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Entrepreneur Today

Mr Minister, Give Us An Entrepreneur’s Budget

And we will give you jobs and fiscal revenues.

Pavlo Phitidis

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The 2013 budget delivered by the Finance Ministry was disappointing for us as entrepreneurs and small business owners.

Every day that goes by without creating vibrant and exciting tax policy to boost entrepreneurship is a day lost and a great number of jobs not being created.

Many small business investment and growth policy opportunities have been missed in the last 4 years since the global recession took hold and bold moves to boost investment in start-up’s and growing businesses remain amiss. Bold, yes, since 68% of private sector jobs are created by businesses employing fewer than 50 people. We need bold moves!

Having worked and continuing to work with business owners in SA, I created a shadow budget, one specifically focusing on the business development process as undertaken by entrepreneurs. This has been done to promote, influence and motivate what we, SA entrepreneurs need to continue investing and building SA and is targeted at businesses with annual revenues up to R100m.

Policy 1

Small businesses do not possess the resources, certain opportunities, momentum and balance sheets of big businesses with the result that risk profiles of small businesses differ dramatically. With this risk, incentives and rewards need to match entrepreneurial investment for the establishment of new business. Risk is a pricing measure and the reward for the risk should be enhanced through the company tax rate.

We call for no tax for the first 2 years of new business establishment followed on by a progressive tax system. The three tiers of the progressive tax system should be matched to other voluntary legislation such as the BEE codes to simplify the plethora of red tape facing entrepreneurs in SA.

Annual turnover Budget

This will allow the entrepreneur to approach new ventures with a reduced risk profile and allow the small profits generated in the early stages of growth to be redirected back into business growth.

Policy 2

It takes at least 5 years for an entrepreneur to find market from start-up and in so doing to learn what the business model his/her business should be building. All this while, the entrepreneur is occupying at least 5 key positioning of CEO, FD, HR, Marketing and Operations.

The busyness that results over this period prevents the entrepreneur focusing on strategic objectives to build the business. Should profits emerge during the early stage period and taxes be paid, the lost opportunity of rather investing in the right strategic actions to build the business is material in the businesses life.

We call for the establishment of an Entrepreneurs Government Bond that will see taxes that should be paid within the first 5 years of a business life being invested into such government bond. The option would be in place for the entrepreneur to draw the taxes out for investment into the business within the 5 year period. Should the option not be taken up, the tax investment will be liquidated into treasuries coffers.

This will allow the entrepreneur to invest cash generated sensibly into building their businesses further. Over a 5 year period, some of the 5 posts filled by the entrepreneur can be taken up by staff creating the time for such investments to made with more deliberate consideration.

Policy 3

Cash flow is the lifeblood of small business. Invoicing big business or government for work done is key to getting paid. In many instances, payment is stretched well beyond reasonable payment periods and in some cases for months. The Vat impact generated by the invoice in one month and the delayed payment of the invoice months later generates cash flow crises for small businesses.

We call for the replacement of the accrual Vat system by a cash receipts Vat system to match the generation and payment of Vat with payment of the invoice by the customer.

This will allow an entrepreneur to self-fund their own growth and not be distracted by the often futile pursuit of seeking outside funding to support growth.

Policy 4

Small businesses are unable to compete with big businesses in terms of employment packages. As a result most school leavers find their first employment in small businesses where they secure experience and skills.

This deep investment made by an entrepreneur is seldom rewarded since the employee moves onto softer, easier options offered by big businesses and government.

The loss of this employee has a profound impact on small business owners who seldom recoup their investment thus discouraging further employment.

We call for a first-time employment subsidy made up of R15 000 cumulative tax credit for any business owner employing a first time employee remaining in their employ for 12 months or more.

This will allow the entrepreneur to offset taxes that remove cashflow from the business against the cost of training.

Policy 5

Banks do not lend to small businesses. Yet funding is a vital resource to mobilise and support the development of a business through its lifecycle from start-up to growth. This inability in SA to seek and secure funding sees many a good business develop at a snail’s pace or eventually fail, something that SA cannot afford.

We call for a further revision of S12J to motivate and mobilise the creation of private sector funding through the establishment of Angel funders; private funders who are motivated through tax policy to invest their funds during the formative stages of the business development process.

This will allow the entrepreneur to access a broader and more empathetic funding source.

Policy 6

The limited resources of an entrepreneur need to be focused on the business development process.

The plethora of red tape costs a small business significantly more than a big business and this cost increases the risk of failure dramatically since it is compounded by the businesses owner not investing the red tape time demand on business growth but compliance adherence.

Tax certificates

We call for a reduction in the red tape through the establishment of a single point of web-based access with form-fill capability to enable a single entry of information for all compliance documents related to doing business within specified sectors as well tax and labour compliance. This should be supported by electronic submissions and tracking reports.

Don’t set tax policy for small business without consulting. The plethora of associations that claim to represent small business including Business Unity South Africa, Business Leadership South Africa and the National African Federated Chamber of Commerce and Industry are not spokes people for SMEs; they guard the interests of big business alone.

I was recently invited to make a contribution to the Davis Commission established by The Department of Treasury to review tax policy. These ideas have been shared and passionately presented.

Whilst challenges present themselves in all policy directives, bold moves are needed in an economy that underperforms the required growth rates a prosperous South Africa demands. Minister Gordhan, no challenge is insurmountable in the face of bold leadership.

We look forward to hearing the South African 2014 Tax budget – let it indicate the value of our contribution as the entrepreneurs and small business owners to building the future of the South African economy for the prosperity of all.

 

Pavlo Phitidis is the CEO of Aurik Business Incubator, an organisation that works with entrepreneurs to build their businesses into valuable assets. Pavlo is a regular commentator on entrepreneurship on 702 Talk Radio and 567 Cape Talk Radio. He can be contacted at www.aurik.co.za

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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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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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