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How Can The Budget Benefit SMEs?

An SME-friendly budget will boost job creation and economic growth.

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Nazeem Martin, MD of Business Partners Limited, is hoping that Finance Minister Pravin Gordhan will spare a thought for small and medium enterprises in his budget.

Minister Gordhan will be announcing his budget tomorrow (26 February) in the face of a yawning deficit, a falling rand, menacing inflation and sluggish growth.

Martin says, “While there is no silver bullet, a budget which includes a range of measures empowering South Africa’s SMEs to expand and employ more people, would go a long way in supporting small-business development.”

Measures that would boost SMEs

Martin lists the following measures that would benefit SME growth:

  • Boost the newly created youth wage subsidy, officially known as the Employment Tax Incentive, to make it more practical for business owners to employ young, first-time workers. As it stands, the scheme provides benefits to businesses only if the new workers earn less than R6 000 per month. Maximum benefit from the scheme is derived if the worker earns only about R2 000 per month.

These thresholds are so low that it arguably provides little incentive for young people to take up a job, and employers will struggle to find candidates. Businesses in the knowledge economy that take the risk of employing first-time young workers at more realistic salaries are therefore largely overlooked by the youth wage subsidy. By increasing the thresholds, the scheme could really begin to boost youth employment.

  • The thresholds for the existing small-business tax incentives are still too low. The most substantial tax break, Small Business Company Tax, allows business owners to pay a lower corporate tax on their first R350 000 worth of profit per year, but only businesses with turnovers of less than R14 million per year qualify.

By pushing up the turnover amount, as well as the profit threshold of the scheme, the tax break will provide a clear incentive for entrepreneurs to invest and expand rather than doing all they can to remain under the radar.

The current turnover scheme tax has the admirable intention of minimising paper work and the tax burden for informal micro businesses, but the take-up has been minimal. A bold expansion of the scheme, or some similar regime, can provide the fuel for a real entrepreneurial groundswell.

Something else that is needed in terms of small-business tax incentives is a substantial tax break for start-ups, for example a minimal flat tax or turnover tax in the first five years of a business’s existence, with a threshold higher than the current R1m per year.

  • The time is right for a substantial fund to finance the most risky of all businesses – start-ups. Several experiments with start-up funds have been done over the past two decades, and it is time to go big – to the tune of at least R1 billion, provided the lessons learned thus far are taken into account.

The first thing that needs to be acknowledged for this particular fund to work is that commercial returns must not be expected. On the contrary, if a true start-up fund gets all of its capital back, it is doing brilliantly. A more realistic benchmark is to try to get back in the region of 65 to 70% of the capital. From the government’s point of view, the unrecouped money is not really lost, because it is spent into the economy.

The second aspect to consider is to implement a substantial mentorship and training programme that forms part of the fund so that the start-ups financed by the fund are properly incubated – a R1 billion fund, for example, should have at least R300m available for incubation.

Private companies should also be allowed to bid against government agencies for managing such a fund. A company such Business Partners Limited for example, which has one of the most substantial mentorship programmes in South Africa, has a wealth of experience in start-up financing to contribute to the success of a flag-ship start-up fund

  • The time for talking about the infrastructure roll-out is over – large-scale implementation needs to happen urgently. If the promised building of roads, bridges, dams, power stations and optic-fibre networks is done with clear set-asides for SME subcontractors. Not only will the economic boost be substantial and long-lasting, but the economy will also be freed from the deadly grip of electricity and broadband shortages.
  • If the South African Revenue Services could reduce down red tape for businesses significantly, so can all other government agencies that add to the compliance burden of businesses, from the department of labour to municipalities. Apart from a continued focus on reducing red tape, a network of one-stop shops where businesses can go to for all their compliance dealings will also help to free South Africa’s entrepreneurs to concentrate on growing the economy.
  • The government’s tax incentives for venture capital investments are immensely complex, as the minimal take-up of the incentive clearly shows. Simplification and strengthening of the scheme can make millions available for investment into local businesses.
  • With the current weak rand, things are looking up for South Africa’s exporters. Now is the time for the government to boost the export sector by reducing duties on imported machinery and equipment and supporting efforts to develop overseas markets for South African products.

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Entrepreneur Today

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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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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