Entrepreneurs across South Africa feel relieved that the Central Reserve Bank of South Africa has left rates unchanged especially off the back of the economic downgrades by Standard & Poor’s and Fitch as well as the pending Moody’s review, according to the Entrepreneurs’ Organization (EO).
Further relief is provided by the news that a second damaging credit rating cut from Fitch, has been avoided.
EO recently released a survey (Global Entrepreneurship Indicator) indicating high levels of optimism among entrepreneurs globally, as well as in South Africa prior to the downgrades. Of entrepreneurs in Durban, Cape Town and Gauteng, 61.5% reported an increase in business revenue year on year, with 50.3% of them reporting an increase in net profit at the time of the survey which took place before the downgrade. However, since then, sentiment is shifting.
“Having spoken to members in the last month, the feeling has certainly changed and there is a strong sense of frustration and anxiety since the cabinet reshuffle and subsequent downgrade among our members,” says Ross Drakes, incoming EO president for Johannesburg. “It will be interesting to see how much the needle shifts in the next survey period, scheduled to take place in September. Until then though, members are keeping an eye on interest rates announcement such as the one made today and have discussed with one another the strategies or approaches they plan to put in place over the short to medium term.”
According to EO member, Andrew Ryan, MD of GOT Holdings, putting investments offshore has been something which he hopes will assist with cushioning any economic downturn. “We set up a business overseas which is managed and controlled by overseas employees. As a business, we have had to be careful in ensuring effective control tax laws and there is purpose in an offshore office, in our case procurement, and is not just a post office.”
Ryan expects the downgrade to have a 50/50 chance of impacting his business but has three guidelines in mind on how to navigate this period. “I plan to use a three point change as a benchmark in the interest rate when making business decisions. Debt will be the first to go, where possible, as well as underperforming assets not keeping up with inflation. I plan to cut costs but not in the area of marketing. As a matter of fact, this is where I would increase spend and focus on being more effective in our marketing efforts,” says Ryan.
In terms of businesses which may be more resilient, property and debt recovery are possibly sectors which will be less exposed to risk.
Saskia Hill, MD of MCS Debt Recovery and an EO member, acknowledges that being in the debt collection industry, they are likely to get more accounts handed over for collections when times are tough.
“When consumers come under pressure, not being able to pay off debt is a negative consequence of a downturn, yet it is also indicative of how opportunities can exist for entrepreneurs when times are tough and that everything is cyclical. It is important for entrepreneurs to do what they can, whether times are good or not, and for me, cash is king. As and when we can, we pay cash for everything and avoid taking on too much debt. Of course, this is not applicable to all industries but it is about being able to identify opportunities such as this through shared experience,” says Hill.
Another option for entrepreneurs to consider is the export market. The local Department of Trade and Industry (DTI) will sponsor trips overseas (60% of flights and 60% of accommodation) if travelling for potential export business. “I have been to Holland on such a basis while looking at business opportunities. You can get 100% full sponsorship from the national DTI but I found more success with the local DTI,” adds Hill.
Another resilient industry is property. “Great property deals always exist when the rest of the market stops buying and everybody is keen to sell, or required to when bonds become either too expensive or home owners are looking to liquidate assets,” says Grant Gavin, MD of RE/MAX Panache and an EO member.
“What we do see as a potential threat is our employees who are going to be concerned about job security,” says Gavin.
“Leaders need to bring certainty when none exists. Mind-set becomes important and therefore leaders need to spend more time focussing on motivation and inspiration. At the end of the day, employees still have a job to do, and even though it may be tougher, a job still needs to be done. This is a time when leaders will be defined from the managers. If there is any area where we will not be cutting costs, it will be in training our staff. Another area where we would increase spend is in marketing. That way, when the market rebounds, and our competitors cut marketing spend, we will emerge as a stronger brand. This approach has been tried and tested.”
Based on feedback and discussions with the EO members, there seems to be consensus that while businesses can expect difficult times ahead, a strong network and support system is critical to keeping heads above the water.
“Being an entrepreneur can be very lonely and having a network to tap into is extremely valuable. The purpose of an organisation such as EO is it allows for entrepreneurs to speak to each other and it certainly helps knowing you are not the only one going through certain problems and this helps enormously,” says Drakes.
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
“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.
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.
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.
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 tax should be submitted at the end of August (first provisional) and at the end of February (second provisional) – for February year-end companies.
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.”
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.
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.