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Identifying and Growing Entrepreneurship Ecosystems

Creating an effective South African entrepreneurial ecosystem.

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Entrepreneurship is a skill that can be learnt, and is not entirely dependent on natural ability or talent, believes Anthony Farr, CEO of the Allan Gray Orbis Foundation, a non-profit organisation aimed at assisting and developing a new generation of high-impact entrepreneurs and leaders to bring about job creation in Southern Africa. “However of equal importance to the skill of the entrepreneur is ensuring an environment that encourages and rewards high-impact entrepreneurial leadership and is tolerant of mistakes and failures,” he says.

Creating an environment that encourages entrepreneurship is not a matter of chance or accident. “Entrepreneurial ecosystems are usually the result of identifying areas and individuals that can affect high-impact entrepreneurial change and putting the correct systems and support structures in place to make it possible for them to succeed,” says Farr.

The elements of an entrepreneurship ecosystem

Daniel Isenberg, Professor of Management Practice at Babson College in the US and keynote speaker at last year’s Cape Town Entrepreneurship Week, has developed a comprehensive system for identifying and growing entrepreneurship ecosystems. According to Isenberg, such an ecosystem consists of hundreds of elements that can be grouped into six general domains:

1) Markets, which includes early customers and networks such as entrepreneurship networks and multinational companies;

2) Policy, which includes solid leadership practices and support from government structures in the form of institutions, regulatory framework incentives and venture-friendly legislation;

3) Finance, under which micro-loans, venture capital funding and angel investors can be grouped;

4) Culture, including visible successes, tolerance for risk and failure, and social status of entrepreneurs;

5) Supports, which broadly covers infrastructure, support professions such as legal and accounting, and NGOs who support entrepreneurs, and;

6) Human capital, covering labour and educational institutions.

“The powerful consequence of this understanding of ecosystems is the flexible dynamics it brings.  Due to unique cultures, regulatory frameworks and available support structures, each entrepreneurial ecosystem will be unique. The interplay between the hundreds of different elements creates these unique environments, so it’s important not to try to copy the success of another country and simply apply their approach locally,” says Farr.

In the South African context, it is of absolute importance that we start to create a business and regulatory environment that is conducive to entrepreneurial success. “South Africa currently has a 25% official unemployment rate and job creation has become a primary objective of government. Economic studies from around the world regularly link entrepreneurship to rapid job creation, GDP growth and long-term productivity increases. The question is: how do we establish an entrepreneurial ecosystem in South Africa?” Farr asks.

Supporting high-impact entrepreneurs

There is an increasing weight of evidence showing the disproportionate impact that a small number of high growth entrepreneurs can achieve. This reality has recently been captured by the Kaufmann Foundation by way of Schramm’s Law which states: ‘The single most important contributor to a nation’s economic growth is the number of start ups that grow to a billion dollars in revenue within 20 years’.

South Africa’s business environment is unrewarding to high-impact entrepreneurs, and there’s a definite stigma associated with failing at a business venture. This often discourages potential entrepreneurs to take a chance and launch their idea, much to the detriment of our economy. “It is vitally important that we start challenging this culture of intolerance toward failure sooner rather than later, or we risk losing a great many opportunities for high-impact entrepreneurial change. Countries such as Ireland and Chile managed to change their attitudes in the space of a single generation, a so called ‘generation on the move’. There is no reason why the same can’t be done locally.”

Farr argues that only once we have considered the above aspects should we look at the role of government   in helping to support an entrepreneurial ecosystem. “Government should remove legal obstacles to business growth, and implement helpful laws that decriminalise bankruptcy, simplifies tax, and allows entrepreneurs to quickly start over after a failed venture. Government’s role is to unleash – not harness – people’s entrepreneurial energies, and build on and reinforce existing clusters instead of trying to create new ones. It’s a case of putting the correct systems in place and then letting entrepreneurs get on with the task at hand.

“Entrepreneurship should be promoted as a worthy pursuit and should form part of the curriculum – both at school- and university-level. But at the same time, we need to start removing legal hindrances to entrepreneurship and create an environment that rewards risk-taking and innovation in business, or we risk being left behind in the global economy.”

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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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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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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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