Keeping your business afloat in the time of COVID-19 – tax and other considerations

INTRODUCTION:

The devastating impact of COVID-19 is being felt across all sectors of the economy in one way or another. Coming out of the hard lockdown, the South African government is taking a risk-adjusted approach, which seeks to balance between the continued need to limit the spread of the virus and the need to reinvigorate the economy.

According to the South African Reserve Bank, South Africa’s economy may contract by between 2% and 4% this year as a result of the pandemic. This figure ultimately depends on certain policy responses, for example whether the National Treasury will continue to commit more spending in line with its fiscal policy and how the private sector will respond.

To this end, government has promised a massive social relief and economic support package of up to R500 billion which amounts to around 10% of South Africa’s GDP, to mitigate against the blow of COVID-19 in our country. Government support towards businesses in this regard, forms part of the country’s three phase economic response to

(1) stabilise the economy;

(2) address the extreme decline in supply and demand and protect jobs; and

(3) to jumpstart the recovery of the economy as the country emerges from this pandemic.

So, let us examine what these measures are in a nutshell:

TAX RELIEF MEASURES:

Certain legislative amendments will be required to implement the tax relief measures which were proposed by the government around late March. These come in the form of the Draft Disaster Management Tax Relief Bill, 2020 and the Disaster Management Tax Relief Administration Bill, 2020.

Some of the proposed relief measures apply only to small and medium sized enterprises or SMEs (for example the deferral of Pay-As-You-Earn or PAYE), while others apply to all taxpayers (for example the Employment Tax Incentive or ETI). The various tax relief measures are summarised immediately below:

  1. PAYE:

Tax compliant businesses with a turnover of less than R 50 000 000 will be allowed to delay 20% of their PAYE liabilities over the next four months (started 1 April 2020 and ending on 31 July 2020).

  1. Deferral of payment of provisional tax:

Deferral of a portion of the payment of the first and second provisional tax liability to the South African Revenue Service (SARS), without SARS imposing administrative penalties and interest for over the next six months.

The first provisional tax payment due from 1 April 2020 to 30 September 2020 will be based on 15% (rather than 50%) of the estimated total tax liability, while the second provisional tax payment from 1 April 2020 to 31 March 2021 will be based on 65% (rather than 100%) of the estimated total tax liability.

Provisional taxpayers with deferred payments will be required to pay the full tax liability when making the third provisional tax payment in order to avoid interest charges.

  1. Expansion of the Employment Tax Incentive (ETI):

The ETI programme was introduced in 2014 as an incentive aimed at reducing unemployment (particularly among the youth) by encouraging employers to hire young work seekers. The impact of COVID-19 on employment during this period may be far-reaching as the majority of the South African workforce is forced to stay at home.

In order to minimise the loss of jobs during this period and beyond, government proposes expanding the ETI programme for a limited period of four months, beginning 1 April 2020 and ending on 31 July 2020 as follows:

  • Increasing the maximum amount of ETI claimable during this four month period for employees eligible under the current ETI Act from R1 000 to R1 500 in the first qualifying twelve months and from R500 to R1 000 in the second qualifying 12 months.
  • Allowing a monthly ETI claim in the amount of R500 during this four month period for employees from the ages of (1) 18 to 29 who are no longer eligible for the ETI as a result of the employer having already claimed ETI in respect of those employees for 24 months; and (2) 30 to 65 who are not eligible for the ETI due to their age.
  • Accelerating the payment of ETI reimbursements from twice a year to monthly as a means of getting cash into the hands of tax compliant employers as soon as possible.

This expansion will, however, only apply to employers that were registered with SARS as at 1 March 2020. An employer is not eligible to claim the ETI if the employer is not compliant in respect of its tax obligations i.e. if the employer has any outstanding tax returns or an outstanding tax debt.  Furthermore, the current compliance requirements for employers under sections 8 and 10(4) of the ETI Act will continue to apply.

  1. The Unemployment Insurance Fund (UIF):

The government is exploring the temporary reduction or setting aside of employer and employee contributions to the Unemployment Insurance Fund (UIF) and to the Commissioner for Compensation for Occupational Injuries and Disease Fund (COIDA contributions). It is speculated that UIF obligations will be set aside for at least four months.

  1. Donations tax:

Donations tax is payable by tax residents of South Africa as follows:

  • a donations tax rate of 20% applies in relation to the donations not exceeding R30 million per year; and
  • a donations tax rate of 25% applies in relation to the donations exceeding R30 million per year.

During this period, any donation to registered public benefit organisations as well as the SOLIDARITY Fund shall be tax deductible.

Taxpayers would generally only be able to benefit from the tax stimuli if they are compliant. As a result, taxpayers would need to ensure that their tax affairs are up to date, in respect of all taxes. The Finance Minister is expected to flesh out further details on the tax-related announcements when he tables the adjusted budget at the time of writing this so additional tax relief measures are anticipated.

TEMPORARTY EMPLOYEE / EMPLOYER RELIEF SCHEME:

A new directive under the Disaster Management Regulations now offers relief to employers and employees who have been affected during the lockdown in the form of a COVID-19 Temporary Employee / Employer Relief Scheme (TERS). All employers and employees who contribute to the UIF had the opportunity to claim if they filled out an application before 30 April 2020.

The calculation of the benefit is based on the last payment made to the employee but capped at the maximum of R6 638.40. The benefit amount is then determined in line with the current sliding scale which ranges between 38% to 60% in terms of a formula. Please refer to the directives issued by the Department of Labour for more information and how the formula works.

We hope you found this article informative and wish you all the best during this period.

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