Davis Tax Commission adopts tax proposals of SAIT
17 July 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
The Davis Tax Committee released its first interim report on Monday. The Small and Medium Enterprises: Taxation Considerations report contain a significant number of proposals submitted by SAIT on behalf of members since its appointment a year ago.
Rationale for submitting commentary
One of the objectives of SAIT is to protect the public interest by participating in policy formation and implementation. SAIT would not be able to fulfil its mandate without the active participation of members and the technical committees.
The secretariat wish to convey its appreciation to all members and committee volunteers who contributed to the proposals and comments now presented and incorporated into the Davis Tax Committee report.
Summary of SAIT proposals adopted by the Davis Tax Committee (DTC)
1. Streamlining of the regulatory regime and reforms to reduce compliance costs and facilitate access to equity finance
The interim report recommends that the current SBC incentive be withdrawn and replaced with a Refundable Compliance Credit (RCR). The rationale for the RCR is to reward SBCs that are tax compliant and to compensate SMEs for their tax compliance costs. The turnover tax system will, however, remain in force. Furthermore, the DTC suggests that in order to incentivise access to equity finance, SARS and the National Treasury should consider the creation of a separate tax incentive to encourage so-called ‘angel investors’. The DTC recommends that the angel investors should be permitted to write-off in full losses incurred on failed investments in micro businesses as a bad debt for tax purposes. All of these proposals align with SAIT’s proposal to streamline the small business regulatory regime and reforms to reduce compliance costs and to facilitate access to equity finance.
2. The entrance requirements of the incentives available to small businesses should be relaxed, the marketing of the incentives should be increased and SARS should focus on enforcement on non-compliant taxpayers
In the SAIT submission and commentary on the 2014 fiscal framework and budget proposals, it was recommended by SAIT that greater emphasis be placed on relaxing the qualification requirements for the turnover tax regime, marketing the regime, and specifically enforcement of non-compliant taxpayers.
These sentiments were echoed in the DTC report. The report recommended that ‘survivalist businesses’ as defined in the National Development Plan (NDP) be provided with a simple form of tax registration in order to ensure compliance with the Tax Administration Act (No. 28 of 2011) (‘the TAA’). The DTC report also recommends that SARS should monitor all declarations made by survivalist businesses to combat tax evasion from larger businesses using such entities as a vehicle to evade tax. The DTC also recommends that SARS establish specific communication channels and campaigns to promote the turnover tax system to ensure increased compliance and to increase registrations. The DTC report recommends that the communication can take the form of either sms, web-based communication (including e-learning) and the establishment of a unit or desk in SARS contact centres that would focus on educating taxpayers on the turnover tax regime.
3. The definition of ‘Small Business Corporation’ in sec 12E(4) of the Income Tax Act (No. 58 of 1962) should be simplified
In the SAIT submission to the DTC, it was recommended that the extensive provisions contained in the SBC definition be revisited, specifically in relation to the accessibility of the incentive to SMEs. The proposal was to simplify the definition of a ‘small business corporation’ to ensure that the SBC regime becomes accessible to a wider group of taxpayers. The DTC responded by recommending to the Finance Minister that the ‘permissible shareholding’ for purposes of section 12E be simplified to include a SBC where the shareholder holds shares in another SBC.
4. The SBC gross income limit should be increased to R 50 million
SAIT advised that the gross income limit in section 12E(4)(a)(i) should be increased to R 50 million. The proposal was accepted by the DTC as it felt that the R 50 million limit ‘is a realistic figure to capture businesses which remain within a breakeven category’.
5. Small businesses should be allowed to account for VAT on the payments basis beyond the R 2.5 million threshold
The Institute recommended to the DTC that the most effective change to assist small businesses would be to allow small businesses to account for VAT on the payments basis. The DTC responded and accepted the proposal by including in the report that SBCs as defined in section 12E should be allowed to account for VAT on the payments basis. This recommendation will, however, be further investigated in the DTC’s review of the VAT system.
6. Delays in releasing VAT refunds
The VAT Committee of SAIT, in their Annexure C submission to National Treasury, submitted that neither the VAT Act nor the TAA contain any provisions that provide for the period in which SARS is eligible to refund amounts claimed. The result is that this anomaly leaves taxpayers with no legislative recourse against SARS because no legal obligation is placed upon SARS to provide a letter of findings in terms of section 42 of the TAA if no audit is launched. The taxpayer also has no recourse in terms of the VAT Act since the repeal of section 44(8).
The DTC concurred with the SAIT position and is proposing that more stringent time limits should be placed upon SARS in relation to the refund of VAT, and that specific communication lines should be established to increase the turnaround time in releasing VAT refunds. The wider implications of this will be assessed in the DTC’s review of the VAT system.
7. Centralise SARS’ small business assistance
SAIT proposed to the DTC that all small business initiatives and training, whether of a tax, financial or business related nature, be centralized.
The DTC report proposes that SARS should establish a comprehensive separate line(s) of communication and offices for the SME sector. The report also proposed that SARS should establish a separate help desk or other communication alternative to increase the turnaround time in releasing VAT refunds. The DTC recommend that assistance be provided to entrepreneurs by the DTI, MSB business, community initiatives and universities.
8. Educate and train SARS officials on small business issues to improve compliance
In the SAIT’s submission on the impact of tax on small business growth in South Africa, it was proposed that more training should be provided to SARS officials (inter alia) to make compliance for small businesses less complicated.
The DTC accepted this this recommendation by making it explicit that ‘dedicated purpose-trained SARS officers’ would be critical in ensuring that the National Development Plan achieves its objectives in the SME sector.
Please click on the links below to access the relevant submissions: