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Tax Incentives For Small Businesses – Give The Little Guy A (Tax) Break

Government has recognised that is unrealistic to expect small businesses to pay the same level of taxes as more established businesses. This led to the introduction of two favourable tax regimes available to certain small businesses.

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Entrepreneurs and small businesses play an important role in our economy, particularly to combat unemployment. Government has recognised that is unrealistic to expect small businesses to pay the same level of taxes as more established businesses. This led to the introduction of two favourable tax regimes available to certain small businesses. 

Small business corporations 

The more well-known of the two regimes is the “small business corporation” (commonly abbreviated as “SBC”) as defined in the Income Tax Act. An SBC benefits from a reduced income tax liability through reduced income tax rates and accelerated depreciation allowance for movable assets. 

Most companies pay income tax at a flat tax rate of 28% on their taxable income. SBCs, on the other hand, can benefit from a reduced tax liability if their taxable income does not exceed R550 000 in a year of assessment. For 1 April 2017 to 31 March 2018, qualifying SBCs will not pay tax on the first R75 750 taxable income. Thereafter, the SBC will pay tax at a progressive rate starting at 7%, 21% of taxable income exceeding R365 000 and 28% on taxable income exceeding R550 000. SBCs may also qualify for accelerated depreciation allowances against taxable income.

Related: 7 Top Tax Tips For SMEs

If a qualifying SBC owns plant or material and uses it directly in a process of manufacture or similar process, the SBC may reduce its taxable income by the full cost of the plant or machinery in the year of assessment in which it is brought into use for the first time.

An SBC may elect to apply accelerated deprecation rates to other movable assets, which would ordinarily have been regarded as wear and tear or depreciation. An SBC may choose to reduce its taxable income by 50% of the cost of the asset in the first year of assessment during which the asset is first brought into use, 30% of the cost in the second year, and 20% in the third year.

Not all small businesses qualify as SBCs. The following entities may qualify as an SBC: a close corporation, a co-operative, a private company and a personal liability company, if at all times during the year of assessment all of the shareholders or members of that entity were natural persons.

Additional requirements that must all be met to be regarded as a SBC, include:

  1. The entity’s gross income may not exceed R20 million for the year of assessment
  2. No member or shareholder of the entity may, at any time during the year of assessment, hold any shares or have any interest in the equity of another company, other than certain specific exceptions which include listed companies, collective investment schemes and others
  3. Not more than 20% of the total receipts or accruals and capital gains of the entity may consist collectively of “investment income” and income from the rendering of a “personal service”
  4. The entity may not constitute a “personal service provider” as defined for tax purposes.

The term “personal service”, for purposes of the SBC regime, is defined to include a wide array of professions, including:

  • any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, if
    • that service is performed personally by a person who holds an interest in the entity; and
    • that entity does not throughout the year of assessment employ three or more full-time employees (other than a shareholder or member or a connected person in relation to a shareholder or member) who are on a full-time basis involved in the business of the entity of rendering that service.

If an entity (in a year of assessment) employs three or more full-time employees (other than a shareholder or member or a connected person in relation to a shareholder or member) who are on a full-time basis involved in the business of the entity of rendering that service, it will not be regarded as rendering a “personal service” and will not be regarded as a “personal service provider”.

Related: What Should I Know About Dealing With Tax When It Comes To My Business?

A company, co-operative, close corporation or personal liability company should therefore carefully consider compliance with the requirements and, if so, take advantage of this favourable tax regime.   

Turnover tax payable by registered micro businesses

 turnover-tax

Businesses are not only burdened by their actual income tax liability, but also by their tax compliance obligations in this regard. This led to the introduction of an optional simplified tax system for registered micro businesses in terms of the Income Tax Act, known as the turnover tax regime.

The turnover tax regime allows qualifying micro businesses to register for and pay a single tax known as turnover tax instead of various other taxes. The turnover tax replaces income tax (including provisional taxes and capital gains tax) and to an extent dividends tax. A micro business is still required to withhold payroll taxes and VAT (if voluntarily registered as a VAT vendor). 

Turnover tax is calculated by applying the relevant turnover tax rates to the taxable turnover of the micro business as determined. For any year of assessment ending on or within the 12-month period before 28 February 2018, registered micro businesses will pay no turnover tax on a taxable turnover not exceeding R335 000.

A turnover tax will apply to 1% of the taxable turnover exceeding R335 000, 2% of the taxable turnover exceeding R500 000, and 3% of the taxable turnover exceeding R750 000. 

Registered micro businesses also benefit from reduced record-keeping requirements and only need to retain information relating to the following:

  1. Amounts received during a year of assessment;
  2. Dividends declared during a year of assessment;
  3. An asset with a cost of more than R10 000 at the end of a year of assessment; and
  4. A liability that exceeded R10 000 at the end of a year of assessment.

As with SBCs, micro businesses are subject to strict requirements of registration. The turnover tax is available to individuals (sole proprietors or partners in a partnership), close corporations, co-operatives or private companies, if their qualifying turnover (as determined) does not exceed R1 million in a year of assessment.

Related: Payroll Tax: 6 Things Small Business Owners Should Know

Certain persons are disqualified as micro businesses, including:

  1. Persons holding shares or having any interest in the equity of a company, other than certain specific exceptions which include listed companies, collective investment schemes and others;
  2. If more than 20% of the total receipts during a year of assessment consists of income from the rendering of a “professional service” (for natural persons) or the aggregate of “investment income” and income from the rendering of a “professional service” (for companies);
  3. If the proceeds from the sale of certain capital assets used mainly for business purposes exceed R1,5 million over a three-year period;
  4. Companies with a year-end other than the last day of February;
  5. If any of the partners, members or holders of shares are not natural persons in a year of assessment;
  6. Personal service providers and certain labour brokers;
  7. Public benefit organisations, recreational clubs, associations and small business funding entities; and
  8. Special rules apply to partnerships.

The term “professional service”, for purposes of turnover tax, includes the same array of professions as for the SBC regime, for example a service in the field of accounting, actuarial science, etc. However, for turnover tax, no exception applies for businesses rendering professional services that employ three or more full-time employees.

Businesses rendering professional services, although they will not qualify for turnover tax, may possibly qualify for the SBC regime, provided they employ three or more full-time employees in addition to meeting the other criteria of qualifying as a SBC.

The turnover tax regime does seem to significantly reduce the tax compliance burden of certain small businesses. It may not be the best option for every small business as it imposes tax on a turnover basis as opposed to a taxable income basis – thus affording lower tax rates but without taking into account exemptions or deductions that would otherwise have reduced taxable income.

We understand that very few businesses are registered as micro businesses on the turnover tax system. This could be ascribed to the determination of whether a business meets the registration requirements.

Author: Esther van Schalkwyk

Entrepreneur Magazine is South Africa's top read business publication with the highest readership per month according to AMPS. The title has won seven major publishing excellence awards since it's launch in 2006. Entrepreneur Magazine is the "how-to" handbook for growing companies. Find us on Google+ here.

Entrepreneur Today

Uber-like Insurance Platform Is Revolutionising The World Of Insurance Claims

the 4-Sure platform, which was launched two short years ago by actuary Shalen Moodley and a collective of seasoned tech gurus, is to provide value-added services that benefit the financial services industry. All partners had substantial success across Africa introducing loan origination platforms for leading banks before deciding to tackle the problems existing in the insurance claims fulfilment process.

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A multi-sided, digitally-driven business platform that has been wholly-developed and launched in South Africa is ‘uberising’ the local short-term insurance industry by transforming the traditional claim fulfilment landscape.

Developed locally by Insuretech sensation 4-Sure and headed up by actuary-turned-entrepreneur Shalen Moodley, the 4-Sure platform seamlessly connects the claims ecosystem consisting of the customer, broker, insurer, service providers and suppliers and manages all complex interactions and sequencing required to deliver superb customer experience, optimal claim cost and fast turnaround times. 

“The new system, which eliminates virtually all the manual processes and “waste work” involved in dealing with a claim, also provides enhanced opportunities for small businesses to compete for insurance claim work traditionally only available to a select few. Simultaneously, it reduces the fraud risks associated with the manual allocation of claims, and reduces costs across the board”, says Moodley.

“There are several weaknesses inherent in the appointment of the traditional insurance panels, “says Moodley. Relationships between the insurer’s agent and supplier base can result in some contractors being favoured above others. The payment of “incentives” by service providers as a reward for getting work can also skew the allocation process and drive massive cost inflations. Furthermore, costs can vary for similar jobs and the use of assessors for approval of routine jobs results in time delays and increased administration costs.”

“Most seriously for most insurers, is that contact with the customer is lost during the claim fulfilment process – they are disintermediated. Often, the result is dissatisfaction on the part of the customer, disrupted processes, unnecessary delays and often the possibility of an unhappy customer withdrawing their insurance and other investments with the associated brands of the insurer.

After extensive discussions with the industry regarding problems faced with settling claims, 4-Sure concluded that reformation of the system should be based on shorter, effective communication structures, the ‘democratisation’ of the panel system and the strategic use of technology to improve customer delivery and satisfaction levels.

Related: Why Start-ups Like Uber Stumble When They Scale

The answer was the building of an entire ecosystem based on the use of sophisticated regressive algorithms that made the ‘Circle of Service’ between insurer and claimant transparent and frictionless. Creating an extensive database, making software available to service providers and connecting suppliers of raw materials as well as early payment mechanisms completed the service circle. As well as speeding up claim response times, the process was also efficient and fundamentally more effective.

Taking inspiration from the concept launched by the Uber transport system, the insurance platform includes a vastly increased list of qualified and rated service providers. As in the ride-sharing service, becoming listed requires that several stringent criteria are met by service providers. When a claim is registered – including the time when the customer requires assistance – it drops into the platform. Appropriate service providers listed can then respond and confirm their availability. They are then required to be on site at the time stipulated by the customer, undertake the work and then complete a Mobile App-driven reporting process for the insurer’s records (including before and after photographs, assessments and costings).

To participate in the platform a service provider must have a smartphone and the software, provided free by 4-Sure. Part of the package includes a service provider ‘scheduler’s’ desktop package that enables job scheduling, field technician allocation and all the information relating to the job to be collated and electronically submitted for payment to the insurer.

“For a sole trader or SME, one of the greatest challenges to building a sustainable business is controlling cash flow. Service providers on 4-Sure do not have to carry an extensive array of raw materials to fulfil allocated insurance claims work. Once they are on site, have assessed the repair work and had it approved within minutes, the service provider is able to visit a 4-Sure approved partner supplier (Builder’s Warehouse, Penny Pinchers, Buco, Plumblink and others) and pick up the required stock.

“They are then using their 4-Sure Mobile App to get the necessary materials and the outlet then bills the insurance company concerned directly through the 4-Sure software for the expenditure. Because of the volumes involved, we have been able to negotiate favourable prices for these services which are now on offer at more than 400 service points across the country.  The service provider bills only for the time and labour spent on the job at the agreed rates. Their bills are then submitted using the 4-Sure software, go directly to the insurer and are generally settled within 24-48 hours.”

“As smaller operators are no longer waiting between 30 and 60 days for their money, they are happy to complete routine jobs for a set fee.  Depending on the service they deliver and the ratings they receive, they are in control of just how much work comes their way.  As a job is loaded on the system and service providers then bid for the work, competition is assured and opportunities for work are equal across the spectrum of service providers – a new paradigm which rewards performance with more work and manages the non-performers off the platform.”

Further value is added to service providers by free access to geo-positioning systems, which not only plots their way to their closest parts supplier but also to the customer’s property.  Jobs that appear on their systems also cover the areas in which they choose to operate. As is the case with their Uber driver colleagues, those closest to the customer can make their presence known and compete for the work. Those who feel the costs of reaching the site do not make a job worthwhile simply do not respond to the job alert,” says Moodley.

For insurers, who can track the response times of service providers in real-time and contact them electronically if they are late on site, the major benefit is that the loss of customer contact at the point of handing over a claim to an incident manager no longer exists.

Related: How Uber Grew To A Billion Dollar Business (And How You Can Make Money With It)

The typical flow of a job is made easier by:

  • Insurers were able to use a sophisticated eco-system that is a centralised platform connecting all players in the supply chain, facilitating a seamless claims fulfilment process.
  • Customer contacts their insurer via their contact centre, their website, or a digital self-service channel and this claim, is electronically dropped into the 4-Sure to facilitate the claim process automatically.
  • A claim’s details being logged directly on the 4-Sure platform instead of being referred to an incident manager. The message enables specific skills, customer location, a time required for service and other factors to be selected so that it can be responded to by competing service providers.

Explains Moodley, co-founder of 4-Sure and one of the innovators behind the home-grown platform that caters specifically for local needs and is believed to be the leading services of its type anywhere in the world:

“4-Sure has succeeded in becoming the first, fully-digital insurance claims platform to provide a truly customer-centric experience. The system is flexible and although the present focus is on non-motor claims, other avenues, including motor insurance and non-insurance opportunities are being investigated and developed,” says Moodley.

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Win A Seat At 10X-e’s 10X-ECUTION Bootcamp (Valued At R5900)

Automatically receive 20% off the Bootcamp just by entering!

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Transform chaos into systematically achieving business goals, at scale. Hosted by founder, Jason Goldberg

Enter by emailing your company name, your name and your designation to Monique: mchaitezvi@edgegrowth.com

About 10X-e:

Scaling – the Bermuda Triangle of growth – is hard, and fraught with failure. Very few of even the top 1% of ventures succeed at scaling, mostly due to poor execution, due to lack of experience scaling businesses. The 10X Program brings the ‘Science of Scale’ and seasoned Scale Up Leaders to help founders navigate the Bermuda Triangle of growth

Our team has helped some of the Continent’s most exciting high growth businesses scale up through the most treacherous parts of the journey. We tailor make multiple workshops to the specific needs of you, your team, and your business. Our workshops serve to address the most pressing challenges that your business faces, helping remove the hurdles towards 10X growth.

For more information on 10X-e, visit: https://10xe.co.za/ 

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Off The Beaten Track

What Tourism Month means in South Africa and how Mango Airlines is focusing on local opportunities.

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This September, being Tourism Month, we have so much to talk about in South Africa, and so many people to engage with, both domestically and abroad. We are privileged to be able to leverage a broad range of destinations – arguably world-class in nature, and they expand way beyond a beautiful mountain, and an ecosystem of game.

The vast majority of leisure tourists, however, remain attracted to the Mother City and various Safari destination, while business tourists tend to stick to hub cities for short durations of time before departing again.

“There is a golden opportunity to expand on the same offerings – while not detracting from them in any way. Our responsibility is to drive tourism into new areas, really emphasising the differentiators that are incredibly attractive to local and international tourists,” said Benediction Zubane, Head of Marketing at Mango Airlines.

“Often tourists visit one of the more well-known sites in an area, and are completely unaware of the other features and destinations close by. We’re seeing a lot of success in township tourism which goes to show how diversifying can really drive new tourism opportunities,” explained Zubane.

Related: Travel Tour Agency Sample Business Plan

According to Statistics South Africa survey on Tourism and Migration, nearly 3.5 million international travellers visited South Africa in August 2017. Top numbers were tourists from USA, UK, Germany, France and The Netherlands, with African visitors primarily coming from SADC countries. Zubane added, “This means there is vast opportunity to begin engaging with travellers in new countries across the globe. We need to become our own best ambassador, talking-up our famous and lesser known destinations, proudly showcases our uniqueness. We should also be tourists in our own country and start exploring the wonders of the Rainbow Nation.”

Mango is passionate about helping its SMEs and entrepreneurial community to successfully overcome the unique challenges facing the tourism industry: “There has never been a more opportune time for small businesses and entrepreneurs to benefit positively from tourism in South Africa, and we hope to celebrate alongside our SME community as they fly high – both literally and figuratively,” he concludes.

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