The government's moves to alleviate the bureaucratic and tax burden on small businesses have continued in this year's Budget.
Finance Minister Trevor Manuel announced that Regional Service Council (RSC) levies, which apply to both large and small companies, will be scrapped, and he proposed several adjustments to the tax requirements for small businesses.
Boris Pelegrin, a senior manager at tax and legal consultants Maitland Advisory, says RSC levies will fall away from June 30 this year.
Currently, all businesses and em-ployers operating within the jurisdiction of a district or metropolitan council or municipality must pay a RSC levy based on remuneration paid, and a regional establishment levy based on turnover. Each municipality calculates RSC levies at its own rate.
Income tax
The following tax adjustments will apply from April 1 this year:
- The tax exemption threshold for small businesses will increase from R35 000 to R40 000 for the tax years ending on or after April 1, 2006. This means that small businesses that earn an annual income of R40 000 or less will not have to pay any income tax, Pelegrin says.
- Instead of paying income tax at the flat corporate tax rate of 29 percent (which remains unchanged), small businesses will pay a lower rate of tax on a portion of their turnover.
From April 1, more businesses will be able to enjoy the lower tax rate of 10 percent on a portion of their income, because Manuel has extended this concession to firms with an annual turnover of up to R14 million. Currently, the concession only applies to businesses with a turnover of up to R6 million.
- However, the taxable income threshold at which the 10 percent rate applies will be raised from R250 000 to R300 000 from April 1.
Depreciation costs
Small businesses may depreciate, or write off, faster than other businesses the costs of small items bought for business purposes. This lowers their taxable income, thereby reducing the tax they have to pay.
The value of the assets that a business may write off, in the year in which they are bought, will increase from R2 000 to R5 000 for assets purchased on or after March 1, 2006. For example, a fax machine bought for less than R5 000 after March 1 can be written off in one year. Pelegrin says all other assets acquired by a business must be written off according to the time periods specified by the South African Revenue Service (SARS).
For instance, a desktop computer that cost R10 000 may be written off only over three years.
Capital Gains Tax
The once-off capital gains tax (CGT) exemption for small businesses on disposal of an active business asset will increase from R500 000 to R750 000 from the tax years starting on or after March 1 this year.
This means that if a small business sells an asset, such as an office building, after April 1 this year, the first R750 000 of profit made from the sale will be free of CGT, Pelegrin says.
This once-off exemption only applies where the owner reaches 55 years of age and sells an asset because of ill-health or retirement.
Value-added tax
Currently, certain payers of value-added tax (VAT), such as small farmers and small businesses, are entitled to submit VAT returns every six or four months respectively, instead of every two months. More taxpayers who pay VAT will benefit from a proposed adjustment to the VAT threshold, which will increase from R1 million to R1.2 million for the tax periods starting on or after July 1, 2006.
Redefining small business
The government plans to redefine what constitutes a small business. The new definition has not yet been disclosed, but it could affect which businesses qualify for the tax breaks granted to a small business.
Tax amnesty
Owners of small businesses who have feared the consequences of failing to to comply with the tax laws in the past will be able to come clean by taking advantage of a tax amnesty, which was announced by Manuel in his Budget speech this week.
In the Budget Review, the National Treasury says an obstacle to small businesses becoming tax-compliant is their fear of the consequences of non-compliance - namely, additional tax, interest and prosecution. Thus, the government has proposed an amnesty for small businesses to make it easier for them to become taxpayers.
The proposed tax amnesty will allow SARS to waive taxes due by small businesses for the years of assessment ending on or before March 31, 2004, where their turnover for the 2005/6 year of assessment did not exceed R5 million.
This waiver will require the submission of an income tax return for 2005, as well as paying a non-disclosure penalty of 10 percent of the business's taxable income earned in 2005.
The amnesty will not be available to taxpayers who have already disclosed the relevant amounts, or those who are formally notified by SARS that they are under investigation before they apply for the amnesty.
It is proposed that small businesses that meet the qualifications for the amnesty will not have to pay the penalties, additional taxes and interest on the tax they owe.
It proposed that the amnesty will be implemented in two phases, with the first phase of the amnesty applying to the taxi industry only. Only taxi owners who are tax-compliant will be able to participate in the government's taxi recapitalisation programme.
The first phase of the amnesty will take effect on August 1 this year and will end on May 31, 2007.
The second phase of the amnesty, for other small businesses, will take effect later in the year.