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Taxing times for small firms as the government fiddles
THE government is causing South Africa's small business entreprenuers significant hardship by refusing to turn the Katz Commission's "tax on a cash basis" recommendation into law. That's the view of Neil Aereboe, partner of accounting firm Ernst & Young, who maintains that the existing tax system (on the accrual basis) penalises small businesses as they pay tax on income they have not yet received. In terms of the Katz Commission recommendation, a business should be taxed only on the cash it received during the year, less that which it paid out for purchases and other expenses. The accrual basis, on the other hand, includes non-cash items like debtors, creditors and stock in the tax computation. Aereboe says the present tax system does not encourage and support the growth of new business in the SMME (small, micro and medium size enterprises) sector, nor does it encourage a tax-compliant ethos. "Despite the government's acceptance - in its 1995 Budget Speech - of the Katz Commission's recommendation that businesses with a turnover of below R2-million be taxed on a cash basis, the necessary legislation and rules have not yet been promulgated. "This is causing significant hardship to small businesses, particularly in their crucial start-up and growth years. Furthermore, it does not encourage these entrepreneurs to join the tax-paying public." Aereboe says the government had anticipated (in the Minister of Finance's 1995 Budget Speech) that it would collect less tax by adopting the cash basis of taxation - and that this loss had already been taken into account in the 1995 Budget figures. "It is now a matter of urgency that the legislation be finalised so that SMMEs can get down to business and spend less time (and money) worrying about tax and compliance," said Aereboe. The following example shows the significant tax saving that will be enjoyed by companies when the cash basis of taxation has been enacted: Sales R1 000 Cost of sales (R500) ---- Gross profit R500 Expenses (R200) ---- Net profit on accrual basis R300 ====== Investment (working capital) : Stock R100 Debtors R200 less Creditors (R50) ---- R250 ====== Net cash inflow R50
The difference in tax on the accrual basis is significant: the firm will pay tax on R300, instead of R50 on the cash basis. This creates particular hardship in the start-up year, says Aereboe, as finance has to be obtained to fund working capital as well as the additional tax.
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