The Effect of the 2018 Budget and Proposals on SME’s

By Alison Haupt

After recent political events, the economic and business climate before the budget speech in February was upbeat for the first time in a decade, even though the challenges faced by the then Finance Minister, Malusi Gigaba, was tough considering that he had to present a credible 2018/2019 budget to dispel the concerns of the rating agencies and foreign investors.

The key changes that all Small and Medium Enterprises (SME’s) business owners should be aware of and in some cases need to act quickly to ensure compliance are as follows:

Increase in VAT from 14% to 15% with Effect from 1 April 2018 (An Effective 7.14% Rate Increase)

The increase in the VAT rate has been long expected over some years and due to the gravity of the 2018/2019 budget deficit, had become unavoidable. The new VAT rate of 15% is nevertheless below the global average rate.

The application of the increased tax rate from 14% to 15% is deemed to be made before, on or after the 1st April as follows:

  1. For services that are performed during a period beginning before and ending before the 1st April 2018, the rate applicable will be 14%, provided that the invoice is dated prior to the said date;
  2. Where goods are supplied or services are performed during a period beginning before the 1st April 2018 and ending after the said date, the value of the supply of goods or services shall, on the basis of a fair and reasonable apportionment, be deemed to consist of a first part supply (at the rate prior to the said date, being 14%) and a second part supply relating to the goods or services supplied on or after the said date at the new rate, being 15%.
  3. Where goods are supplied or services performed during any period beginning on or after the 1st April 2018, the rate of VAT will be at 15%.

The above does not apply in respect of any sale of fixed property.

SME’s must ensure that their financial systems are configured to apply the new VAT rate. SME’s who have not implemented the changed rate may suffer financial loss for non-compliance, including having their turnover deemed to include the rate of 15% even though only 14% VAT was charged, late payment penalties, interest and understatement penalties.

Adjustments to the Personal Income Tax Rates

No adjustments have been made to the top four income tax brackets.  However, below inflation adjustments have been made to the bottom three income tax brackets.  This has resulted in greater relief for those in the lower income tax brackets. The medical tax credit has been increased from R303 to R310 per month for the first two beneficiaries and from R204 to R209 per month for the remaining beneficiaries. The primary, secondary and tertiary rebates have also been adjusted. The new tax threshold for taxpayers under 65 years of age has increased from R75 750 to R78 150.

Wealth Taxes

With effect from 1 March 2018, an increased estate duty will be levied at 25% (previously 20%) for estates above R30 million, and consequently, donations in excess of R30 million will also be taxed at 25%.

Employee Taxes – Non-Taxable Reimbursive Travel

With effect from 1 March 2018, the 12 000km tax free travel reimbursement threshold has been removed. In addition, the prescribed rate per kilometre has been increased to R3,61 per kilometre.

Further, the portion of the travel reimbursement that exceeds R3.61 per kilometre must be reflected as remuneration on the employees’ IRP5 tax certificate.

To the extent that amounts for travel are reimbursed in excess of the prescribed rate are deemed to be remuneration, such amounts will be subject to Pay-As-You-Earn (“PAYE”), Unemployment Insurance Fund Contributions (“UIF”) and Skills Development Levy (“SDL”) irrespective of the total business kilometres travelled and reimbursed during the tax year. These amounts will also form part of remuneration for purposes of calculating the allowable tax deduction limit in respect of contributions made towards a retirement fund.

Employers will need to ensure that they utilise the correct IRP5 source codes for disclosure purposes.

Small Business Corporations (SBC’s)

The tax tiers and rates for SBC’s remained unchanged other than the threshold of taxable income subject to 0% that increased in line with personal tax threshold, from R75 750 to R 78 150.

Plastic Bag Levy Increase from 1 April 2018

The plastic bag levy will increase by 50% to 12 cents per bag.

Increase in Ad Valorem Excise Duties with Effect from 1 April 2018

Higher ad valorem excise duties for luxury goods which are currently at 5% and 7% will be increased to 7% and 9% respectively.

The classification of cellular phones will be updated to include “smart phones” to ensure that they too attract ad valorem duty.

The maximum ad valorem duties on motor vehicles will be increased from 25% to 30%.

There were a number of proposed tax amendments, some of the more pertinent proposals are highlighted below.

Official rate of Interest

It is proposed that the official interest rate be increased to a level closer to the prime rate of interest. The proposed amendment will increase the taxable benefit on low interest loans. However, it will affect the amount of the deemed donation of individuals who have interest-free loans to trusts.

Medical Tax Credits

It has been proposed that where taxpayers carry a share of the medical scheme contribution or medical cost of a third party (for example, adult children jointly contributing to their elderly mother’s medical scheme), the medical tax credit be apportioned between the various contributors.

Employment Tax Incentive

It is proposed that the employment tax incentive be reviewed before its expiry date on 28 February 2019. The impact of the incentive is currently greater in smaller businesses when compared to larger business.

VAT on Electronic Services

It is proposed to extend the scope of “electronic services” to include “any services supplied by means of an electronic agent, electronic communication or the internet for any consideration”. Cloud computing and other online services are included. Non-resident suppliers of electronic services, except telecommunication services and educational services will be required to register for VAT in SA (value of the sales exceed R50 000 in any consecutive 12 months). The impact of this will be substantial for foreign suppliers who supply any services electronically. These amendments are proposed to come into effect on 1 October 2018.

Carbon Taxes

A revised Carbon Tax Bill was released in December 2017 for public consultation. The bill is expected to be enacted before the end of 2018 and it is proposed that carbon tax will be implemented from 1 January 2019.

Cryptocurrency Transactions

Cryptocurrencies are extremely volatile and their sustainability is uncertain. This effect is currently addressed by the general tax principles. However, the supply of cryptocurrencies can cause administrative difficulties in the VAT system. It is proposed that the income tax and VAT legislation be amended to remedy this.

Tax Administration

It is proposed that taxpayers should be provided with notification by SARS prior to the commencement of an audit in an effort to keep all parties informed.

Deregistration of Non-Compliant Tax Practitioners

Habitual non-compliant tax practitioners that do not rectify their behaviour after being notified by SARS, are at risk of being deregistered.

Tax treatment of Doubtful Debts

To date no criteria has been set out by SARS for the claiming of the doubtful debt allowance. This has resulted in different SARS offices applying different criteria in the amount that they will allow as a doubtful debts allowance. It is proposed that the criteria for determining the allowance should be included in the Income Tax Act.

Alison Haupt is a professional accountant and Business Accounting Network franchise owner based in Woodstock, Cape Town

 

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