentive (ETI), an employee must pass a minimum wage test, which involves comparing the employee’s wage paid to that of the sector’s wage regulating measure.

If there is no wage regulating measure, the monthly wage paid must be at least R2 000, with no option for a weekly or hourly minimum. The ETI legislation will need to be amended to be based on the National Minimum Wage’s hourly rate.

Related: Why Tax Law Changes Could Threaten The Uptake Of The Employment Tax Incentive

National Minimum Wage and Child Support Grants

The monthly national minimum wage of R3 500 (based on a 40-hour week) equates to an annual income of R42 000, which is the current maximum income ceiling for parents to qualify for child support grants.

If worker’s wages were today increased to the R3 500 monthly minimum, those who are parents would no longer qualify to receive child support grants. One assumes that this will be addressed by the relevant authorities.

Is the agreement going to assist Workers?

At 2016 values, over 6 million workers would benefit from being paid at R20 per hour. Even though the R20 will be eroded by inflation by May 2018 and even though it is being phased in for farm and domestic workers, approximately 4 million workers will still benefit from the National Minimum Wage when it is implemented. 

We are coming off a base of high levels of unemployment (27.1% of the workforce), and according to recent surveys, we have the worst wage inequality in the world. To estimate the countrywide cost of introducing the National Minimum Wage, assume an average wage of R1 per hour per worker for 4 million workers for a 160-hour month and do the sums. 

The principle is that in the process of employers paying an extra wage of R640 million every month to help uplift 4 million workers, that the R640 million will circulate back into and stimulate the economy. 

Follow @SageGroupZA on 22 Feb for LIVE expert insights from the annual Budget Speech. #Budget2017

Rob will be conducting the 2017 Annual Payroll Tax Seminars in different cities around South Africa, where he will discuss the 2017 Budget proposals. 

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3 Stealthy Tax Hikes Payroll Managers And Employees Need To Take Note Of

By Rob Cooper, tax expert at Sage, and chairman of the Payroll Authors Group of South Africa

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“Dammed if you do and dammed if you don’t.” 

The adage summarises the difficult decisions government and the Finance Minister faced when balancing the country’s books, rescuing state-owned enterprises, and reviving the growth of our economy. Given the economic pressure that most taxpayers are facing, government ideally needed to achieve all of that without direct increases to personal income tax in the most recent Budget Speech.

Personal income tax has comprised at least a third of South Africa’s total tax revenue in recent tax years, despite growing unemployment. The 2019 Budget, presented in February, forecasts that personal income tax will account for nearly 39% of tax collected during the upcoming (2019/20) tax year. Given that we are in an election year and that the tax base is fragile, it’s not surprising that the Finance Minister and the National Treasury avoided direct increases to the statutory tax tables used to calculate PAYE for employees in the budget.

Nonetheless, government has made inflation work in its favour to impose some tax increases by stealth. Here are three ways government is raising more revenue without direct tax increases:

1. Bracket creep

The statutory tax tables used by payrolls and employers have not been changed for 2019/20, nor have the brackets been adjusted for inflation. This effectively amounts to an indirect tax increase that will yield a revenue saving of approximately R12.8 billion for government’s coffers.

It is not unusual for government to use ‘bracket creep’ to effectively raise more revenue. But unlike previous tax years, even low- and middle-income earners are not getting much relief. Rebates and the tax threshold are being increased by small amounts to allow some relief, but many people this year will feel the pain as inflationary salary increases push them into a higher tax bracket.

2. Medical aid credit not adjusted for inflation 

As proposed in the 2018 Budget, the Finance Minister did not apply an inflationary increase to the Medical Tax Credit, which allowed him to raise an extra R1 billion in revenue for the year. Surprisingly, these funds will be allocated to general tax revenue rather than ring-fenced for healthcare. In previous tax years, revenue generated from below-inflation increases on medical scheme credits was used to fund National Health Insurance (NHI) pilot projects.

There is still no clarity on how the NHI is going to be funded except for a general statement that the funding model is a problem for the National Treasury to solve, and that the principles of cross-subsidisation will apply. One wonders if any real progress will be made soon, given the fiscal constraints government faces.

3. Business travel deduction left untouched

The Budget leaves the per-kilometre cost rates used to determine tax deductions for business travel untouched. By not increasing travel rates to account for inflation, government effectively increases income tax collection at the cost of the taxpayer. This will be a blow for people who need to claim from their employers for business travel in their personal vehicles. This change has slipped through largely unnoticed and the budget does not provide numbers for the expected increase in tax revenue.

Closing words

Amid political turmoil and uncertainty, the Finance Minister presented a balanced budget for 2019/20 that offers hope for the future along with some tough love. With government taking steps to accelerate economic growth and improve revenue collection, we should hopefully see a steady improvement in government finances, which will translate into less pressure on the taxpayer in future years.

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Entrepreneur Today

SMEs: Staying On The Right Side Of The Taxman

Remaining SARS compliant can be a constant challenge for small- to medium-enterprises (SMEs), especially when they are trying to focus on growing their businesses and streamlining their operations.

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EasyBiz Managing Director, Gary Epstein, says submitting taxes can be a seamless process that does not have to take up more time than is necessary. “If business owners understand what is required of them and they put a few processes into place to deal with their tax submissions properly, their lives will be so much easier.”

What are the top three considerations for SMEs when submitting tax returns?

“Firstly,” says Epstein, “SARS returns must be accurate and submitted in terms of the relevant Act. Secondly, returns should be submitted and paid on time to avoid unnecessary penalties and interest, and thirdly, business owners must follow up on queries issued by SARS. “Do not ignore these queries, act on them as soon as possible”.

What are the major SARS submission deadlines for SMEs?

Epstein points out that small business owners need to adhere to various tax deadlines, each with their own particular dates for submission. “It is important that business owners diarise the dates (and set advance reminders for themselves) and/or enlist the services of an accountant or financial adviser to help them keep abreast of requirements.”

Value-added tax (VAT)

VAT payments need to be submitted in the VAT period allocated to the business, according to various categories and ending on the last day of a calendar month. This may mean making payments once a month, once every two months, once every six months or annually, depending on the category.

Provisional taxes

Provisional tax should be submitted at the end of August (first provisional) and at the end of February (second provisional) – for February year-end companies.

Employee taxes

In addition to submitting an annual reconciliation (EMP501) for the period 1 March to end of February for Pay-As-You-Earn (PAYE), Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF), employee tax, in the form of an EMP201 return, needs to be submitted by the seventh of every month.

When can SMEs get extensions and is it worth it?

Epstein says SMEs can apply for various extensions, but these are subject to the Income Tax Act and Tax Administration Act.

“It is best for SMEs to consult their tax professionals to get advice regarding extensions for their businesses.”

What is SARS not flexible about?

SARS is not flexible when it comes to late returns and late payments.

“I cannot stress enough how important it is for SME owners to ensure their tax returns are submitted on time. In this way, they will avoid the inconvenience and expense of additional fines and interest,” notes Epstein.

What skills do SMEs need in their organisations to be able to submit to SARS efficiently?

Business owners often don’t have the time or expertise to deal with tax submissions throughout the year. If the business cannot afford to employ a full-time accountant or financial services expert, it would do well to outsource its tax requirements to a registered tax practitioner.

“I would recommend that even if they are not submitting the tax returns themselves, business owners should have a broad understanding of the tax regulations and what is expected of them. There is a lot of helpful information on the various Acts and tax requirements on SARS’ website,” says Epstein.

How does the right software help SMEs remain SARS compliant?

SME’s (and their accountants’) jobs can be made easier by using reliable accounting software to calculate accurate VAT reports. These reports are only as accurate as the data entered into them, which means care needs to be taken when inputting data into the accounting programme. Epstein says a good accounting software package must be reliable, easy to use and functional.

“SMEs need to check that the software has thorough reporting capabilities and can interface with other software solutions. Of course, it is also important to find out whether the software is locally supported by the vendor or not.”

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Entrepreneur Today

4 Dangers Of Business Under-insurance

A common short-term insurance peril that many SMEs face when submitting a claim following an insured event is the risk of being underinsured.

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Malesela Maupa, Head of Products and Insurer Relationships at FNB Insurance Brokers says, many small business owners mistakenly believe that by merely having a short-term insurance policy in place they are adequately protected against unforeseen events.

“This is technically correct provided that the business is covered for the full replacement value of the items insured. However, in circumstances where the sum insured does not cover the full replacement value or material loss of the item insured, the business is underinsured,” explains Maupa, as he unpacks the dangers of business underinsurance:

1. Financial loss

The most common risk is financial loss on the part of the business. If the business is underinsured or the indemnity period understated, the short-term insurance policy will only pay out the sum insured for the stated indemnity period as stated in the schedule, with the business owner having to provide for the shortfall. This often leads to cash flow challenges, impacting profit margins or rendering it difficult for the business to recover following the financial loss.

2. Reputational damage

Should an underinsured business not have sufficient funds to replace a key business activity or critical component following a loss, this may impact its ability to fulfil its contractual obligations, leading to a loss of business or market share, and irreparable reputational damage in the worst-case scenario.

3. Legal action

A small business also faces the risk of customers or clients taking legal action against it, should it fail to deliver on goods and services following a loss or be unable to honour its financial commitments that they committed to prior to the loss.

4. Survival of the business

A catastrophic event such as fire, which could result in the loss of stock or company equipment and documentation, could threaten the survival of a small business that is not yet fully established, if the business assets are not adequately insured.

Working with an experienced short-term insurance broker or insurer is essential when taking up short-term insurance to ensure that business contents are covered for their full replacement value.

Furthermore, depending on the nature of the business or item insured, the policy should be reviewed on a regular basis to avoid underinsurance as the value of items often change overtime due to fluctuations in economic activity. Where it’s necessary, evaluation certificates need to be kept up to date.

“Lastly, SMEs should ensure that the sum insured does not exceed the replacement value, which would lead to over insurance. Should a business submit a claim following a loss, the insurer would only pay out the replacement value, regardless of the higher sum insured,” concludes Maupa.

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