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 Government infrastructure plans good for SMEs

 

 Business Partners expects to put more money into the hands of South Africa's entrepreneurial community in the year ahead than the previous two years, says Nazeem Martin, Managing Director of the country's leading entrepreneurship finance firm.

He bases his prediction not only on the slow but inevitable recovery of the economy from the 2008 crash, but also on the major infrastructure spend so forcefully outlined in the government’s Budget for 2012.

The government’s big building boost comes at exactly the right time, says Nazeem. It will blunt the effect of the world’s still anaemic economy on South Africa by boosting the sales for suppliers of raw materials and equipment and providing thousands of jobs, albeit temporary ones. Furthermore, by embarking on a massive infrastructure build in a downturn means South Africa will be avoiding the high prices charged by construction firms in boom times, and by the time the full recovery of the global economy comes, the new infrastructure will have done away with many of the bottlenecks that currently hold back South Africa’s growth potential.

On a macro-scale, therefore, the Budget is excellent for the economy and by extension good for the country’s small and medium businesses, says Nazeem. But in the coming months, Business Partners Limited’s management team will be making a careful study of the more immediate opportunities that could flow to small and medium businesses from the infrastructure programme. Nazeem says it is far from clear to what extent the government will stipulate local content and subcontracting in the execution of the big projects. There is always a danger that a project given to a large conglomerate will be carried out with imported material, equipment and even labour, with minimum benefit to the local economy.

Then there is the greatest risk to consider for small and medium businesses who do business with government – late payments can and do kill small businesses even if they’ve delivered excellent work. Business Partners Limited can add a lot of value as a small business’s financier by applying pressure on government departments to pay on time, but this helps little if the department is administratively dysfunctional.

Nazeem’s hope is that government, from municipalities to national departments, will contract in good project-management skills by giving the infrastructure projects to deserving large companies, while stipulating clear levels of local SME subcontracting and content.

Commenting on the other aspects of the 2012 Budget, Nazeem believes that more could have been done for the country’s small and medium enterprises. While attempts have been made to further reduce the burden of red tape on micro businesses, the thresholds are too low.

Nazeem was referring to new rules announced in the Budget that will allow certain businesses with a turnover of less than R1m to pay their taxes only twice a year, including employees tax, VAT and turnover tax. On the face of it, the allowance reduces the paperwork burden for micro businesses considerably, from as much as 18 payments a year to only two. But in practice the impact will be limited.

Firstly, in order to qualify for the reduced paperwork, the business has to be registered for turnover tax. Not all businesses may register for it, and even if they can, it is not always advisable. Secondly, because a R1m turnover is also the threshold for obligatory VAT registration, only a tiny minority of micro businesses pay VAT, so reducing the frequency of VAT payments won’t make much difference.

In short, any attempt to reduce red tape for small businesses is welcome, but more can be done, says Nazeem. He warns that too low thresholds can lead to a mindset among businesses that find themselves close to the cut-off points of trying to stay small.

The same goes for the increases in Capital Gains Tax (CGT) and the new dividend tax of 15% that replaces the 10% Secondary Tax on Companies. Business owners must take note of the new CGT exclusions when they want to sell their businesses after the age of 55, and the tweaks to the Small Business Corporation tax break are “not too shabby”, but Nazeem warned strongly against overreacting to the changes by spending energy on “managing their profits downwards” in order to avoid paying taxes. “We take a very straightforward approach: the companies that we invest in must keep good sets of books to assist them in making good business decisions, then they must pay the taxman every single cent that is due to him, not a cent more, not a cent less,” he says.

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