South Africa plans to do away with its special tax regime for small businesses in place since 2001. Tens of thousands of businesses that qualify for Small Business Corporation (SBC) tax are set to benefit from a new R15,000 ($1,400) tax refund from the South African Revenue Service (Sars), including for the first time, those in a tax-loss position. But a few will lose out too. Job creating firms may be the biggest losers.
The annual refundable tax compliance rebate, set to come into effect on January 1 2016, would replace the existing SBC tax if the provision, contained in the 2014 Draft Taxation Laws Amendment Bill released last month is approved by the country's Parliament.
Currently, SBCs are taxed through special reduced tax rates, instead of the flat corporate tax rate of 28%, but if adopted small businesses with an annual turnover of between R1 million and R20 million would receive the rebate and be taxed at the corporate tax rate.
Those firms that fall below this threshold can qualify for micro-business tax, with the committee having proposed that the tax exemption threshold be lifted from the present R150,000 to R335,0000.
The new SBC rebate was proposed in an interim report on small and medium enterprises by the tax committee headed by Judge Dennis Davis (pictured above).
The report was made public last month after having been presented to then minister of finance Pravin Gordhan in January. A number of recommendations were introduced in this year’s budget. The committee says the main purpose of the new rebate will be to assist small firms with their tax compliance costs.
Those set to gain
Most small businesses that presently qualify for SBC are set to benefit, particularly those with an annual taxable income of under R50,000 or those in a tax-loss position. There are a good number of these.
The committee points out that in the 2012 tax year 40,633, or 47% of the 86,333 active SBCs did not record taxable income (see the graphic above). Added to this 25,636 SBCs had taxable income of less than R100,000, which on a mean level of R50,000 taxable income means the tax concession amounted to as little as R14,000.
If realised, an SBC that makes a loss of R 20,000, which at present would not incur any tax liability, would receive a refund of R15,000, while a SBC with a taxable income of R30,000 which at present has no tax liability, would under the new proposed regime receive a R6,600 tax refund (see the diagram below).
But those with higher taxable incomes would lose out. For example a SBC with a taxable income of R750,000, which under the current SBC regime has a tax liability of R 115,702, would see its tax liability increase to R195,000 (R750,000 X 28% - R 15,000).
But the committee says just 4,519 SBCs in the 2012 year qualified for the maximum benefit under the current regime, which can be as much as R94,549.
Over in Brazil
While the committee is looking to replace the SBC tax with this questionable rebate, Brazil's congress and senate has approved the expansion of its Simples tax regime to a further 140 categories of businesses (just like in South Africa's SBC only certain types of firms can qualify, mainly to avoid tax breaks going to freelancers). About 450 00 additional small businesses in Brazil are expected to benefit.
While the committee may have criticised the SBC scheme (just like Simples) as being expensive and cumbersome to administer for firms, the main question is whether replacing the reduced tax rates with a rebate is such a good idea in the first place. In the end it may simply amount to something of a free handout - to about 70,000 firms (going on the committee's estimates).
Stephen Timm writes on small business in emerging economies. He is based in São Paulo. This article is an adaptation of one that first appeared in Small Business Connect. You can read it here.
Stephen Timm is a