During his 2020 Medium-Term Budget Policy Speech not so long ago, Finance Minister Tito Mboweni announced that government has projected tax increases of R5 billion in 2021/22, which will be followed by increases of R10 billion in 2022/23, R10 billion in 2023/24 and R15 billion in 2024/25.
These impositions will require SMMEs to utilise the best available accounting skillset to minimise the impact of the imminent bite on their bottom-line.
The future is uncertain and there is much speculation about a whole range of predicted trends (such as the possible disappearance of cash by 2030), but there is a sizable obstacle that SMMEs will definitely have to deal with in the short term – the projected increases in tax.
“The avoidance of taxes is the only intellectual pursuit that carries any reward”: John Maynard Keynes
While there are diverse reasons why SMMEs ultimately fail, financial mismanagement and poor performance are two of the most often-cited explanations.
A financial forecast as a tool, allows businesses to plan their finances for the future – with the consideration of their present and past performances. This implement should be mindful of the looming tax increments within the South African context, if it is to be effective in steering the company to a state of readiness and efficiency, particularly during the ongoing COVID-19 pandemic.
Being that the increases are projected to be an ongoing imposition over the next five years at least, here are some expert accounting tips for SMMEs on how to best manage future projections and targets in our volatile local tax environment.
1. Appropriate and timeous management of the tax predicament
SMMEs are advised to manage their expectations within our rocketing tax context, in order to prepare themselves in dealing with their future successes and failures. Understanding the context, timing, various tax implications and what is projected at company level is vital in preparing for the inevitable pinch on the pocket.
The COVID-19 trial hasn’t come at the best of times for our government as it can’t afford to be as giving as others around the globe. There are governments that have given deferrals on payroll taxes, VAT and corporate income tax as a collective package. In South Africa, tax compliant businesses have been allowed to defer 20% of their employees’ tax liabilities and a portion of their provisional corporate tax payments – ask your accountant for details.
2. Pick the right forecasting model for your business.
Picking between the right qualitative and quantitative forecasting approach should be determined by the core data of the company being dealt with. The projected tax increments should be factored in, as the overall objective is to forecast profitability and not just actual sales. For example, in the Qualitative Model, there is Trend Projection, where the accountant looks at the trajectory of what is happening at that point in time, while following the trend in the publicised increases.
3. Adaptability and reducing costs where applicable.
According to Johnny Yong, who is technical manager with the International Federation of Accountants’ (IFAC) Global Accountancy Professional Support (GAPS), and Robyn Erskine, who is partner at Brooke Bird in Australia, SMEs should evolve with the times.
“Death and taxes are the two constants in life. It is therefore not surprising for SMEs to be asking this question. In other instances, the corporate vehicle or tax structure may need to evolve as the business grows. [Accountants] can discuss this with their clients – at a certain point of the SME’s evolution. Preparation (for the entrepreneur) is important to ensure long term success of the business,” they penned for the IFAC website.
4. Charitable contributions as a means of getting tax breaks
This is a tool that can be achieved through manoeuvring and strategy. The South African treasury has announced tax breaks which might help soften the tax pinch.
The tax-deductible limit for donations (currently 10% of taxable income) will be increased by an additional 10% for donations to the Solidarity Fund during the 2020/21 tax year.
The bona fide donations have to be made to an approved organisation, agency, institution, or department of government listed in section 18A (1) of the Income Tax Act and there must be a receipt to prove the donation. Make sure of course that you can afford the cash outflows involved.
5. Planning accordingly and compliance.
The benefits of forecasting can never be overstated. The thoroughness of forecasting gives the organization insight into the possible future performance of the business and how to prepare.
A specific benefit is that forecasting can lead to better accuracy in budgeting. This includes accounting for future tax spend. The complete forecast can serve as a framework for developing new strategies.
Don’t be left scrambling for cover at the last hour, ask your accountant for help with this – don’t let high taxes kill your business!
