The budget and small business

2013-02-28 11:02 - *Kobus Engelbrecht
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Pravin Gordhan, Finance Minister during his 2013 Budget Speech. Photo: REUTERS

THE Minister of Finance tabled some tax proposals that will have an impact on business owners, including:

Special economic zones

In certain special economic zones, the Minister of Finance will authorise the following tax incentives, after consultation with the Minister of Trade and Industry:

  • A 15% corporate income tax rate for businesses in such areas;
  • An employment incentive allowing a tax deduction for employment of workers earning less than R60 000 per year;
  • An accelerated depreciation allowance for buildings in these areas, based on the existing regime for urban development zones - in order to encourage developers to invest more in industrial premises.

Government’s intention is clearly to stimulate business activity in these areas and business owners should seriously consider making use of these opportunities.

Small business corporation relief

Government proposes that the R14m turnover threshold for small business corporations be increased to R20m and that the graduated tax structure for such corporations is revised as follows:

budget

Business owners should seek advice from reputable tax advisers to find out if and how they can utilise these rules to their advantage. 

Reforming the taxation of trusts

To curtail tax avoidance associated with trusts, Government is proposing several legislative measures during 2013/14. Certain aspects of local and offshore trusts have long been a problem for global tax enforcement due to their flexibility and flow-through nature. Also of concern is the use of trusts to avoid estate duty, which will be reviewed.

The proposals will not apply to trusts established to attend to the legitimate needs of minor children and people with disabilities. The proposals are as follows:

  • Discretionary trusts should no longer act as flow-through vehicles. Taxable income and loss (including capital gains and losses) should be fully calculated at trust level with distributions acting as deductible payments to the extent of current taxable income. Beneficiaries will be eligible to receive tax-free distributions, except where they give rise to deductible payments (which will be included as ordinary revenue). 
  • Trading trusts will similarly be taxable at the entity level, with distributions acting as deductible payments to the extent of current taxable income. Trusts will be viewed as trading trusts if they conduct a trade or if beneficial ownership interests in these trusts are freely transferable. 
  • Distributions from offshore foundations will be treated as ordinary revenue. This amendment targets schemes designed to shield income from global taxation.

With the help of knowledgeable professionals, business owners should review their estate plans and related structures to ensure that they comply with all relevant tax laws. They must also make sure that arrangements made in the past still have the desired outcomes after the proposed changes have been implemented.

Business taxes

Restricting debt to prevent base erosion

Although debt financing is a feature of all healthy economies, debt is often used to erode the tax base. Closure of artificial and excessive debt has been on the tax policy agenda for more than two years. To bring this matter to a conclusion, Government proposes the following:

  • Artificial debt: Some debt instruments will be re-characterised as shares (along with the underlying yield) if they contain certain features. The main concerns are so-called debt instruments that do not have a realistic possibility of being repaid in 30 years, or debt that is convertible into shares at the request of the issuer. Banks and insurers will be excluded from this re-characterisation. 
  • Connected person debt: Excessive debt issued to connected person creditors is of concern if the creditor is exempt from tax on the interest, because connected persons can often use debt and equity interchangeably without serious economic consequence. Limits will be imposed so that the interest on this form of debt does not exceed 40 % of earnings after interest on other debts has been taken into account. Excess interest will be allowed to roll over for up to five years. 
  • Acquisition debt: In corporate restructuring, use of acquisition debt against future earnings effectively eliminates taxable profits for years to come (with the debt often renewed via a new acquisition in later years). Interest on excessive debt will be allowed to roll over for up to five years. This system will replace the discretionary system applied to interest on discretionary debt. 

Business owners should take heed of these proposals and ensure that the capital structures of their businesses, after the implementation of these proposals, continue to serve their best interests. 

Employment tax incentives 

A youth employment tax incentives will be introduced to encourage the hiring of young people. This will create a graduated tax incentive at the entry-level wage, falling to zero when earnings reach the personal income tax threshold. As mentioned earlier, similar tax incentives will be made available to eligible workers of all ages within special economic zones. 

Tax administration 

It is also proposed that various measures be launched to assist with tax administration, including a single registration process to simplify registration for all businesses, streamlined processes and forms, and automated tax clearance certificates. 

It is also very positive to hear that the (very punitive) understatement penalty provisions under the new Tax Administration Act will be refined and relief will be provided for bona fide errors.

*Kobus Engelbrecht is head of marketing at Sanlam Business Market

 

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