Davis Tax Committee on tax in the SME sector

[Dave A]

The Davis Tax Committee is inviting any comments from interested parties with regard to how the current tax system can be improved to promote growth and tax compliance within the SME sector.

Specifically, input into the following three areas is required:

1. What should the definition of "small business” actually be?
2. What tax table should be used to tax these small businesses?
3. What incentives and allowances should be introduced to assist small businesses?

Any comments or suggestions, anyone?

For a little background on this committee, you can read this Moneyweb article.

And as food for thought, here is SARS' Small Business info page to get some headline points as to what SARS does for small business at the moment.

[Marq]

And as food for thought, here is SARS' Small Business info page to get some headline points as to what SARS does for small business at the moment.

From this page one can see that sars is not very serious about tax for small businesses.

I understand from a recent tax seminar that Turnover tax is a total disaster with about 9,000 registrations to date and they are going to abandon this scenario.

The only other offerings on this page... are that you must register for vat, paye etc and jump through all the usual hoops.

My guess is that the only reason sars would be interested in this subject is tackle the cash businesses and bring them into the fold.

This is a brave subject to tackle given the Govn preference to waste and squander the tax they receive ( a subject that if corrected would solve the huge gap they have in trying to balance the budget). They are keen to increase taxes in all areas rather than tackle an area like small business which would probably create an outflow or a reduced inflow for them.

Sorry about the negative input but thats just how I feel today.

[Dave A]

I don't think anyone can blame you for feeling that way, Marq. And I'm sure you're far from alone.

My feeling is what is needed at this early stage is ideas on how to improve the situation, no matter how outrageous they might seem. They might not get taken up exactly as presented, but it's often those far out "looney tunes" ideas that trigger a pretty solid idea as to what might be done.

My one thought was for SARS to make a full blown payroll system available online - for free.
Goodbye trying to keep track of all the rules to calculate the deductions etc.
And goodbye filling in monthly returns and the various reconciliations and filing them with SARS - they could be generated automatically from the raw data entered.

[wynn]

Perhaps a page out of the book of BBBEE that if the turnover of a small business is R5mil or below PA they are not subject to filling out any documents or returns just pay VAT and SITE?

[Marq]

OK - heres a few views - not in any order, just off the bat stuff.

Dave - are there any local stats out there that have sized businesses?
Say in terms of staff to turnovers. Turnovers to profits. Analysed to get an idea of ideal marginal returns or diminished returns.

It would appear that there is a vast difference of opinions on this subject and SA has probably taken the EU view.
But again it depends on what the subject is, who is involved and what outcomes are to be created before a view is taken.

No doubt the tax man will have the same view - At what point does a business or a group of businesses create a critical mass that will have an effect on the overall income of the Country. It would be the old 80/20 principal. Also the tax man would only be interested in the money not the number of employees.

Further definition of sme's into micro small and medium also create misleading definitions and expectations. Given local scenarios which I am sure are not unique, one could experience a one or two man government tenderprenuers generating millions in turnover going through the banking system to the local runaways operation involving 50 people but only generating a subsistence income all on a cash basis. Both will argue a micro business size when it comes to the taxman, while to their families and friends they will boasting about their huge Businesses.

Here are the usual definitions based on the EU policies - http://ec.europa.eu/enterprise/polic...me-definition/

Heres another table reflecting different views.


This shows the complexity of the subject .

At the end of the day the taxman just wants his cut - so size will be based on Turnover or profits and that point where it makes sense for them to put some effort into the administering of this group of Businesses.

I believe they should not worry about these definitions and sizes - we should go back to a simple solution where all businesses pay a a fixed percentage of their turnover - say 5% (suck a small number) , on a monthly basis.
End of the huge definition rule book that is only good for keeping a door open.
End of all the court cases sucking on this incomprehensible system open to different interpretations.
End of administrators, politicians, attorneys, accountants, form fillers, committees, seminars and meetings sucking time away from doing real work and keeping one away from generating the very income that is being discussed.
End of all other types of taxes that suck the entrepreneurial acumen out of business and individuals.

Two definitions on a one pager - Definition of turnover and definition of a business. Thats the new tax law. Finish and klaar.

One off or short term incentives and allowances should given to certain sectors and areas that can show promise of increased revenues once they have been given a hand up. These can also be used to improve situations where international concerns are eroding local efforts to maintain the economy balance.

KISS principal so that all can get involved in paying tax.

With that out the way - we can concentrate on those spending and stealing that money.
Make a proud people ready to contribute, because they dont feel ripped off and they know 'their money' is going to their general well being, not to a corrupt and incompetent minority.

[IanF]

I originally read this as Dave's tax committee

I will think about something later.

[Justloadit]

Take the money collected from import duties and plough it into the very industry that it's attempting to protect, as it needs the support to become more efficient, not take the money into government coffers which helps no one.

This money from import duty could be set up as a zero interest 5 year loan to companies to upgrade to become more competitive in their field.

[CLIVE-TRIANGLE]

I'm sure we would all like to see better tax breaks for small business, but in truth the breaks have mostly been keeping pace. From last year to this year the breaks have increased by R16k +, and over a non sbc the break comes to R94k.

What I really have a gripe with, besides red tape (but in truth that effects non sbc's as much) is that any prudent businessman, if he owns the property from which he operates, will house the property in a property owning company, at the least. That of course immediately disqualifies his operating company from being an sbc. So this simple act potentially costs him R94k per year. It may not be the intention of the act, but it certainly is the consequence.

[Mike C]

I believe they should not worry about these definitions and sizes - we should go back to a simple solution where all businesses pay a a fixed percentage of their turnover - say 5% (suck a small number) , on a monthly basis.

I can't really go with the idea of taxing turnover, as some businesses have large turnover with smaller profit. I do, however, support the idea of simplifying things. If it gets too complicated (as is the want of bureaucracy) then confusion reigns.

I suppose the difficulty of using profit as a gauge is that it can be manipulated by director's drawings and other expenses.

It think a small business could be defined as a business which has 10 or less employees (numbers can be changed) and an annual profit of less than say R500,000.

[Justloadit]

Cannot look at profit alone, as the numbers can be changed by members drawings/income.

A one man show can churn R3million in a month with out much sweat, but his profit may be 0.25% of the turn over. You say huh, well look at prepaid services, such as airtime and electricity, this is all web driven except for the verification of incoming deposits, and the purchasing of replenishment stock. We make mark ups of 0.25% on the sale, and make our money on turning it as many times as 22 times a month, but looking at turn over, we are compared to a a company that does R36million a year, who have 50 plus staff.

A better way of looking at a company size is maybe extracting the amount o f VAT the company pays, this will give a pretty good indication of the company's health, irrespective of turnover figures.

There is another curve to this ball of looking at VAT only, what about the companies that export? they may land up claiming VAT rather than paying VAT, since export orders are zero VAT rated. What is important is that these non VAT values must be completed ion the VAT form, as SARS does verify when you start claiming or paying very little VAT.

[Dave A]

A better way of looking at a company size is maybe extracting the amount o f VAT the company pays, this will give a pretty good indication of the company's health, irrespective of turnover figures.

There was a proposal along those lines when we were thrashing the BBBEE thresholds for EME's and QSE's. The problem is, as you point out, it's fiddly and there's the potential for some manipulation; probably more unreliable than turnover as an indicator if you combine turnover with the business sector to get an idea of size.

Factor in the goal to create employment, then you want to reward sectors which need high employment levels to hit the threshold more than those that can do it with low employment levels - which ultimately means going the turnover route to set thresholds for preferential tax treatment makes more sense.

I do sympathise with your frustration over it, but the upside for you is you have far less employee issues to deal with, which in SA with the way the labour environment is at the moment, is a fairly considerable "benefit" not to be sneezed at

What I really have a gripe with, besides red tape (but in truth that effects non sbc's as much) is that any prudent businessman, if he owns the property from which he operates, will house the property in a property owning company, at the least. That of course immediately disqualifies his operating company from being an sbc. So this simple act potentially costs him R94k per year. It may not be the intention of the act, but it certainly is the consequence.

Great to see someone else sees this as an issue. This was going to be my next "point of interest", although looking at the issue from a different angle.

My angle on this is:
The SBC turnover threshold is R35 million per annum, if I remember correctly. (I'm sure I can rely on someone correcting me if I'm out of date on that).
And realistically most small businesses do significantly less than that - certainly in any of the service industries, which is the sector most likely to give you the best employment creation bang for your buck. In fact the vast majority* are micro-enterprises (turnover of less than R5 million per annum).
The service industries are also a fertile breeding ground for new start-ups. True, many fail, but we're playing a numbers game here and trying to push the odds in the direction we want, right?

Now when someone is successful in one small or micro venture, the odds of them successfully launching another micro or small biz is fairly good. Arguably better than the ambitious techie with no business experience, and often better than the successful micro entrepreneur trying to push on to significantly higher levels beyond their current business acumen / expertise in their existing business (the business acumen needed at each level is significantly different, and quite often proves to be a fatal step up if charged at too quickly).

And based on my experience, that next venture if in a new industry will typically be a partnership - combining tech expertise in one partner with proven business acumen in the other...

I don't know if that makes the point well enough. Perhaps I need to give more thought on how to present a cohesive, structured argument that brings a number of factors together. I might come back to this on another day(but I'll leave what I've put down so far in case I don't).

The upshot of it all though is - Why inhibit this potential SMME breeding ground with such a stiff penalty? There must be a way of rule making that can leverage that micro or small business acumen in a win/win way. As long as the total turnover of the companies with common shareholding doesn't exceed the threshold - something like that.

I'm open to suggestions - I just recognise we're missing an opportunity here.

*Perhaps not by share of the market based on turnover, but certainly by number of enterprises.

[wynn]

Because SMME's are not 'little big businesses' they naturally don't have the admin capabilities of 'big businesses' (although some 'medium enterprises do) so to relieve them of all the unnecessary bulls#!t admin (which most of them ignore anyway) base the tax on an excess of a particular turnover R5million for a 'micro enterprise' as I said before, R35million for a 'medium enterprise' as Dave said before (although I don't believe a 'medium enterprise' is a small business it should have it's own set of rules) and calculate a figure that actually puts some money into the pocket of those employing others permanently (this will also prevent small businesses from unnecessarily using labor brokers when they have work to do)

So if I have a small but registered decorating business with two permanent employees that turns over R2million a year I have no tax to pay no returns to submit and in fact receive say R600 per permanent employee per month so that the Gubbermunt don't have to support him for more than the figure given to me and I am incentivized to keep them on permanently instead of using a labor broker or casual labor when I have a job to do that requires labour.

I will of course pay VAT on everything I purchase so they at least will make that.

[CLIVE-TRIANGLE]

The upshot of it all though is - Why inhibit this potential SMME breeding ground with such a stiff penalty? There must be a way of rule making that can leverage that micro or small business acumen in a win/win way. As long as the total turnover of the companies with common shareholding doesn't exceed the threshold - something like that.

It's R14m total income Dave, to qualify as an SBC.

I do understand the reason for the natural shareholder / not holding other shares requirement, because otherwise the temptation to split my R60m enterprise into 5 SBC enterprises would win every day. But the problem is that until recently even dormant companies and shelf companies that are held as stock, fell foul of this rule. My feeling is that it needs an additional criteria to eliminate the unintended consequences.

Your alternative idea is very interesting ( As long as the total turnover of the companies with common shareholding doesn't exceed the threshold - something like that.) I must think on that for a while.

I did notice that the SBC declaration on the ITR14 does not mention the issue of connected persons, whereas I thought the Act does, I will revisit that because it opens an obvious door.

As it is, my strategy for some years has been to split the entities when R14m gets too close, and make one the 100% holding company ( obviously the profitable one!), so that at least it qualifies.

[Dave A]

Probably have to nominate one company in the group to get the income tax windfall to ensure treasury doesn't lose on the deal, but at least the other(s) could still benefit from the accelerated depreciation allowance.

The other factor that might make this an opportune time to approach the issue is SARS has conceded that their complexity argument against group taxation legislation probably isn't justifiable anymore given the way our tax regime has become so complicated already over recent years.

[Jddt]

Hi my input is as follows:

What should the definition of "small business” actually be?

I think that small business should be looked at from a revenue and asset angle with reference to expenditure as well, the company structure should stay simple.
With the above said profits should be sustainable or let me rather say taxable profits, possibly thresholds set on revenue and expenditure combined.

What tax table should be used to tax these small businesses?

I think that the SBC tax rates should be dropped to say that the first R350K is exempt and thereafter apply say 10%.


What incentives and allowances should be introduced to assist small businesses?

I think that this should be aligned with the main problems/challenges that small business owners have namely the following:

1) Cash-Flow constraints
2) VAT payments
3) Payment terms
4) Business Financing/Funding
5) Basic accounting and finance skills sets

Based on the above I would suggest the payment basis for VAT to help with cashflow and possibly extended vat period for VAT payments.

Add more capital asset allowances for business broaden the scope here - For example an allowance on training where a large part of training costs can be subsidized in order to equip everyone in the business with all skills necessary to make it sustainable for everyone in the long run.