|Is the Davis Tax Committee a saviour for small businesses? PART I|
26 July 2014
With the release of The Small and medium Enterprises (SME): Taxation Considerations, Interim report July 2014, the Davis Tax Committee (DTC) has made a bold move aimed at incentivising the establishment and development of the SME sector in South Africa.
Erich Bell, Tax Technical at the South African Institute of Tax Professionals (SAIT), believes the DTC report offers practical strategies that would help South Africa achieve the key objectives laid out in the National Development Plan. “The interim report has been widely welcomed by the tax fraternity, and Judge Dennis Davis, together with the other dedicated professionals in his team, should be commended for their insightful work performed in this regard,” adds Bell.
The proposals contained in the interim report should leave the small business owner with lots to smile about if newly appointed Finance Minister, Nhlanhla Nene, implements the recommendations in his 2015 Budget speech.
In the following two series article, Bell provides a broad overview of the key proposals in the DTC’s report, especially in their relation to small business development.
The proposed Refundable Compliance Rebate (RCR)
While the Income Tax Act currently provides incentives for Small Business Corporations (SBC), allowing a more favourable tax rate and an accelerated write-off period for assets used in the manufacture process, the DTC found that the current benefit afforded by this incentive is relatively small and has not been as effective as hoped in bringing more micro and small business into the tax fold.
The DTC report recommends that this current incentive is replaced with the Refundable Compliance Rebate (RCR) which would reward the tax compliance of SBC’s and subsidise part of the costs involved in being tax compliant.
The new incentive would be applicable to all SBC’s that have submitted income, VAT and employees’ tax returns within nine months of the end of year assessment, irrespective of whether the SBC is in an assessed loss position. If the business’ turnover is less than R335000, the DTC report suggests the taxpayer be exempt from tax, based on the turnover tax system.
The RCR proposed rebates in line with an SBC’s turnover, ranging from a R20000 rebate for turnover above R1million, R15000 for turnover between R500 000 and R1million, and R10000 rebate for turnover between R335 000 and R500 000.
However, according to a recent study conducted by SAIT, it can cost a small business up to R53 356 on internal tax compliance costs and R9 982 to obtain external tax compliance assistance. Many of SAIT’s members feel that the RCR could be even more generous with the rebate.
Turnover tax system overhaul
There are some welcome changes proposed from a turnover tax perspective, where natural persons or companies with turnover less than R1 million per annum have elected to be taxed in terms of the turnover tax regime.
In its current form, taxpayers who elected to make use of the turnover tax system are required to remain on the system for three years. The DTC, recommends that taxpayers may choose to leave the system whenever they like, but without the option to re-elect it.
Currently these entities start paying tax where their taxable turnover exceeds R 150 000 but the DTC recommends that this limit is increased to R335 000 per annum. It is further proposed that entities whose taxable turnover does not exceed R 335 000 would only have to submit an annual declaration setting out the taxpayer’s details, bank account numbers and a statement that its turnover has not exceeded R 335 000. It is also proposed that the maximum rate at which they pay tax be decreased from 6 per cent to 5 per cent.
In series two, Bell continues his focus on the SME sector and the DTC’s proposals relating specifically to the cost of compliance, the Employment Tax incentive, angel investors and incentives for education and skills development.