Here's my take on the Budget Speech

David Van Niekerk, Editor In Chief, The Practical Tax Loose Leaf Service, 16 Mar. 2015

Tags: tax, budget speech, budget speech 2015, tax return, allowances and deductions, tax rebates,

I don’t think anyone was surprised by the budget speech.

The increases were expected, as government had only two means available to it by which to meet budget requirements: decrease spending or increase taxes. The third means of meeting the budget requirement, which is economic growth, is still woefully falling short of what’s needed.

There were no long-term changes mentioned by Nene that focused specifically on tax legislation as a means by which to encourage a higher economic growth rate. And there really should have been. Nene should be focused on targeted tax relief for specific industries, whilst making it easier (and cheaper) for manufacturers to import raw materials and export produced goods. You need to start with industries underpinning every national economy – agriculture, mining and manufacturing.
Instead, we have a useless tax regime applicable to only a handful of taxpayers being made “more attractive” to entice taxpayers onto it by lowering rates of tax and promising less of an administrative burden. Turnover tax is unpopular for a reason! Not only does it prejudice micro business who find themselves struggling to make any profits (because they still need to pay tax on turnover, regardless of whether they actually made any profit or not), but in some instances turnover tax is worse than the Small Business Corporation tax regime. And let’s be honest here – micro business is all about cash flow, so why would someone move onto turnover tax when they’re in a loss situation to effectively pay tax on that loss? Turnover tax also does nothing to encourage growth (it does the opposite, actually).
The intention of any tax legislation should be to grow the tax base, direct the efforts of taxable businesses to grow in certain areas, and allow for sufficient revenue to be collected to cover the budget. Except, right now, instead of being a progressive piece of legislation, it’s simply a reactive piece of legislation. It seems that changes made are simply in reaction to budget deficits.
So what should the minister do to use the legislation to achieve the higher revenue and larger tax base it so sorely needs?
The focus must be on the base activities in the economy. A small hint of going in the right direction is Section 12J focusing on venture capital companies, and giving these companies limited benefit to investing in new, unlisted businesses. We also have a twinkling of a positive change found in Section 12I, but this is limited to industrial policy projects only. If the ideals to which these two sections ascribe, and the logic behind them, is implemented into more areas of tax legislation, government should be able to not simply use tax as a means by which to take money, but also as a means to give money back to specific taxpayers through deductions, allowances or even better, re-imbursive tax credits.
We also see Special Economic Zones (SEZ) in Section 12R that reduces tax from 28% to 15%, so it is absolutely clear that legislation is capable of directing growth in specific areas of the economy. Of course, a SEZ is geographically limited, which although having its own benefits, falls very short of what I believe is the better version: SEA, or Special Economic Activity.
Imagine a tax system that helps you grow, and rewards you for investing in that growth. Imagine a tax system that helps finance your compliance, capital expansion and employment of staff. It’s almost happening on a geographical basis via SEZ’s, so why not iterate on this and create SEA’s?
It’s not just about creating a proactive tax legislation to benefit growing businesses operating in specific industries which play to the strengths of our country. It’s also about how these pieces of legislation materially impact on the taxpayer.
Cash flow is the biggest hindrance to growing a business. If tax were to focus on an industry with the view to growing small business into big business, it must take cognizance of this. It is not enough to simply grant higher allowances or bigger deductions. That doesn’t help put money into business which it needs to finance growth. Yes, it helps keep money in a business via not having to pay taxes if the allowances result in a tax loss, but it doesn’t help put additional money into that business either. If you’ve never paid tax because your small growing business is making a loss (i.e. no cash outflow as no tax is due), then the only thing higher allowances and deductions will achieve is growing an assessed loss.
Further, and worse still, even if your small business was making profits, but cash flow was invested in capital (assets and staff), where would the money come from needed to pay income tax? How does that help a growing business in the first few critical years when it needs cash inflows to invest in expansion? Is there an alternative to higher allowances or deductions?
Yes, there is.
We’ve seen this successfully implemented via the Employees Tax Incentive (ETI), where even if a business has paid absolutely no PAYE (no cash outflow), they are still entitled to money back into their bank account via paid out unutilized ETI credits. That is absolutely huge for small business – essentially, government is directly financing a portion of their salaries, and not just reducing the tax burden. They are saying, “If you employ this type of person, we’ll pay for part of their salary”. Money in the bank!
If the method and ideology illustrated with the ETI were applied to new tax legislation, whereby the benefit is moved below the line into a reimbursive tax credit (thus not reducing deductible expenses), small growing businesses won’t just end up building unutilized (and therefore ineffective and useless) assessed losses during those critical first years.  A reimbursive tax credit will allow the government to directly fund businesses operating in specifically chosen industries i.e. SEAs.
The whole point of the reimbursive tax credit would not only be to accelerate the benefit, in cash terms, of allowances and deductions that small businesses would otherwise only be able to utilize in future tax years when making profits, but also as a means for government to directly “invest” in and finance growing businesses operating a SEA business.
There would need to be a form of recoupment of these reimbursive tax credits after a number of years, or where the business has grown beyond “small” status, but when a government has helped finance the growth of a small business into a big business making profits, the taxpayer would be much more amenable to repaying the money that helped them reach that point.
The best part of this is that government already has an entity in place to facilitate this, being SARS. They wouldn’t need to implement any new system to administer direct government spending, merely adapt the current system as was done with the introduction of ETI.
It is no longer appropriate for tax legislation to operate in a purely reactive manner. Increasing individual income tax by 1%, opportunistically increasing the fuel levy while petrol prices are low, and doing hardly anything to reduce spending is not the way tax should be leading this country forward.
Tax is a given. It will always be here. But there are opportunities to use it as a means to stimulate growth instead of simply as a means to run a country’s infrastructure. I really hope those in the finance ministry put time and effort into investigating what these opportunities are with a view to meaningfully, and timeously, implement legislation to facilitate their realization.

P.S. For everything you need to know about your tax affairs, simply use this one tool...


Geoff Carroll 2015-03-20 09:55:27

One of the better analysis of the Budget I have read since the 26th Feb. Keep it up David. Kind regards, Geoff


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