Cape Town - Minister of Finance Pravin Gordhan emphasised the need to accelerate employment in order to achieve inclusive growth in his 2016 Budget.
The unemployment rate, measured by Statistics SA at 25.5% in the third quarter of 2015, necessitates a focus on the development of small businesses because of their ability to generate employment.
This makes it important to consider the implications of the 2016 Budget on small business development, according to Bright Amisi, MD of the Avante Group.
He pointed out that the establishment of the Department of Small Business Development (DSBD) in 2014 was welcomed as a sign of government’s seriousness in promoting the growth of the sector.
Gordhan has allocated an additional R475m to small business development over the mini budget expenditure framework. A matter of concern for Amisi will be the proportion of the additional funding that will be used directly to support small businesses and cooperatives - the two focus areas of DSBD.
"A notable development, within the constrained fiscal space, is that Gordhan has not been able to grant any fiscal concessions to small businesses through tax rates adjustments or rebates," said Amisi.
The tax-free portion of the taxable income of small business corporations has been adjusted marginally from R73 650 to R75 000. All other tax brackets have remained the same, with taxable income of R550 001 and above still taxed at 28%.
There has also not been any adjustment to the turnover tax for micro businesses, with the tax-free amount still capped at R335 000 and the turnover portion above R750 001 taxed at 3%.
Small business owners - of at least 55 years - selling their business for not more than R10m will still be allowed a R1.8m capital gains tax (CGT) annual exclusion. However, Amisi sees as bad news the effective increase of the CGT rate for companies to 22.4% from the current 18.65%.
"The minister has kept compulsory registration for value-added tax (VAT) at taxable supplies of R1m, despite the effect of inflation. This is one area where he could have granted some relief to small businesses, especially those involved in the provision of consulting and professional services," said Amisi.
Implications for employees
Natalie Napier, partner in the tax department at global law firm Hogan Lovells, pointed out there will be a review of transactions involving companies buying back the shares from the seller and issuing new shares to the buyer. It is indicated that such a transaction is, in substance, a share sale that should be subject to tax. Anti-avoidance measures will likely be introduced.
Further amendments will also be made regarding the refinancing of third-party backed shares to introduce new anti-avoidance measures where investors structure their transactions to circumvent third-party anti-avoidance rules.
The proposed withholding tax on service fees will be withdrawn from the Income Tax Act and dealt with under the provisions of reportable arrangements in the Tax Administration Act.
In situations where interest is written off as irrecoverable, there is currently no mechanism for a refund of interest withholding tax already paid, she pointed out. It is proposed that a mechanism be introduced to allow for this.
It is also proposed that collective investment schemes be excluded from applying section 9D to investments made in foreign companies. There will also be amendments to the Income Tax Act to include additional anti-avoidance measures to, among others, prevent taxpayers from disguising high salaries. Any share incentive schemes that are implemented must, therefore, take cognisance of the revised provisions.
If foreign employers in South Africa do not deduct PAYE, they will be obliged to register for provisional tax. This will have implications for foreigners rendering services in South Africa and it will have to be confirmed if there are PAYE obligations given the particular factual circumstances.
"Such businesses hardly have any meaningful input VAT to claim, but will be made uncompetitive when they have to add 14% VAT to their normal fees. The current option for voluntary registration if taxable supplies exceed R50 000 already caters for the needs of small businesses involved in retail and the supply of goods."
Overall, Amisi said Gordhan did well to keep the tax concessions for small business in place, even when the need for raising additional revenue would have prompted a rethink.
"Small businesses will be well advised to review their tax compliance as the minister alluded to the need to equitably share the tax burden," cautioned Amisi.
Lyndy van den Barselaar, managing director of Manpower SA, said support for small businesses is once again a focus in the 2016 Budget, because it is undeniably important for the creation of jobs in South Africa.
"This is especially as we are constantly seeing an increase in the number of start-up businesses in the country, particularly in the telecommunications sector," she said.
"I believe the planned investments into the energy, transport, banking and telecommunications industries is testament to how important these sectors are to the economic growth of South Africa, and in job creation."
Steps to reduce the regulatory burden for business investors may boost the amount of foreign investment coming into South African businesses, which will assist with economic growth and even job creation, she added.
"Overall, I find this year's budget speech to have a cautiously optimistic outlook for businesses, despite the difficult economic times we are currently facing,” she said.
Anthea Scholtz, tax partner at Deloitte, pointed out that the SA Revenue Service is working to reduce red tape to support business development for small businesses.
It has rolled out small business desks, designed small business tools to help businesses register for tax at their own premises and implemented a single tax registration process, which will eliminate the need to re-register for different taxes.
* Visit our special issue on Pravin Gordhan's 2016 Budget Speech.