New tax rules will hurt small businesses

Cape Town – MPs considering the tax changes proposed by Finance Minister Pravin Gordhan in his February budget heard that some proposals will hurt small businesses, because the new rules will discourage private lenders from putting money into them.

The SA Institute of Chartered Accountants told the standing committee on finance during public hearings on the tax bill on Tuesday  that narrowing the interest threshold exemptions – limiting them to savings through widely available interest-bearing instruments such as bank deposits, government retail bonds and collective investment money market funds – will affect legitimate transactions and will deal a big blow to small businesses.

Muneer Hussain, head of SAICA's taxation department, gave the example of a taxpayer selling his house. If he received the cash and put it into his bank, he would receive interest and the interest would be tax-exempt.

However, if the buyer is unable to obtain financing, the seller could grant a 20-year loan with the house as security, and receive interest at market rates. But he will not benefit from a tax exemption under the proposed new rules.

Hussain suggested that if an investor wanted to inject some cash into a start-up business and receive 8% interest on his money, he would not receive an exemption on the interest and would effectively get only 4.8% as a net return. If he had left the money in the bank, he would not have paid tax at all on the first R22 300 of interest.

"Clearly there is no decision involved," Hussain said. "You will invest in the bank and not in the small business." 

SAICA officials also urged MPs not to be so hard on company cars. In particular Wessel Smith, a member of the national tax committee, urged them not to add VAT to the car price when the employer is able to claim back the VAT.

He also suggested that maintenance plans will be included in the determined value of the vehicle under the new rules,  and called for its exclusion on the grounds that the monthly fringe benefit value already includes a portion relating to employer-incurred maintenance.

"We also submit that the 4% value applied against the value of the vehicle is not in line with the actual cost of maintaining and running the vehicle," Smith said.

"On a R200 000 vehicle the AA rate would be R7 186, while the fringe benefit would be R8 000. The fringe benefit is therefore higher than the actual benefit received."

David Lemmer, from Price Waterhouse Coopers, told the committee that the General Anti-Avoidance Regulations (GAAR) passed by parliament three years ago have become virtually a dead letter. Instead, every year the treasury passes more and more specific measures to close various tax loopholes.

Lemmer urged the authorities to rely instead on the general measures – and have them thoroughly tested in the courts.

"If you allow GAAR to take effect and have the courts deal with it, in five years' time you will have a comprehensive practical GAAR.

"It will be far more flexible than what we have at present and will prevent impermissible tax-avoidance far better than what we are doing each year of creating another little anti-avoidance section."  

 - I-Net Bridge