Saturday, August 31, 2013

Business takes a closer look at digital currency

United States authorities increase scrutiny of the digital currency.
Representatives of Bitcoin's largest lobby group met federal law enforcement and financial agencies this week as United States authorities increased their scrutiny of the controversial digital currency.
Patrick Murck, general counsel for the Bitcoin Foundation, confirmed the group was meeting the Federal Reserve, the FBI, the treasury department, tax officials and members of the secret service.
Unlike traditional currencies, Bitcoin is not backed by a central government — it is created by a computer program.
It can be traded or used to buy goods and services. Authorities have expressed concerns about potential money-laundering abuses and its use in funding illegal activities including drug purchases.

Murck said the agenda of the Washington meeting was to “help regulators, policymakers and law enforcement officials better understand the Bitcoin protocol and ­distributed finance so they can make better decisions and develop new methodologies for identifying and interceding in illicit activity.

“Bitcoin and distributed finance is here to stay and our preferred path forward is a co-operative one, where we all can help ease each other's transition into an inclusive and distributed global financial system."

The meeting comes amid signs of a crackdown on Bitcoin. Earlier this month, the US senate committee on homeland security wrote to Janet Napolitano, the secretary of homeland security, to ask for details of any “plans or strategies regarding virtual currencies and information regarding any ongoing ­initiatives you have engaged in regarding ­virtual currencies and the name of the person most knowledgeable about any such plans, strategies or initiatives".

Also this month, New York's department of financial services sent subpoenas to 22 companies involved with Bitcoin seeking information on their business practices.

The Bitcoin Foundation clashed with California's regulators in July when the state's regulators accused the foundation of being engaged in money transmission without proper authorisation — a charge vigorously denied by the Bitcoin Foundation.

Murck said he hoped the federal meetings would clear up misunderstandings. “We view this as the beginning of a conversation about the appropriate role of government and law enforcement in this emerging space. Our hope is that this is the beginning of an open dialogue between good-faith stakeholders to find common ground and develop public-private partnerships.

“It is refreshing to see US regulators at the federal level take a responsible approach to working with the industry to understand these issues.

“Contrast that with what we are seeing at the state level: regulators seem more interested in rushing to conclusions and tripping over themselves to be first movers, without regard to the unintended consequences for the industry and US policy at the national level." — © Guardian News & Media 2013

Fuel giant executive’s resignation sparks speculation

An analyst says the surprising resignation by Sasol's chief financial officer is "very unusual" and has unsettled some in the market.
Sasol’s chief financial officer, Christine Ramon, has resigned.
The sudden resignation of Sasol’s chief financial officer, Christine Ramon, just two weeks before the release of what appears to be a good set of company results, has unsettled some in the market.

One analyst said it was “very unusual for someone this senior to leave without some prior indication in the market” and at the start of a capital investment programme, including a $21-billion investment in two gas-to-liquids plants in the United States.

Ramon’s resignation follows her sales of R33-million of her shares on May 14. The mystery is unlikely to be solved, however, until September 9, when Sasol’s annual results to June 2013 are presented.

Sasol spokes­person Jacqui O’Sullivan said the company was in a closed period and could not comment.
“Sasol is required legally, as soon as a decision of this nature has been made, to make it public, but no further comments can be made during the closed period,” O’Sullivan said. “Ramon will be presenting the financial results on September 9.”

David Shapiro of Sasfin did not see anything “sinister” in Ramon’s resignation. He said in a market review on radio this week that there is a new chief executive and managing director at Sasol and this had, ­perhaps, prompted the change.

But the market was taken unawares by the announcement on Monday that the petrochemical giant’s second-most-senior executive was leaving. Concerns were raised about a possible gap in management as a result of her departure.

Paul Victor, executive: group finance, will take up the position of acting chief financial officer on September 10.

Ramon joined Sasol in 2006, after resigning as chief executive of Johnnic Holdings, holding the position of director of various businesses within Sasol before taking up her role of chief financial officer in 2009.

In a JSE statement, Chief executive David Constable credited Ramon with a number of “landmark” achievements at the company, including the Sasol Inzalo Black Economic Empowerment deal in 2008, the company’s Canadian gas acquisitions in 2010/2011 and the 2012 $1-billion bond issue.

On August 1, Sasol said it expected its earnings to rise by between 20% and 30% for the previous financial year, owing to Sasol Synfuel’s improved production and favourable exchange-rate conditions.

The UK’s good news is bad

Despite the positive spin about growth, what can happen will overshadow Japan’s lost decade.
Precarious position: The United Kingdom’s economic recovery is described as feeble. (Luke MacGregor/Reuters)
If all else fails, they say, you can always lower your standards. This is what the United Kingdom has become used to doing in relation to its economy.

The UK’s economic performance since the start of the coalition government in May 2010 has been so poor that last Thursday's announcement of 0.6% growth in the second quarter of 2013 was greeted with a collective sigh of relief.

Having declared the British economy to be “on the mend” on the strength of this, the chancellor of the exchequer, George Osborne, is said to have regained his swagger.

Even the opposition grudgingly acknowledged that the latest figures were good enough news, although it was quick to add that the benefits of the recovery have been almost exclusively ­concentrated at the top.
But even the opposition’s interpretation may be too charitable. Including the last quarter, the UK economy has grown by just 2.1% during the 12 quarters since the current government came to power.

This compares very poorly with the 2% growth that the economy had managed in just four quarters between the third quarter of 2009 and the second quarter of 2010. The coalition blames this poor performance on the eurozone crisis.

It gets worse
But this argument is not very persuasive when output has more than recovered to pre-crisis level in many eurozone countries, including France and Germany, whereas UK output is still 3.3% less than what it was at the beginning of 2008.

It gets worse. During the past five years, the UK’s population has grown by 3%. This means that, on a per capita basis, the country's income is 6.3%, not just 3.3%, less today than it was five years ago.

This performance is far worse than what Japan managed during its infamous “lost decade” of the 1990s. At the end of that period, Japan had a per-capita income 10% higher than at the start.

If the UK is to match this performance, it will have to grow at the rate of 3.9% every year for the next five years (or 3.3% in per capita terms, assuming that the past five years’ population growth rate of 0.6% a year continues). Even the most optimistic cheerleaders for the coalition government are not talking such numbers.
Thus seen, describing the UK economy as being “on the mend” is a near-Orwellian redefinition of economic recovery. The fact that most people accept that description, even if with reservations about the uneven distribution of its benefits, shows how low the standard of performance we expect of the UK economy has become.
Recovery process my be derailed
But even applying this low standard, it is not clear whether the UK can expect a sustained recovery. There are at least two factors that can derail the recovery process, especially given that it is so feeble.
The first is the likely evolution of the global economy. The eurozone may be dragging itself out of a recession but things can turn for the worse at any moment.
Especially given the severity of austerity in countries such as Greece, Spain and Portugal, the policy’s continuation may result in another bout of political unrest, negatively affecting the economy.
Thanks to its avoidance of the worst form of austerity policy, the United States economy has recovered from the 2008 crisis more strongly than the European countries.
But, with another federal debt ceiling negotiation looming later in the year, it is possible that the US recovery will be set back by another round of budget cuts.

The Chinese economy has slowed down visibly. And the Chinese government seems determined to keep it that way for a while. Concerned about financial stability, it has clamped down on credit expansion.

Ban on government spending
Worried about seething public anger about government corruption and extravagance, it has imposed a ban on “wasteful” government spending (lavish buildings, banquets and foreign trips).

These are all good policies in the long run but they will dampen Chinese demand in the immediate future.
The other two biggest “emerging” economies, Brazil (second largest) and India (third), have both seriously slowed down in the past few years.

India’s growth rate fell from 10.5% in 2010 to 6.3% in 2011 and then to 3.2% in 2012. The equivalent figures for Brazil were 7.5%, 2.7% and 0.9%. Both these economies suffer from high inequality and social tensions, as shown by the recent protests in Brazil and the resurgence of Maoist guerillas called the Naxalites in the eastern part of India.

Therefore there is always a possibility that political unrest may dampen these economies even further.
These global factors are beyond the UK’s control but there is another factor at least partially within its control that may derail the recovery. It is the asset bubbles that have developed in the stock market and the property market, fuelled by cheap credit (sound familiar?).

Level of share prices unjustifiable
Share prices have reached levels that simply cannot be justified by the state of the economy. In May 2013, the FTSE 100 share price index surpassed the pre-crisis peak of June 2007, although it has come down a bit since then.

Given that the pre-crisis peak was supported by a buoyant (albeit unsustainable) economy, current share prices, which have no such support, can only be described as an even bigger asset bubble.

Although the rest of the country is still experiencing a stagnant housing market, property markets in London and the southeast are beginning to look inflated, given the state of the economy. And the government is stoking this property bubble with the Help to Buy scheme.

These asset bubbles have provided important sources of demand in the UK economy in the past few years. But the trouble is that they are shaky even for asset bubbles, for they are only sustained by historically low interest rates and the massive indirect subsidies given to banks through the so-called quantitative easing scheme.

The fragile nature of these bubbles is revealed by the nervousness with which financial market participants react to pronouncements by central bankers.

They know that the current price levels are viable only with quantitative easing, so they are readying themselves to jump as soon as there is a sign that it may come to an end. When the asset bubbles deflate, there is likely to be a serious fall in demand that will derail the recovery.

In the past few years, the UK should have found a way to stage a recovery without having to rely on state-sponsored asset bubbles. As it hasn’t even tried, it is facing the prospect of having a “lost decade” that is even more “lost” than the original one in Japan. — © Guardian News & Media 2013
Ha-Joon Chang teaches economics at Cambridge University. He is the author of 23 Things They Don’t Tell You about Capitalism

The switch from punch to mojitos

The US exit from quantitative easing will not be a sober affair, especially for developing economies.
The jury is out on how the US’s quantitative easing policy will affect other currencies. (Issei Kato/Reuters)
The exit from quantitative easing will be gentle, the United States Federal Reserve keeps saying.
The pace of reduction in asset purchases from the current rate of $85-billion a month will be gradual. It will depend on economic conditions. Nothing is predetermined.

Yet the yield on 10-year treasuries has surged from 1.7% at the start of May to 2.8%, helping to stoke a storm in developing economies that is starting to look very dangerous.

Hot money is flowing out of Asia and Latin America, pushing up effective interest rates in economies where rates of growth had started to slow anyway.

The Indonesian rupiah has fallen 11% against the US dollar in the past three months. The Indian rupee is off 13% in the same period.

Brazil, which two years ago was grumbling about global “currency wars" and the difficulties presented by an appreciating real, is now confronting the opposite problem: the real has fallen 16% against the dollar in three months. Much more of this, and we're looking at a proper crisis.

Currency interventions
There are two main ways the tale could develop from here. A cheery plot line would see some of the currency interventions, such as Brazil's, succeed in providing a brake.

Investors might reflect that a gentle adjustment would deliver some long-term global benefits.
As Singapore's finance minister argued, it's in nobody's interests that ultra-low interest rates continue indefinitely if they just reinforce financial imbalances.

It's the rate of adjustment that matters and — in theory at least — most Asian countries are better equipped than in 1997 and 1998 to fight back. Back then, their foreign reserves were tiny. By and large, the reverse is true this time.

The Fed could also lend a hand by emphasising — again — its flexibility. As Nick Parsons, strategist at National Australia Bank, puts it, the Fed may be withdrawing the punch bowl but it will be serving mojitos: it is conceivable that US interest rates will stay at 0.25% for several years.

The alternative — and gloomy — script would involve the crisis starting to feed on itself.

A pile of foreign reserves is a handy weapon in a currency crisis but it's a weapon that, once deployed, has to be seen to work. India is top of the worry list.

Not much effect
Capital controls and market interventions have had little effect so far. They have merely encouraged alarm among foreign investors who are required to fund the yawning budget deficit.

Meanwhile the worry — not just in India — is that big companies have borrowed too heavily in dollars, a recipe for pain.

And what would follow a serious crisis in India, such as a call for assistance from the International Monetary Fund?

In the 1997-1998 crisis there was a domino effect as Thailand, Malaysia, South Korea and Indonesia were sucked in.

What we know about today's global economy is that it's even more interconnected. Which way will the tale go?

A muddling through is probably still the safer bet on the grounds that the economies of the US and parts of Europe appear to be recovering
But a confident forecast? No. Quantitative easing was a grand monetary experiment. We just don't know how withdrawal will play out. — © Guardian News & Media 2013

The X-million-dollar question: How rich is Mamphela?

It appears Mamphela Ramphele’s quest for transparency has been clouded by intrigue.
Tongues wagged this week following the public claim of Mamphela Ramphele, the founder-leader of political party Agang, that she is worth R55-million — an amount contradicted by Forbes magazine, which put her wealth in 2011 at more than $50-million.

But, while the publication has defended its calculations and Agang’s spokesperson has said he cannot explain the difference, little has been made of the fact that the Forbes article made a vague assertion rather than providing a specific breakdown, or that in 2009 the Sunday Times Rich List reported a completely different figure, of R93-million.

Ramphele disclosed last Friday that her personal wealth amounted to R55 436 063 and challenged President Jacob Zuma to disclose his assets.

The amount was modest compared with that of fellow businessmen-turned-politician Tokyo Sexwale, who disclosed in 2009 that his wealth was R2-billion, and Cyril Ramaphosa, whose net worth has been estimated at more than R6-billion.

In the public interest that was generated after Ramphele’s disclosure, a two-year-old Forbes article surfaced asserting that the former University of Cape Town vice-chancellor and managing director of the World Bank was worth roughly 10 times the amount she had claimed.

The 2011 article listed Ramphele as one of nine women on the continent worth more than $50-million. The article, titled “Africa’s richest women”, made no mention of how her wealth was calculated or where the author had sourced the information.

Forbes Africa editor Chris Bishop has defended the figure. “It’s done on shareholding, it’s done on equity, it’s done on debt, it’s done on cash and it’s also done on possession,” Eyewitness News reported him as saying.

However, circumstances may have altered her current financial position, said Bishop. “This assessment was made more than two years ago; things may have changed since then,” he said.
If the figure was incorrect, Ramphele had two years to raise it, said Bishop. “She never contacted us to dispute [it].”

Enter a third party: South African research organisation Who Owns Whom. Based on information provided by the company to the Sunday Times in 2009, Ramphele was featured on the publication’s Rich List with the claim that she was worth R93-million.

Unlike Forbes, the company provided the Mail & Guardian with a detailed explanation of the calculation and copies of the backup documents.

“The figure of R93-million published in 2009 was calculated based on Dr Ramphele’s holdings of Mpilo Investments through Circle Capital Ventures [an investment company founded by Ramphele] through the Ramphele Family Trust, as disclosed in the 2008 and 2009 [Mediclinic] Annual Reports,” said Carla Mould, chief operations officer for Who Owns Whom.

“In 2010 and beyond, although Mpilo continued its stake in Mediclinic, there was no note disclosing an indirect holding in Mpilo by Dr Ramphele, and also it was noted in 2010 that she had resigned as chairperson and director of Circle Capital. We were unable to establish whether these shares were disposed of, but we opted to err on the side of caution and exclude these from our list.”

At the time of going to press, Agang had not responded to the M&G’s request for confirmation that the 2009 valuation of R93-million was correct. If it was, what has happened to the other R38-million over the past four years? Ramphele has yet to clarify.

It appears Ramphele’s quest for transparency has been clouded by intrigue.
The issue has become one of lost millions: but is it a R38-million question or a R445-million one?

Research shows franchise growth

More stores opened than closed, mostly by new entrepreneurs.
Fast food and resturants make up the largest component of franchises in South Africa. (Jeff Attaway)
Business owners may be taking strain amid weaker economic growth, but a new survey shows that the franchising sector in South Africa remains relatively strong — generating R302-billion for the economy last year and employing more than 300 000 people.

The survey, conducted by Research IQ for the Franchise Association of South Africa (Fasa) and released in August, showed that for every one franchised unit that closed last year, another three opened their doors.
The survey also found that almost half of all franchisors have been in operation for more than 12 years.

Another strong indication of the sector’s growth is that it added about 3 700 new franchised units in the last financial year, bringing the total number of franchised stores in South Africa to more than 30 000. Most of these are in Gauteng.

The province has nearly three times as many franchised units as the Western Cape and four times as many as KwaZulu-Natal.

The number of local franchises grew by 21% between 2010 and 2012 to 668 franchises, and 90% of them are developed locally.

Many franchisors have also expanded throughout Africa and to Australia, Europe, the Middle East and the US.

Fast food outlets
Although franchising is active in about 17 business categories in South Africa (compared with more than 70 in the US), the survey found that the sector, once dominated almost exclusively by fast foods and restaurants, is becoming more diverse.

Fast food and restaurants still make up the highest number of franchised units in South Africa – accounting for about quarter or 22% of stores – but a range of other sectors are growing fast.

Retail accounts for 20%; business-to-business services for 10%; building, office and home services for 9%; automotive products and services for 8%; and childcare, education and training for 8%.

Derek Smith, chairman of Fasa, said the growth of franchising in South Africa has been “phenomenal” and “continues to play a leading role in fostering entrepreneurship in small business development and in job creation”.

Researchers found that the 217 franchisors that the survey sampled, had opened 1 205 stores under new franchisees that signed up in the last financial year — compared with just 341 units closed down during this period — a net gain of 884 stores.

This translates to three new stores opened for every one store that franchisors closed. Fast food outlets and restaurants continue to make up the highest number of stores opened. They account for 356 (30%) of new stores opened followed by retailing with 254 new stores.

In contrast just 23% of stores that closed were fast-food outlets, compared with 13% in the childcare, education and training sector, and 10% each in the business-to-business services and the real-estate sector.

Those in the franchising sector often argue that the sector could prove a key driver in growing the small business sector and creating jobs and this latest survey may add weight to their argument.
Just under half (46%) of franchisors sampled reported that they had been in business for more than 12 years, with 75% having been in business for more than six years.

This contrasts with the high failure rate of small businesses, with Minister of Trade and Industry Rob Davies revealing in May that five out of seven small businesses in South Africa close their doors within a year of opening.

Franchisors are also optimistic about future growth, with 88% saying they believed they would see growth. Only 4% predicted a decline and a further 8% were unsure.

When asked what the main challenges were to running a franchise, most franchisors cited finding the right franchisee (20%) with the right skills (20%) and staffing (19%) as their biggest concerns.

The 2012 survey puts the sector’s contribution at 9.7% of gross domestic product (GDP), significantly lower than the 11.8% contribution that the franchise service provider Franchize Directions’ survey reported for 2009/10.

Research IQ’s Margaret Constantarias believes that the difference in GDP contribution by the sector between the 2012 survey and Franchize Direction’s survey might be linked to the different methodologies the two studies used, adding that Statistics SA does not collect specific figures on the franchising sector.
The difference could also be down to the 2009 recession, which may have temporarily raised the sector’s contribution because it remained one of the few well performing sectors during that year.

However, the 2012 survey does point out that franchising’s total share in the finance, real estate and business services; in the wholesale, retail and motor trade; and in catering and accommodation industry sectors (at 28% of R1.06-trillion) remains significantly lower than elsewhere in the world, meaning there is still significant potential for growth in franchising.

Data from the 2010 Franchize Directions survey shows that the percentage of black franchisees has fallen from 33% of all franchisees in 2010 to just 20% of all franchisees in 2012.

These figures were not contained in a Fasa press release on the survey, but Constantarias again pointed out that the difference between 2010 and 2012 figures might be attributed to different sampling methods used.
Commenting on the data about black franchisees making up only a fifth of all franchisees, Fasa executive director Vera Valasis said the central challenge remained access to finance for people who wanted to buy franchised units.

Mojalefa Mohoto, the department of trade and industry’s chief director for small business development, agreed. He pointed out that funding from banks and development finance institutions played a crucial part in increasing the number of black franchisees.

Mohoto said the department was working on a micro-franchising model with six business owners in the Western Cape to develop the concept.

This could include franchising tour operators or solar-water heater installers, for example, and would make franchised stores more affordable as the cost for such units would be under R500 000.

Two investments by the Development Bank of South Africa’s Jobs Fund could help more black entrants to enter the franchising sector.

One of these is a R110-million investment by the fund into Business Partners SA Franchise Warehouse Fund, which will be disbursed over three years. Another is a R17-million commitment to the Hot Dog Café to help new franchisees buy franchised units.

SA Franchise Warehouse Fund co-director Dewald Theron said his fund, which is administered by Business Partners, will allow franchisees to commit 20% of the costs to buy a franchise rather than the 50% one usually has to contribute to buy a franchise.

The fund is aimed at assisting franchisees who qualify for new businesses, but whose own cash or collateral contribution does not meet commercial funding criteria.

Funding would only be available for franchise business systems that have been accredited by SA Franchise Warehouse in terms of the requirements of the fund and Theron said the fund is currently in the process of accrediting franchises.

To qualify for funding, franchisees would have to attend a five-day business seminar and also take a test to ensure their suitability for funding.

The fund is currently accrediting franchises and Theron said he expected the first funding to be available to franchisees by the end of this year.

This feature has been made possible by advertisers. Contents and photographs were sourced independently by the Mail & Guardian’s supplements editorial team.

Bitter end of tax restrictions for micro businesses

Companies are not taking advantage of tax breaks because criteria are too onerous, say analysts.
It is hoped that Minister of Finance Pravin Gordhan’s tax review committee panel, which began work in July, will look into why so few small businesses benefit from the tax breaks on offer to them. (David Harrison, M&G)
South Africa might have some of the most generous tax breaks on offer for small and micro businesses, but they remain grossly unused.

Figures from the South African Revenue Service (Sars) show that in the 2012 tax year just 86 354 enterprises were taxed as “small business corporations” (SBCs) and that just 8 493 micro firms registered for “turnover tax for micro firms”. Both options mean smaller enterprises are taxed at a lower rate than the country’s 28% corporate income tax rate.

Although Sars says the figures are subject to a final reconciliation, they are likely to remain worryingly low.
No one seems to know why the uptake has been so poor and Sars isn’t saying — but some speculate that it could be due to poor marketing of the tax breaks and to the onerous criteria one needs to meet to qualify for some of the tax breaks.

Easing the burden
It is hoped that the Minister of Finance Pravin Gordhan’s tax review committee panel, which began work in July, will look into why so few small businesses benefit from these tax breaks.

The committee’s head, Judge Dennis Davis, said in July that he expects the review to take up to two years, but that a report on small business taxes could be out by the end of the year.

In recent years Sars has introduced a number of tax breaks and measures to ease both the tax and compliance burdens for small firms.

These include the introduction of SBC tax in 2001, where businesses with an annual turnover of up to R14-million (R20-million from the 2013/14 tax year) pay less tax, and a turnover tax in 2009, in which firms with just basic accounting records and a turnover of up to R1-million can pay less tax.
In the same year Sars introduced a venture capital tax incentive with tax rebates for investors in small businesses.
A research and development (R&D) tax incentive that came into effect in 2006 also benefits many small firms.

Sars has also carried out a number of other initiatives to ease the tax burden for small firms — such as a tax amnesty in 2006, lifting the turnover threshold for VAT to R1-million and introducing a special concession to allow smaller firms to submit VAT three times a year, instead of bi-monthly (though Sars says only 1 001 firms used the special concession in 2012).

Sars can afford to grant generous tax breaks to small firms (worth over R5.1-billion in the SBC tax alone between 2008 and 2011 tax years) because the bulk of corporate taxes come from large firms. Just 459 companies contributed 57.6% of the company income tax assessed in 2010, according to 2012 tax statistics.
Yet with the tax breaks remaining so undersubscribed, the cost to the fiscus is even less. Take the venture capital tax incentive, contained in section 12J of the Income Tax Act. Four years after it was introduced, only one small business, an IT firm, has benefited from a venture capital investment.

This is despite Sars having overhauled the incentive last year, after a campaign by industry members against the onerous criteria needed to qualify for the incentive. However not all the onerous criteria were removed.
The incentive aims to boost venture capital investments in small businesses by allowing individuals to make upfront tax deductions if they invest in venture capital companies, which in turn invest in certain kinds of small enterprises.

South Africa Venture Capital Association (Savca) chairperson Erika van der Merwe said that the small uptake was due to the incentive not having been widely marketed by Sars and it not being perceived as “sufficiently attractive” by the venture capital market and high-net-worth individuals.

Jeff Miller, director of Grovest, said the provision in the 12J regulations (in which a deduction is recouped if an individual disposes of their shares in a venture capital company) might have put some investors off.
It means that when investors chose to sell shares, Sars would — in one year — recoup the full amount of an investor’s deduction and apply capital gains tax to any profits made from selling of the shares.
Miller pointed out that such a provision does not exist for the UK’s venture capital incentive. Three years ago the recoupment rule was cited by one venture capitalist as the key reason why his fund was unable to raise sufficient money from investors using the incentive.

Olivewood Resources chief executive James Allan, whose fund remains in limbo without having made a single investment since registering in 2009, said he was given no explanation by Sars of why the rule had not been changed.
Investors might also be put off by the high penalties. Sars can issue a fine equal to 125% of the amount contributed by an investor if Sars opts to later withdraw the status of any investment firm as a venture capital company.

Venture capital companies also have to be vetted by Sars first and licensed with the Financial Services Board (FSB) before they can begin operating. Miller said that Grovest’s application to the FSB took nearly a year.
The incentive should be spurring more angel investors to investing in small companies, but Brett Commaille, who runs angel investment network Angel Hub, said unlike in the UK, investors are not given the choice to place investment directly in firms to benefit from tax rebates, but have to do so via a venture capital company.
Commaille points to McKinsey & Company data on venture capital incentives, where 74% of UK angel investors reported that the tax incentives played a highly significant role in their decision to invest in a small business.

Then there’s the SBC tax. Businesses taxed under this dispensation enjoy a potential tax saving of about R60 000 a year and can also write off equipment against taxable income in the year in which it was bought.
Under the current R14-million threshold the number of companies that elected to be assessed as SBCs during the 2009, 2010 and 2011 years of assessment came to only between 107 000 and  110 000, according to Sars. This is despite there being over two million companies registered with Sars by March 2012.

Because firms must select to be taxed as SBC, and Sars then checks that they qualify, in 2011 only about 90 000 businesses got the tax break.

Piet Nel, a project director at the South African Institute of Chartered Accountants (Saica), believes onerous rules that disqualify certain types of businesses and business owners from benefiting from the tax are partly responsible for the low uptake of the SBC tax regime.

One interpretation note currently on the Sars website deals extensively with the SBC incentive and the agency’s spokesman, Adrian Lackay, added that this is being updated.

To qualify for the tax, business owners can’t have shares in more than one business, can’t derive more than 20% of their revenue from investments and the rendering of personal service and can’t be a personal service provider unless they employ three or more people.

Nel wants Sars to do away with the rule that personal service providers can only qualify if they have at least three employees. He said many personal service providers start off with one person before expanding and so the rule discounts many start-ups in the services sector.

Over the years a number of business owners have taken Sars to court after being discounted from qualifying for SBC tax and Nel said he had heard of at least four cases in the last month where business owners had disputes with Sars over whether they qualified for SBC.

Finally, there’s turnover tax on micro businesses. Only 10 000 businesses have registered for turnover tax.
It is not clear how many of these are informal businesses that have been introduced into the tax net, or whether they are businesses that would have paid ordinary tax anyway.

Turnover tax does have one serious drawback: businesses pay tax regardless of whether they make a profit or not, whereas under ordinary income tax they would at least be guaranteed a zero tax rate in the event of a loss. Furthermore, once signed up for turnover tax a business must stay in the system for at least three years.
Brazil’s Micro Entrepreneur Law, introduced in 2009 to bring mainly street traders into the tax net, offers traders the chance of getting onto social welfare if they sign up.

Over 2.7-million Brazilians have to date signed up to the regime, according to Brazil’s Ipea statistics bureau, with 55% reporting higher sales after formalisation according to the country’s small business support agency Sebrae.

No benefit like that exists for turnover tax, so it could be likely that informal sector operators in South Africa steer clear of the tax.

But what kind of tax system will best benefit small businesses and the fiscus? The US uses a graduated tax rate, applicable to any size firm, according to a company’s sales. The tax rate ranges between 15% and 47%, depending on a firm’s sales and the state it is registered in.

Such a system (a similar one also in use in Korea), creates more certainty, simply because there are no barriers or boxes that need to be ticked to enter the system, allowing more companies to qualify. The trade-off, however, is the ability to break larger companies into smaller ones and therefore qualify for lower taxes.

It is also probably why Sars —like its counterpart tax agencies in Russia, Malaysia and Brazil — favour separate tax dispensations for smaller firms; it makes it easier to assess whether a company really is a small business or not.

Sharon Smulders, head of tax technical, policy and research at the South African Institute of Tax Practitioners, tends towards the US’s system, pointing out that one needs to allow business owners easy access into the tax system and then “rather pick up any tax avoidance or restructuring through regular audits”.

South Africa’s SBC tax rate for small firms — between 0% and 28% — makes it difficult to compare the country’s taxes with those of other countries. However, the 2013/14 turnover threshold for SBC of R20-million is higher than that of Russia (firms below R18.2-million are taxed at 15%), Brazil (firms below R15.2-million are taxed at between 4% and 17%), Malaysia (firms below R7.6-million are taxed at 20%) and the UK (firms below R4.7-million are taxed at 20%).

South Africa may have generous tax breaks, but for business owners to benefit, Sars could do with lowering the amount of onerous criteria needed to qualify for them.

Readers can send suggestions on how to improve small business taxes to the tax review committee at
This feature has been made possible by advertisers. Contents and photographs were sourced independently by the Mail & Guardian’s supplements editorial team.

Zuma's announcement of new SIU, NPA heads elicits mixed reactions

Political parties have expressed mixed feelings after the appointment of new SIU, NPA and public prosecution heads was announced by Jacob Zuma.
The appointments were announced by President Jacob Zuma. (Reuters)
The reaction from political parties and civil society was mixed on Friday following the appointments of a new national director of public prosecutions (NDPP), the new head of the Special Investigating Unit (SIU) and new director of public prosecutions in KwaZulu-Natal.

The appointments were announced by President Jacob Zuma earlier on Friday.
Mxolisi Nxasana is the country's new NDPP, with Vasantrai Soni named as the new head of the SIU.
Sophy Moipone Dinah Noko is the new director of public prosecutions in KwaZulu-Natal.

The Democratic Alliance (DA) was pleased the positions had been filled but had reservations over Noko's appointment.

"We are pleased that the president has honoured his undertaking to the Constitutional Court that he would appoint by end August," justice spokesperson Dene Smuts said in a statement.

Soni appointment
However, the DA was currently engaged in litigation emanating from Noko's decision to withdraw charges against provincial legislature speaker Peggy Nyonyeni and Tourism MEC Mike Mabuyakhulu.

"The temporary withdrawal of charges against businessmen Toshan Panday and Navin Madhoe in a different matter are also of some concern," she said.

Of Nxasana's appointment, Smuts said he was a leader within the independent legal profession and suggested Nxasana may wish to review the withdrawal of charges against Nyonyeni, Mabuyakhulu, Panday and Madhoe with Noko as their first order of business.

The appointment of Soni as head of the SIU was noted, and with the unit in need of leadership, the DA trusted that he would restore its focus.

The Law Society of South Africa (LSSA) welcomed the appointments at the SIU and NDPP, especially Nxasana's appointment.

"Nxasana brings with him relevant experience as a seasoned criminal law practitioner, and leadership experience," the LSSA said in a statement.

Nxasana, a former president of the KwaZulu-Natal Law Society, had also served on the Criminal Law Committee of the LSSA, co-chairpersons Kathleen Matolo-Dlepu and David Bekker said.

"Our prosecution services are at the heart of the criminal justice system and carry the expectations for justice of the victims of crime, sadly often serious, violent crime and organised crime, in our society."

They said the LSSA was confident Nxasana would bring the skill, conscientiousness, integrity and independence necessary for the head of the prosecution services to deal with matters fairly, efficiently and professionally.

"We offer the support of the attorneys' profession to our colleague," they said.

Flaw in the selection
The Inkhata Freedom Party was pleased with the appointments, stating Nxasana's was long overdue.
"We also welcome the appointment of the head of the SIU, Vasantrai Soni and the appointment of the director of public prosecutions in KwaZulu-Natal," justice spokesperson Velaphi Ndlovu said in a statement.
"We urge the new heads to remain unbiased and true to justice in every sense of the word when they take up their new appointments."

The Council for the Advancement of the South African Constitution (Casac) welcomed the appointments but questioned the manner in which Nxasana's appointment was made.

"The manner of the appointment [of Nxasana] reveals a flaw in the selection process leading to such a critical appointment," said executive secretary Lawson Naidoo in a statement.

Casac called for a more transparent process when key appointments are made so the public was aware of the character of the appointee. – Sapa

Wheeling in the dead to claim pension