Hitting back at Costa Divaris’s “Tax Shock Horror”

As expected, the proposals made by the Davis Tax Committee concerning the taxation of Small Business Corporations are taking some flack in the media.

This is hardly surprising as some SBC’s are going to lose out if the DTC recommendations are implemented. These SBC’s happen to be those well represented by the accountants and tax advisors firing broadsides in the media.

This above is demonstrated in the attack featured in Tax Shock Horror Newsletter of Costa Divaris, July 2014 where the DTC proposed refundable tax credit is suggested to be ‘of little or no value in commencing a business or assisting an ailing business in an assessed loss position.’

The SBC tax concession was first introduced in 2000. Most agree that the concession is not achieving much today. Investigations conducted by the DTC reflect that ‘within the 45 670 taxable SBC’s there are 12 658 within the sectors of Agencies, Financial Services and Insurance and the medical profession. Presumably these fall within the SBC definition as they employ three or more who are not connected persons in relation to the owners of the SBCs in question. Collectively these SBCs enjoy R387 million (24%) of the total R1,36 billion SBC incentive.’

It could never have been the intention of the legislation to provide a tax break of up to R94 549 per annum to what are essentially profitable niche businesses within these sectors.

Tax Shock and Horror continues with ‘Here is the essence of what is actually being proposed—a social grant to loss-making businesses. Should it perhaps rather be called a business rescue grant?’

Some say that the SBC tax regime should be abandoned completely and the R1,3 billion absorbed into the national revenue stream. That would make a mockery of the National Development Plan objectives that have huge expectations for contribution from the SME sector in achieving the goals for 2030.

So, if the SME tax package is a grant, is it better to reward a handful of successful niche businesses with grants of up to R94 549 per annum, or spread out the benefit amongst all SBC’s trying to make a contribution to RSA? After all, profitable or not, all SBC’s have to face a substantial tax compliance burden.

Reducing compliance burden is easier said than done. Yes, we all experience problems at SARS and service levels need much attention. But simplification has every potential to result in massive tax evasion in the SME sector. For this reason the DTC decided in favour of contributing to the cost of tax compliance rather than creating concessions that could erode the tax base.

In any event, the DTC report contains essentially two proposals (1) a most generous tax package to micro businesses with turnover below R1 million per annum (conveniently ignored in the Tax shock and horror article), and (2) the redeployment of the existing SBC tax benefit in the form of a refundable tax rebate. The micro business concessions will reduce compliance costs to the absolute bare minimum.
The Shock and Horror article goes into some depth in analysing some of the problems of the SME sector, in particular the cashflow of SME’s exposed to Governments tardy payment of SME creditors.  Yes, this is a substantial issue but as pointed out in the DTC report ‘’Clearly SARS would be in breach of its mandate were it to become actively involved in the promotion of the SME sector beyond the consequences for the sector which flow from the tax system.’

There have been many suggestions to the DTC that the ‘silver bullet’ to resolve the tax issues of the SME sector would be to change to the cash basis of taxation. This would obviously avoid the hassle and expense of requiring SME’s to account for debtors and creditors. The suggestion has obvious merits but there is more to the issue.

Micro-businesses are already able to adopt the cash basis for both income tax and VAT. But, to qualify as an SBC the business must be registered as a company or closed corporation. As such they are required to prepare annual financial statements taking into account debtors and creditors. Thus, by allowing these SBC’s to account for taxation on a cash basis is simply going to require complex adjustment in the tax and vat returns.

The cash basis of recognition of income has many implications that will be comprehensively examined in the DTC VAT report due out later this year. Reference us made to this in the DTC SME report.

Everyone is entitled to their opinion. But in RSA it is important to express your opinions through the appropriate channels. Tax shock and horror continues….

‘People ask me why I don’t make a submission to the DTC. And, in the past, I have been invited by SARS to attend sessions at which amendments to the tax law have been discussed. Here are my thoughts on the subject:

Over the past few years (actually ever since the 1990s), we have been smothered by new legislation, regulations and procedures. It is difficult enough to read and keep up with all the changes to the law and the new acts introduced, let alone spend time writing papers and attending meetings. I run a business, and if I don’t charge for my time, I don’t get paid. Civil servants are paid for what I am invited to do at my own expense.

In any event, tax commissions do not matter. My belief is that SARS has already decided what changes it wants.’

The terms of reference for the Tax Review Committee are to inquire into the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability. The committee will take into account recent domestic and international developments and, particularly, the long-term objectives of the National Development Plan.

Perhaps it is arrogant for a privileged South African to flippantly dismiss an opportunity to make some form of contribution to the NDP. If there is to be any hope of the NDP achieving its objectives all South Africans need to get involved in its processes. And not simply sit back and hurl turds on the Internet.

I write the above in my personal capacity. This is not an official press release of the Davis Tax Committee.

This article also appears on www.biznews.com

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