The 2014 Budget and how it impacts the SME Owner/Entrepreneur

No matter what they claim, no other political party could have presented any other budget in SA at this point in time. That is economist JP Landman’s view of Finance Minister Pravin Gordhan’s latest National Budget. “We now need growth from innovation and greater efficiency.” He was a guest speaker at a post budget event hosted by Deloitte in Cape Town.

“SA’s next phase of growth will have to be about dynamism and the agility of the private sector by means of synergies created with government,” said Landman.

The government is acutely aware of the importance that SME’s play in the current economy and their role in growing the economy and creating jobs. The recent inclusion of the Business Rescue provisions contained in Chapter 6 of the new companies act (2008) is further proof just how important job creation and in this case job preservation is to the current administration. It is our opinion that more support should be given to those companies applying for business rescue in the form of post commencement funding. Funds are theoretically available through the likes of the IDC but the qualification criteria are currently not conducive to Post Commencement Finance.

The recent introduction of turnover taxes relevant to Micro Enterprises and special tax treatments applicable to Small Business Corporations are further examples of how Government is engaging with the private sector for the betterment of the South African economy as a whole.

The main tax proposals for 2014 include the following:

• Adjustments to tax tables relating to retirement lump-sum payments.
• Tax breaks to encourage household saving.
• Measures to encourage small enterprise development.
• Clarity on valuation of company cars for fringe-benefit tax purposes.
• Government proposes an increase of 12c/litre in fuel levy and an increase of 8c/litre on the Road Accident Fund levy. The effective date for both levies is 2 April 2014.
• Reforms to tax treatment of the risk business of long-term insurers.
• Amending rules for VAT input tax to combat gold smuggling.
• Measures to address acid mine drainage.
• Postponement of carbon tax to 2016 in order to ensure its alignment with desired emission-       reduction outcomes identified by the Department of Environmental Affairs.

What is specifically related to the SME/ Entrepreneur?

Turnover tax for micro businesses

The turnover tax regime is targeted at businesses with an annual turnover of up to R1 million. It is proposed that turnover up to R335 000 should be tax-free and the maximum tax rate should be reduced from the current 6% to 5%. Other suggestions include scrapping the requirement for businesses to opt into the regime for 3 years and requiring annual, rather than biannual, tax returns.

Small business corporations (SBC)

The reduced tax rates applicable to SBCs are considered ineffective in encouraging investment as the compliance cost for these types of entities is still very high. It is proposed that the reduced tax rate regime be replaced with an annual refundable tax compliance rebate.

Employment tax incentive

Excess amounts of the employment tax incentive can be set off against future PAYE liabilities. To enhance this incentive, SARS is developing a mechanism to reimburse firms in instances where the incentive exceeds PAYE payable. The refund system will become effective during the fourth quarter of 2014.

Debt reduction rules

Tax relief measures for companies undergoing business rescue and other forms of debt compromise will be considered to address any tax charges arising as a result of business rescue procedures.

Limited interest deductions for reorganisation and acquisition transactions

This rule was introduced to reduce the significant risk to the economy and the fiscus emanating from the use of excessive debt for funding company acquisition. A formula is used to calculate a limitation of interest deductions in reorganisation and acquisition transactions. Certain unintended anomalies in the application and impact of these rules have been identified and are to be addressed.

High tax exemption for controlled foreign companies

In the case of a South African resident company that owns many foreign companies, it is cumbersome to establish whether the high tax exemption applies if most of the income of the controlled foreign companies is attributable to a foreign business establishment. It is proposed that an option be provided to deem the net income of a controlled foreign company to be nil if either the high tax or the foreign business establishment test, when applied to aggregate taxable amounts, is met.

Carbon tax

Implementation of carbon tax is postponed to 2016.

Four-monthly VAT category

Government proposes to eliminate this category of vendors (< 1 000) and to bring registered vendors into the bi-monthly VAT system.

Interest and dividends

• Interest from a South African source earned by any natural person less than 65 years of age, up to R23 800 per annum, and persons 65 and older, up to R34 500 per annum, is exempt from taxation.
• Interest is exempt from withholding tax only where it is earned by non-residents from any sphere of the South African government, a bank or if the debt is listed on a recognised exchange.

Donations

Deductions in respect of donations to certain public benefit organisations are limited to 10% of taxable income before deducting medical expenses (excluding retirement fund lump sums). The excess may be carried forward for deduction in the following year.

Subsistence allowances and advances

Where the recipient is obliged to spend at least one night away from his or her usual place of residence on business and the accommodation to which that allowance or advance relates is in the Republic and the allowance or advance is granted to pay for –

• Meals and incidental costs, an amount of R335 per day is deemed to have been expended;
• Incidental costs only, an amount of R103 for each day which falls within the period is deemed to have been expended.

Where the accommodation to which that allowance or advance relates is outside the Republic, a specific amount per country is deemed to have been expended. Details of these amounts are published on the SARS website.

“In our dealings with entrepreneurial ventures and small to medium sized enterprises, it is clear that getting the right advice is critical and can make or break a business. Knowing and understanding the changes and proposed changes within the budget and how it applies to these enterprises is key. Business owners are not getting this advice or guidance as there is a perception that the business cannot engage the services of an experienced financial expert due to the cost of employing a full time resource. However, there are companies such as ourselves, that outsource financial talent on a part time or interim basis that can help these business owners without bankrupting it in the process,” comments Grant Robson, Executive Chairman of the Finance Team

“Overall the budget is encouraging for the small to medium enterprise business owner. As with anything, understanding and interpreting the changes within the budget and how it applies to your business is key,” concludes Grant.