When the two approaches are juxtaposed like this, the inequity of the current system is glaring.It is unfair on several levels.Firstly, it is regressive taxation of the worst kind.A person such as this hypothetical taxpayer earning R100 000 should be in the lowest income tax bracket with an effective rate of 8.2% but is actually subject to a tax rate of 35.2%.Based on the 2010 personal tax tables, this is the rate at which a salary earner of R1 400 000 pays. One way of defining the extent of the overpayment is to simply take the difference in the two rates being 27% (35.2% – 8.2%). To emphasis the regressive nature of this taxation, if the same exercise is undertaken for a higher income of R600 000 instead of R100 000 the overpayment, as measured by the difference in effective tax rates under the two systems, is only 6.3%.The excess burden is clearly greater for the lower income individual.That is, less the small business owner makes, the more he/she is overtaxed.
Secondly, the current system discriminates against those people who earn their income from business rather than employment.The integrated system achieves the same result regardless.This accords, not just with fairness, but common sense in that the same income of two individuals should be taxed equally regardless of the source. A strong case could even be argued that if equity is to be affirmed, it would actually mean taxing the business owner at a lower rate than the employee.The reason being that, despite equal incomes, the business owner has assumed far greater risk than has his salaried counterpart.Calculated risk taking, as exemplified by the small business, is something that government should seek to foster and support rather than undermine and inhibit.One of the central motivations for establishing the close corporation was to provide smaller undertakings with corporate status in an effort to support this sector.It begs the question why government would then undermine its own efforts by choosing to tax them as companies and not trusts where it allows for the benefits of corporate status with integration.In this way, government has forgone the opportunity to provide real support to smaller enterprises in the form of financial assistance and fairer treatment via the tax system.
A rebuttal by National Treasury to the above would submit that avenues of relief are available to the shareholder.For instance, the person should rather operate as a sole-proprietor or partnership and avoid the situation altogether.However, this misses the point; there are significant benefits to operating as a company, especially limited liability and perpetual succession.It is also a means of allowing the business owner to formally structure the operations and lay the groundwork for future stakeholders.
Furthermore, it was even emphasised in South Africa’s Margo Report of 1986, that the tax asymmetry between companies and individuals "has in practice had a significant impact on the choice of the form in which entrepreneurs carry on their business activities”.A further rebuttal by National Treasury to the deleterious consequences above would be to claim that they are mitigated via the tax breaks granted to small businesses in terms of s 12E and the turnover tax.While relief is granted in theory, the criteria to qualify for a small business corporation, as defined in s 12E, are so stringent that it would not be easy for a company to qualify.For instance, the company would be disqualified from s 12E, if the shareholder happened to hold shares in other non-listed companies (this is particularly realistic for the entrepreneur who may float several small companies owing to the diverse nature of the businesses he/she is involved with) or a company is above the qualifying revenue threshold but is in operational difficulty such that the taxable income is low despite a relatively high gross income.The turnover tax is similarly restrictive and in any event targeted more toward micro-enterprises than SMEs.As can be seen, the limited nature of s 12E and turnover tax is not sufficient in redressing the problems cited above, this is especially so given that s 12E only became relevant, to all intents and purposes, in 2006 with the increase in the qualifying threshold despite the fact that the above scenario has been in existence for decades.
As an aside, the examples above make a broader point: corporate taxes must eventually be borne by individuals. Of course, where larger corporations are concerned, the link is not as clear-cut and who the individuals are, is uncertain but the principle still remains.It should be emphasised that the Taxpayers’ Foundation is in no way against corporate taxation. We support it, but it should just be recognised that it is eventually a tax paid by actual people and not by the ‘legal fiction’ of the corporation.
Overall, it is quite clear that our current system is biased against one of the most important sectors in the economy being small businesses.At a time where it is difficult for people to gain employment, they should be encouraged to start their own ventures and not be punished when they do.These ventures are critical in growing the economy and for them to become future employers. Addressing this tax problem should be a priority for National Treasury.The solution is simple: just tax SMEs as though the shareholder is a sole proprietor with all the income being vested in his/her hands.
Vuyisa is a man with a mission; an entrepreneur who was thrust into the limelight when Finance Minister Pravin Gordhan singled him out in the 2010 Budget speech for one of his ‘tips for Pravin’. Vuyisa’s belief that the country needs a larger budget for youth development and his initiative to launch an online social platform called Student Enterprises, to support youth job creation and entrepreneurship, won him the recognition.With a BCom (financial accounting) and specialist qualifications in property, Vuyisa is studying entrepreneurship, too.His experience covers the property industry, business development and communications.He is a director of the South African Black Entrepreneurs Forum (SABEF).Not content to watch things happening around him, he sets out to make them happen and to change the world for the better.He is determined to give South African taxpayers a voice and work to improve the efficiency of government expenditure.
Source : By Vuyisa Qabaka (TaxTALK)