72 SAJEMS NS 10 (2007) No 1

Tax compliance burden for small, medium and micro

establishments in the business services industry

JMP Venter and B de Clercq

Department of Taxation, UNISA

Abstract
The aim of this study is to determine whether the size of a business, classified as small, medium or
micro establishment (SMME), has an impact on its management of the compliance burden placed
on it by taxation laws. A survey was conducted amongst small, medium and micro establishments
in the business services sector in Gauteng province, South Africa. The study finds that the majority
of SMMEs in the business services sector outsource their tax responsibilities due to lack of skills
and time. Also, the significance of taxation inputs for making business decisions and preferences
for administrative relief measures varies according to the size of the organisation.
JEL E62, H25, L11

1 – improve coordination of government

Introduction initiatives for supporting the small business
sector; and
This study focuses on the impact taxation – increase small businesses’ contribution to
has on the administration and management the GDP (SEDA, 2005).
of small business services establishments in • The South African Revenue Service (SARS)
Gauteng. The rationale for research into small has launched a wide-ranging programme
establishments in the business services sector of measures to support small business. This
lies in the following: study evaluates some administrative measures
• In the 2005 Budget Review, the Minister of aiming to reduce compliance cost and provide
Finance announced further taxation changes to a more enabling environment for small
recognise the services sector for its prominence businesses (Deloitte & Touche, 2005).
in stimulating growth, and stated that small It is clear therefore that small business tax
business tax relief measures would also surveys are not only important in the support
be extended to small, medium and micro of national accelerated and shared growth
establishments (SMMEs) in the services sector strategies and sustainable development, but
(National Treasury, 2005). also in the development of skills. Such research
• Lionel October, deputy director-general of the is of major importance in understanding current
Department of Trade and Industry presented and future tax issues anticipated to shape the
the government’s new Small Enterprise business services tax environment.
Development Strategy at the end of 2005.
According to October’s presentation, some of 2
the objectives of the revised strategy are to: Background
– create an enabling environment for small
enterprises; The selection of the population used in the
– create sustainable jobs in the small business survey considered three aspects, namely:
sector; • the size of the organisation to be surveyed;
SAJEMS NS 10 (2007) No 1 73

• the sector of the economy being investigated; be classified as micro-, very small, small or
and medium enterprises, following a complex set of
• the region selected. thresholds. Table 1 provides an extract of the
classification in terms of the National Small
The motivation for each of these selections, Business Act for the business services that are
which were SMMEs, business services and included in this study.
Gauteng, will be discussed below. Medium, small (small and very small) and
micro establishments in the finance and business
2.1 Small, medium and micro services sector are included in the study.
enterprises (SMMEs) Business services establishments in the informal
In terms of the National Small Business Act economy (non-VAT registered establishments)
102 of 1996, as amended, small businesses can are excluded from the study.

Table 1
Classification of micro-, very small, small or medium enterprises

Sector or subsector in accordance Size or class Total full-time Total annual Total gross
with the Standard Industrial equivalent turnover asset value
Classification (SIC) of paid (Rm) (fixed
employees property
excluded) (Rm)
Fewer than: Less than: Less than:

Finance and business services Medium 200 26,00 5,00

Small 50 13,00 3,00
Very small 20 3,00 0,50
Micro 5 0,20 0,10

Community, social and personal Medium 200 13,00 6,00

services Small 50 6,00 3,00
Very small 20 1,00 0,60
Micro 5 0,20 0,10

Source: National Small Business Act 102 of 1996

Of the three criteria prescribed in the National 2.2 Business services sector
Small Business Act, i.e. total number of full-time
Figure 1 is based on data from the data mining
employees, total annual turnover and total gross
system of the South African Reserve Bank
asset value, used to categorise businesses as
(SARB) and Statistics South Africa. It is notable
micro, small, very small or medium, the number
that for the past decade, the annual real growth
of employees is often the most effective, as it
of the business services sector has outpaced the
is generally the easiest to ascertain and can be
real GDP growth of the economy as a whole. The
compared across all sectors except agriculture.
real growth of the business services sector was
Accordingly, this study applies “employment”
6.3 per cent in 2002, 4.1 per cent in 2003 and 7.5
figures to classify businesses as small, medium
per cent in 2004 (SARB, 2006). This provides
and micro establishments.
further justification for studying the business
services industry. In fact, the share of the
business services industry in the total economy
has increased by approximately five percentage
points between 1980 and 2004.
74 SAJEMS NS 10 (2007) No 1

Figure 1
GDP and business services growth performance (per cent), 1969-2004

Source: SARB, 2006

2.3 Gauteng region the study provided in the previous section. The
objectives of the study are to:
According to the Department of Trade and
Industry (2004), Gauteng is the leading province • determine how business services establishments
in South Africa for both formal and informal of different sizes manage and administrate the
business. Gauteng accommodates 46.7 per taxes, duties and/or levies for which they are
cent of all formal SMMEs and 26.9 per cent responsible;
of all informal SMMEs, with KwaZulu-Natal • determine the significance of tax inputs and
in second place with 12.6 per cent of all formal the usage of tax advice in business decisions
SMMEs and 25.3 per cent of all informal in business services SMMEs; and
SMMEs. • assess business services establishments’
SARS maintains a database of the number of preferences for various tax measures to reduce
business services establishments registered for the administrative burden of managing tax
levy payments in terms of the Skills Development matters, and determine whether different
Act 97 of 1999, by employment size and measures are preferred by the various
province. The database clearly indicates that categories of SMMEs.
most registered business services employers,
namely 54.4 per cent, are based in Gauteng 4
(SARS, 2003). Research methodology
On the basis of this distribution of business
activities, Gauteng was selected as the focus The research methodology used to construct
of the study and, more specifically, the formal a model able to meet the primary research
sector in Gauteng. objectives of the study is explained in this
section.
3
Research objectives 4.1 Sample population
The sample population consisted of micro (1-
The reasons for conducting a tax survey confined 20 employees), small (21-50 employees) and
to the business services industry of Gauteng in medium (51-200 employees) business services
particular are evident from the background to establishments operating in Gauteng. Financial
SAJEMS NS 10 (2007) No 1 75

managers, general managers, accountants business services establishments were included

and owners of business services SMMEs were in the sample.
targeted as sample elements / respondents. To meet the objectives of the study, an inter-
viewer-administrated paper-based questionnaire
4.2 Data collection methodology was designed. Questions to meet the objectives
of the study were formulated in consultation with
Interviewer-administrated telephonic interviews
role players such as the National Treasury and
were used to collect data from the sample
SARS. Questions to elicit both closed-ended and
of business services SMMEs operating in
open-ended responses were included. Various
Gauteng. This method was supplemented with
data capturing and verification procedures were
a self-administrated approach for respondents
followed to ensure the accuracy of the data.
preferring to receive the questionnaire by fax
and complete and return it again also by fax.
4.4 Validity of the data
4.3 Sample In total, 130 responses were received, which
represents a response rate of 65 per cent for
The Bureau of Market Research (BMR)
the survey. Sample surveys are subject to error
Register of Business Services Establishments
and mainly yield estimates but no precise values.
(BMR, 2004) was used as sample frame. To
Sample error occurs when the selected sample
ensure that only micro, small and medium
does not perfectly represent the population. The
business services establishments operating in
formula for allowable sample error is:
Gauteng were selected from the sample frame,
all foreign elements, for example large business vx = Ez
services establishments (200+ employees), were
where E = allowable error and z = number
removed from the database.
of standard deviation units that will yield the
A systematic disproportionate stratified
desired level of confidence (90 per cent level
sampling approach was used to select 200
of confidence). Taking the potential sample
business services SMMEs. This sampling
error into account, a confidence interval that
method ensured that a systematic sample from
will probably contain the population parameter
the micro, small and medium business services
can be stated.
subgroups was selected. The disproportionate
Table 2 shows the interval estimate for the
sample approach was required because a large
total population based on a 90 per cent level
proportion of business services establishments
of confidence for selected research variables
located in Gauteng are micro establishments.
investigated in the survey. It is clear, for
The BMR Business Services Register confirms
example, that the figure for business services
that at least 85 per cent of business services
micro establishments that outsource their capital
establishments operating in Gauteng can
gains tax responsibilities is between 24.8 per cent
be classified as micro establishments. The
and 19.3 per cent.
disproportionate approach ensured that at
least a minimum of 30 small and 30 medium

Table 2
Interval estimates for selected research variables

Research variable Sample statistic Interval estimate (per cent)

(per cent)
Lower Higher

Outsourcing capital gains tax functions (micro) 20.4 19.3 24.8

Burden to comply with tax regulations has 34.8 27.8 30.7

increased substantially over past three years
(micro)
76 SAJEMS NS 10 (2007) No 1

Handling SDL* internally (small) 57.6 47.0 68.2

Burden to comply with tax regulations has 49.2 38.5 59.9

increased substantially over past three years (small)

Handling SDL* internally (medium) 92.0 83.0 100.0

Burden to comply with tax regulations has 16.0 4.0 28.0

increased substantially over past three years
(medium)

* Skills development levies

5 is important in determining how much tax an

establishment pays. In this section, the income
Taxation requirements for business
tax classification of business services SMMEs
services SMMEs will firstly be investigated. This will be followed
by an outline of the various other direct and
5.1 Tax implications for the different indirect taxation requirements with which
establishment types business services SMMEs have to comply. Non-
Income tax (also referred to as normal tax) is compliance with these rules as a result of lack of
levied in terms of section 5(1) of the Income Tax proper administration or management may lead
Act 58 of 1962 on the taxable income received to penalties and interest being charged, which
by or accrued to any person during the specific could be detrimental to businesses.
year of assessment. Calculating the taxable
5.2.1 Income tax
income of the person depends on the nature of
activities and legal form of the relevant taxpayer. The Income Tax Act 58 of 1962 provides details
There are basically two broad categories of of the different components that are used to
taxpayers; the first category includes persons calculate taxable income and tax liability. A
taxed directly on the income received (for taxpayer’s annual tax liability is calculated on the
example, a sole trader or partnership) and the basis of the annual tax return that that taxpayer
second category includes those cases where the must submit. The information in the tax return is
business is taxed and not the individual (for used to calculated the taxpayer’s taxable income
example, companies and close corporations). for the year of assessment. This amount is then
Trusts are also taxed as separate legal persons, multiplied by the appropriate tax rate depending
but due to the complexities surrounding trusts, on the business services SMMEs taxation
they fall outside the scope of this study. classification. The following tax rates can be
The procedure for determining the taxable applied to a business services SMME depending
income of the different enterprise types is on the legal structure of that SMME:
summarised in Annexure A. As no trusts are • A sole proprietor or each individual partner of
included in the survey they are not included in a partnership is subject to tax on his/her taxable
the annexure. It is important to note that a close income at progressive rates ranging from 18
corporation is included in the definition of a per cent to 40 per cent; and
company in terms of section 1 of the Income Tax • Companies and close corporations pay tax
Act 58 of 1962, thus any reference to companies at a flat rate of 29 per cent on their taxable
includes close corporations. income for the year of assessment (except in
the case of a small business corporation or
5.2 Direct and indirect taxes personal services company – refer to the next
Taxes can be divided into two groups, namely sections) and 12.5 per cent secondary tax on
direct and indirect taxes. For business services companies on the net amount of dividends
establishments, this income tax classification declared (SARS, 2006).
SAJEMS NS 10 (2007) No 1 77

5.2.2 Small business corporations The first important aspect of these requirements
To support the development of small and to consider is the requirement that small and
medium enterprises a graduated company medium size enterprises be incorporated.
tax rate structure for incorporated small and Figure 2 provides the enterprise form of the
medium size enterprises was introduced in 2000 participants in the survey to show how many of
and is reviewed on a regular basis (Manuel, 2000; them trade in the form of a company or close
2005; 2006) In 2001 another major concession corporation.
was introduced, allowing the immediate write-
off of all plants and machinery used in a process Figure 2
of manufacture or similar process in the year Profile of participating business services
they are brought into use for the first time. An SMMEs by enterprise form
accelerated write-off allowance for depreciable
assets (other than manufacturing assets)
acquired on or after 1 April 2005 is also available
at 50 per cent of the cost of that asset in the tax
year during which that asset was brought into
use for the first time, 30 per cent in the second
year and 20 per cent in the third year (Income
Tax Act 58 of 1962).
To enjoy these concessions, companies
and close corporations must comply with the
following requirements:
Figure 2 shows that more than half of the
• The shareholders or members must be
participating establishments are close corpo-
natural persons and must hold the entire
rations and companies (59 per cent) that might
shareholding/members’ interest of the
qualify for the small business corporation
company/close corporation;
concessions based on legal form. The sole
• Shareholders or members may not hold any proprietors (17 per cent) and partnerships (24
shares or interest in the equity of any other per cent) will thus however not qualify for any
company (with limited exclusions); of the concessions.
• The gross income of the corporation for the year The next important consideration of the
of assessment must not exceed R14 million; small business corporation definition is the
• Not more than 20 per cent of the total of all annual turnover of a company. Statistics South
receipts and accruals and all capital gains Africa’s Integrated Business Register (2004)
of the corporation may consist collectively classifies entities registered with the Companies
of investment income and income from and Intellectual Property Registration Office
rendering a personal service – a small (CIPRO) by turnover. This register shows that
business corporation which is engaged in almost half the CIPRO-registered active entities
the provision of personal services will still are micro enterprises, and almost 90 per cent are
qualify for the relief if at least four full- either micro or very small. On the basis of the
time employees are employed throughout information provided, small, medium and micro
the year of assessment; these employees enterprises, which form the basis of the study,
should be engaged in the business of the comprise almost 99 per cent of the total number
small business corporation rendering that of companies registered in 2004. (Statistics
service on a full time basis; and South Africa, 2004) The annual turnover of
respondents participating in the survey is shown
• The company/close corporation may not
in Figure 3.
be an employment company (i.e. a labour
broker without an exemption certificate or a
personal service company) (SARS, 2006).
78 SAJEMS NS 10 (2007) No 1

Figure 3
Business services SMMEs by turnover category

Based on current legislation, all micro and requirement for business service SMMEs relates
most small establishments will comply with to personal services. The following section
the turnover requirement of the small business analyses personal services in a business service
corporation definition. environment.
Having complied with the legal form and
turnover requirements, the next important

Figure 4
Distribution of registered corporations by industry, 2004

Source: Statistics South Africa, 2004

SAJEMS NS 10 (2007) No 1 79

5.2.3 Personal service entity classified as personal service companies

A company defined as a personal services entity therefore disqualifying them from the benefits
will not be entitled to the concessions granted granted to small business service corporations.
to small business corporations, although the The Fourth Schedule of the Income Tax Act
company will be defined as a micro, very small, 58 of 1962 defines a personal service entity as a
small or medium enterprise in terms of the company where services are rendered on behalf
National Small Business Act 102 of 1996 (as of that company to a client of that company
amended). personally by any person who is a connected
Statistics South Africa classifies service person in relation to that company and:
establishments as those who derive 50 per cent • That connected person would be regarded
or more of their turnover from services rendered as an employee of that client if that services
(Statistics South Africa, 2005). One of the factors were rendered by that connected person
considered in selecting the business services directly to the client;
sector was the number of corporations involved • That connected person or that company is
in the business services sector. Figure 4 provides subject to the control or supervision of that
a more detailed overview of corporations client as to the manner in which or the hours
registered with CIPRO by subsector. during which the duties are performed in
Figure 4 reflects the relative importance rendering that service;
of the finance and business services industry
• The amount paid or payable in respect of
in particular, with 43 per cent of all active
that service consists of or includes earnings
firms being financial and business services
which are payable at regular intervals, daily,
establishments.
weekly, monthly or other intervals; or
The survey included the following finance
and business services industries according • More than 80 per cent of the income of
to the Standard Industrial Classification of that company consists of amounts directly
all Economic Activities (SIC) (SIC code in or indirectly received from one client
brackets): (Stiglingh, Venter & Hamel, 2006).
• Renting of machinery and equipment An SMME classified as a personal services entity
(85), will not only not qualify as a small business
• Computer and related activities (86), corporation but will also pay income tax at an
increased rate of 34 per cent (Income Tax Act
• Research and development (87),
58 of 1962).
• Legal; accounting, bookkeeping and audi- The definition does however have an important
ting activities; tax consultancy; marketing exclusion if the entity employs more than three
research and public opinion research; business full-time employees who are engaged on a full-
and management consultancy (881), time basis in the business of such a company
• Architectural, engineering and other of rendering any such service, other than any
technical activities (882), employee who is a shareholder or member of
• Advertising (883) and the company or is a connected person in relation
to such person.
• Business not elsewhere classified (e.g.
Of the respondents included in the survey, just
labour recruitment and provision of staff;
more than a third (or 46 of the 130) were micro
investigation and security activities; building
establishments (1–20 employees), 45.4 per cent
and industrial plant cleaning; photographic
were small (21–50 employees) and 19.2 per cent
activities; packaging activities) (889)
were medium (51–200).
(Postma, Dorfling & Van Wyk, 2004).
Table 3 profiles the participating business
Based on the SIC activities included in the services SMMEs according to number of
survey, a number of establishments can be employees.
80 SAJEMS NS 10 (2007) No 1

Table 3
Profile of participating business services SMMEs by number of employees

Characteristics SMME category

Micro Small Medium

Average number of full-time staff 8 27 108

Average number of full-time administrative staff 4 7 12

As discussed previously, almost all small and 5.3 Other direct taxes
micro establishments will qualify as small
business corporations in terms of the turnover • Capital gains tax: A capital gain arises when
rule. However, micro establishments will have the proceeds from the disposal of an asset
to satisfy the criterion for the minimum number exceed the base cost of that asset. A capital
of employees before they are eligible for this loss occurs when an asset is disposed of and
tax benefit. the base cost of that asset exceeds the proceeds
Because of the important contribution of of that asset. For individuals, only 25 per cent
business services to the South African economy, of the net capital gain, after deducting the
which was mentioned above, and in response to annual exclusion, is included when calculating
various industry representatives approaching the tax payable. For companies and close
the government about the cash flow hardships corporations, only 50 per cent of the net capital
that the personal services entities regime has gain on the disposal of assets is included in the
imposed on small businesses, the government taxable income. Capital gain forms part of an
has proposed certain amendments to the Income SMME’s taxable income (SARS, 2006).
Tax Act No 58 of 1962 to limit the scope of the Compliance: Capital gains and losses must
personal services entities (National Treasury, be declared in the income tax return for
2006). the tax year in which the asset is disposed
The proposed amendments are: of (Stiglingh et al., 2006). For any costs
• To limit the personal services entity regime incurred, the base cost documentary proof
to situations where the client controls or must kept and provided on request (De
supervises how the work is performed, but Koker, 2005).
only if that work is performed at the client’s • Secondary tax on companies (STC): Section
premises; should the client thus control and 64B of the Income Tax Act 58 of 1962
supervise work performed by the entity on stipulates that STC is payable by all South
a limited basis, i.e. not all the work is done African resident companies on the dividends
at the client’s premises, the company will no (including deemed dividends) which the
longer be deemed to be a personal services company declares to its shareholders. STC
entity; is not part of the normal tax payable by a
• The third criteria for a personal services entity company and must be separately calculated.
as stated above will be deleted; a client will STC is calculated as follows: 12.5 per cent of
now be allowed to make regular payments the net amount of the dividend. (Stiglingh et
to an entity providing a service, as this is al., 2006)
normally due to administration rather than an Compliance: STC is payable on the last day
employee/employer relationship; and of the month following the month in which
• The last proposed amendment reduces the the dividend is declared. Non-payment
number of full-time employees to three or or late payment will lead to interest and
more instead of four and more (National penalties being charged (Clegg & Stretch,
Treasury, 2006). 2005).
SAJEMS NS 10 (2007) No 1 81

• Provisional tax: Those taxpayers earning 5.4 Indirect taxes

income not classifiable as remuneration
(as defined) are normally required to pay • Value added tax (VAT): VAT is an indirect tax
provisional tax. Provisional tax is a method levied in terms of the VAT Act 89 of 1991. VAT
to pre-pay the tax that is due for the year must be included in the selling price of every
of assessment. The provisional tax is paid taxable supply of goods and/or services made
biannually (Venter, Hamel & Stiglingh, by a vendor. In determining the VAT liability,
2006). the vendor must subtract all the input tax
claimed from the output tax charged. Should
Compliance: SMMEs earning an income of
the output tax exceed the input tax, the vendor
more than R10 000 must register within 30
has to pay the excess to SARS. Should the
days as provisional taxpayer (SARS, 2005a).
input tax exceed the output tax, the vendor
Three provisional tax payments must be
will be entitled to a refund from SARS (SARS,
made during the year, the first within six
2006).
months of the commencement of the year
of assessment, the second before the last Compliance: A person with taxable supplies
day of the financial year and the third of more than R300 000 (excluding VAT)
normally within six months of the end of the must register as a vendor for tax purposes
year of assessment. Each payment must be (De Koker & Kruger, 2004). Every vendor
accompanied by the appropriate tax return is registered for a specific tax period,
providing detail of the payment. The third depending on the size of the business. The
provisional tax payment is voluntary and can tax period may vary from one month to four
be made by companies or close corporations months. The VAT returns (VAT 201) and
whose taxable income exceeds R20 000. any VAT due to SARS must be filed and
Non-payment will lead to interest being paid before the 25th of the month following
charged. Non-payment or late payment the end of the tax period (Tustin et al., 2005).
of any of the other payments will lead to A supplier must furnish a recipient with a
interest and penalties being charged (SARS, tax invoice within 21 days of a request to do
2004a). so (SARS, 2004b). If there is a change in the
conditions of sale a debit or credit note should
• Employees’ tax: Employees’ tax refers to the
be issued (Brettenny, 2005). Late payment
tax that the employer withholds from his/her
or submission of a VAT return could lead to
employees at the end of each pay period
interest and penalties being charged.
(Venter et al., 2006).
• Skills development levies (SDL): The levy
Compliance: Any business that pays
is calculated as a percentage of the earnings
remuneration to employees that exceeds
of the employees (SARS, 2006). The levy
the tax threshold must register within 14
is payable to the sectoral SETA which is
days of becoming an employer. (Venter et
concerned with the development of skills
al., 2006). The employer must complete
in that sector (Warren, 2004). With certain
and submit a monthly return (EMP201).
exceptions, every employer, as defined in the
The return and the payment must be made
Fourth Schedule to the Income Tax Act 58 of
within seven days of the end of the month in
1962, is liable for SDL (Skills Development
which the tax was withheld (SARS, 2005b).
Levies Act 9 of 1999).
At the end of the year the employer must
issue each employee with an employee’s tax Compliance: SDL contributions are payable
certificate (IRP5) (Silver & Klein, 2005). It on a monthly basis, on or before the seventh
must also submit an annual reconciliation of the month following the month to
(IRP501) to the local SARS branch office, which the SDL contributions accrue. SDL
within 60 days of the end of the tax year contributions are normally submitted with
(Clegg, 2004). PAYE and UIF on the EMP201 form (Skills
Development Levies Act 9 of 1999).
82 SAJEMS NS 10 (2007) No 1

• The Unemployment Insurance Fund (UIF): in order to avoid normal income tax on the
The Unemployment Insurance Fund insures income derived from those assets and/or estate
employees against the loss of earnings due duty when those assets are excluded from their
to termination of employment, illness and estates (Jordaan et al., 2006).
maternity leave. A monthly contribution has to Compliance: Donations tax must be paid
be made by the employer (1 per cent) and the to the Commissioner within three months
employee (1 per cent) based on the earnings of the date upon which the donation was
of the employee (SARS, 2006). made. The payment must be accompanied
Compliance: The Unemployment Insurance by a return on the form prescribed by the
Contributions Act 4 of 2002 requires Commissioner (Venter et al., 2006).
employers who are registered with SARS • Stamp duty: Stamp duty is levied on instruments
for purposes of employees’ tax or skills such as leases of immovable property and
development levies to pay their UIF unlisted marketable securities at different rates
contributions to SARS. Those who are (SARS, 2006).
not required to register with SARS must
Compliance: The instrument must be signed
pay their UIF contributions over to the
at the time of execution thereof or at the
Unemployment Insurance Commissioner
latest within 21 days of execution thereof
(Unemployment Insurance Contributions
(Goodall, Jacobs & King, 2004).
Act 4 of 2002). UIF contributions are
payable on a monthly basis, on or before the
5.5 Conclusion
seventh of the month following the month in
which the UIF contributions accrue (SARS, From the discussion in this section it is clear that
2005b). there are many legal requirements that SMMEs
• Custom and excise duties: Custom duty is a must meet. Correctly applying the legislation
consumption tax levied on imported goods and complying with relevant timeframes place
and is usually calculated as a percentage a major burden on SMMEs. Considering that
on the value of the goods. Excise duty is a micro business services establishments only
consumption duty levied on certain locally have on average three full-time administrative
manufactured products (SARS, 2006). employees and medium-sized business
services establishments only have 12 full-time
Compliance: Goods imported, documents
administrative employees, most SMMEs will
relating to the importation, including the
find it difficult, not only to comply with the
transport document and suppliers’ invoices,
requirements but also to keep up to date with
must be produced if required by a customs
changes.
controller (Corbin & Cowell, 1994).
• Transfer duty: Transfer duty is levied on the 6
purchase price payable for the acquisition
Analysis and interpretation
of fixed property. Transfer duty is levied
at a progressive rate of 0 per cent to 8 per of research findings
cent depending on the value of the property
This section provides an analysis of the tax survey
acquired and the legal form of the purchaser
conducted among business services SMMEs in
(SARS, 2006).
Gauteng during the period November 2005 to
Compliance: Transfer duty must be paid to January 2006.
the Commissioner within six months of the
date of the transaction (Transfer Duty Act 6.1 Corporation profile
40 of 1949).
• Donations tax: Donations tax is a tax imposed Table 4 profiles the participating business services
on persons who want to donate their assets SMMEs according to selected characteristics.
SAJEMS NS 10 (2007) No 1 83

Table 4
Profile of participating business services SMMEs by selected characteristics

Characteristics SMME category

Micro Small Medium

Average number of years in operation 11 15 19

Average number of full-time staff 8 27 108

Average number of full-time administrative staff 4 7 12

Percentage of full-time administrative staff dealing with tax

45 per cent 34 per cent 35 per cent
matters

Table 4 shows that participating SMMEs are be a priority to ensure that as many of the micro
fairly experienced, reflected in their average and small establishments as possible grow to
number of years in operation. The mature status become medium organisations. The analysis also
of participating SMMEs was very encouraging shows that almost half the administrative staff
for purposes of collecting objective and reliable of micro establishments deal with tax matters,
data. The data confirms the government’s view compared to only a third in the case of small and
that the SMME sector should be targeted for medium establishments.
future growth. The information indicates that There seems to be a correlation between the
the longer a business is in operation, the larger it size of an establishment based on employee
becomes and the more people it can employ. For figures and size based on turnover. The more
example, an average micro businesses that had employees an establishment has, the bigger its
been in existence for 11 years employs eight full- turnover. The information also clearly indicates
time staff members while medium businesses that the government is targeting the correct
that have been operating for 19 years employ an section of the sector in terms of small business
average of 108 full-time staff. It should therefore corporations.

Figure 5
Establishments outsourcing their direct tax liabilities
84 SAJEMS NS 10 (2007) No 1

6.2 Management and administration of ability to administer and manage different

taxation functions tax functions internally. As can be seen from
Table 4, the larger the establishment, the more
The research model was constructed to deter- administrative personnel it can appoint. This
mine which taxes/duties/levies are managed therefore increases the business’s capability for
and administrated by SMME business services handling the function internally. It is also clear
establishments internally and which are that employees’ tax functions are generally
outsourced. Figure 5 indicates the percentage performed internally, irrespective of the size of
of establishments liable for various direct taxes the establishment, possible due to the routine
that elect to outsource the responsibility for nature of this tax function compared to the other
these taxes to a third party. tax functions.
It is clear from Figure 5 that the size of
an establishment has a direct impact on its

Table 5
Outsourcing the responsibility for indirect taxes/duties/levies

Responsibility for taxes/duties/levies Micro Small Medium

(per cent) (per cent) (per cent)

Value-added tax (VAT) 50.0 33.9 8.0

Customs and excise duties 21.7 10.2 12.0

Stamp duties 30.4 22.0 12.0

Unemployment Insurance Fund (UIF) levies 41.3 33.9 8.0

Skills development levies (SDL) 28.3 33.9 8.0

Workmen’s compensation levies 26.1 15.3 4.0

Regional Service Council levies (RSC) 53.0 40.0 43.0

In relation to indirect taxes, it is clear that medium the main reason why they outsource these
establishments are better positioned to manage functions. The reasons provided for outsourcing
the functions as they outsource considerably the functions are provided in Table 6.
fewer responsibilities than do small and micro Of the reasons cited for outsourcing tax
establishments. This can be illustrated by the fact functions, lack of time to handle these functions
that 50 per cent of micro establishments outsource internally is mentioned as a major factor by
their VAT functions compared with 33.9 per cent all three categories of SMMEs. Besides time,
of small establishments and only 8 per cent of lack of adequate tax skills to handle functions
medium establishments. internally is a further reason for outsourcing
It is interesting to note that the tax function tax functions.
that is outsourced by most SMMEs is Regional Due to the ever-changing nature of taxation,
Service Council levies. The government’s a great deal of time is required to keep up to
decision (Manuel, 2006) to repeal these levies date with changes and it is very difficult to find
and not to replace them with any other tax staff with appropriate tax skills. Table 6 confirms
should bring welcome relief to SMMEs. that the changing nature of taxation is one of
To better understand the reasons for the major challenges facing SMMEs. It could
outsourcing tax functions and responsibilities therefore be expected that establishments
by SMMEs, respondents were asked to identify would invest in training and updating their
SAJEMS NS 10 (2007) No 1 85

employees to ensure compliance with the latest SMMEs that perform tax functions internally
requirements and utilisation of new incentives. and that have invested in training for their
However, according to Figure 6, this is not employees in the past.
the case. Figure 6 indicates the percentage of

Table 6
Reasons for outsourcing tax functions

Reason SMME category

Micro Small Medium

(per cent) (per cent) (per cent)

Unskilled tax staff 32.6 28.8 12.0

Cheaper to outsource 23.9 18.6 4.0

Time factor 43.5 30.5 24.0

Figure 6
Investment in staff taxation training

It is clear from Figure 6 that very limited therefore useful in determining the value of tax
investment is made to support the tax training inputs/advice/information to SMMEs in coping
needs of employees and managers. with this burden through planning, survival and
income/expense management.
6.3 Value of tax inputs/advice on It is clear from the analysis presented in Table
effective management of the 8 that business services SMMEs hardly use tax
business inputs/advice/information for management and
planning purposes. This suggests that SMMEs
It is interesting to note that 35 per cent, 49 either do not have the required skills to utilise
per cent and 16 per cent of micro, small and tax inputs as a strategic management tool, or
medium establishments respectively believe that they do not see the potential advantages of
that the burden of complying with government an effective tax information system to support
tax regulations has increased substantially over business planning and strategising.
the past three years. The research model is
86 SAJEMS NS 10 (2007) No 1

Table 8
Value of tax inputs/advice/information

Statements SMME category

Micro Small Medium

(per cent) (per cent) (per cent)

Tax functions are only performed because they are compulsory 39.1 30.5 24.0

Inputs from tax staff/division/consultants are used for short- 10.9 1.7 20.0
term tactical business planning

Inputs from tax staff/division/consultants are used for long-term 10.9 18.6 28.0
strategic planning

Tax knowledge support effective management of income/ 17.4 8.5 12.0

expenses

Information provided by tax advisors is important for the 26.1 20.3 28.0
survival of the establishment

The most logical reasons for the low level of factor to why taxation is not seen as an input in
utilisation of tax inputs/information could be that business decisions.
tax functions are viewed as compulsory activities
or that the tax functions are handled by outside 6.4 Tax measure preferences
consultants whose mandate probably does not
During the last couple of years, the National
included the supply of tax related information
Treasury and SARS have introduced a number
but merely dealing with tax responsibilities on
of initiatives to support the SMME sector.
behalf of SMMEs.
These invitatives include a reduction in the
Another factor that could determine whether
number of VAT returns that need to be
taxation contributes to the management of
submitted by small business corporations
a business could be the person/department
and the provision of an accounting software
responsible for managing the tax functions.
package. In this study respondents were asked
Respondents who perform tax functions internally
to indicate which of a range of possible options
were asked to indicate whether the tax functions
to reduce tax compliance burdens they would
are the responsibility of top management of
prefer. A preference index was compiled to
the establishment or a financial/accounting
assess the preferences for the various tax
department. Only 27 per cent of micro, 21 per cent
measures presented to the SMMEs. This index
of small and 28 per cent of medium establishment
was compiled by allotting multiplying values to
indicate that top management is responsible for
each of the rating options: not preferred = 0;
tax functions. This could thus be a contributing
preferred = 50; and highly preferred = 100.

Table 9
Preference index for tax measures by SMME category

Tax measures Micro Small Medium

(Index) (Index) (Index)

Higher VAT thresholds 55 36 22

Filing returns for VAT less often 61 43 28

Filing returns for employees’ tax less often 58 36 24

SAJEMS NS 10 (2007) No 1 87

Special simplified tax regime for SMMEs 59 66 57

Reduced penalties/interest charges for SMMEs 75 81 82

SARS ‘help desk’ to provide information/assistance 76 79 80

Reduced tax rates for SMMEs 65 78 66

It is interesting to note that the majority of an establishment exists, the more it shows
respondents did not select a reduction in the growth in its turnover and also in the number
rate of tax paid as their first choice. Both small of people it employs. Considering the objectives
and medium business services establishments of the accelerated and shared growth strategy,
selected a reduction in the penalties and special attention should be given to support
interest charged as their preferred option. The SMMEs in the early years of their existence.
reason for this selection can be found in the Generally, tax inputs are not considered as
number of administrative staff employed by the an important factor when making business
establishments. In Table 6, respondents indicated decisions. The survey indicates that the value of
that lack of time was the main reason for tax advice decreases as establishments grow from
deciding to outsource their tax responsibilities; micro to small businesses and then increases as
this being the case, they probably also find it they grow further to become medium-sized
difficult to complete the functions retained businesses. The reason for this could be that,
internally in a timely manner. The second at the start of a new business, the different tax
support measure selected was the establishment implications are important for that business, as
of a SARS helpline; in this regard, SARS must be non-compliance could be fatal. As the business
congratulated for recently establishing SMME grows, the initial tax problems have been dealt
support desks at their branches. However, based with and the management’s concern regarding
on the responses received from the survey, the the future of the business decreases. However,
existence of this support function is either not as the business becomes larger, taxation again
properly communicated to SMMEs or is not become important in attempts to increase the
complying with the requirements of SMMEs. business’s profits. It is suggested that improving
tax skills and knowledge among SMMEs will
7 lead to more effective management of taxation
Cconclusion functions, which may ultimately result in cost
savings and help to ensure the long-term survival
The government’s accelerated and shared of the establishments.
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