Mandy Myers

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Mandy Myers

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Ayanda Khuzwayo

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Cathi Eastment

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Nelisiwe Dlamini

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Radical economic transformation regarding tax changes?

COSATU issued a press release recently in relation to its “enormous expectations” for the 2017/18 budget.  As regards the tax proposals, how does Budget 2017 measure up?

Income tax and VAT increases should only be for high income earners

This expectation was largely met:

• No VAT increases have been proposed, even though the Davis Tax Committee recommends that VAT be increased over the longer term, and the South African VAT rate of 14% is substantially lower than the Organisation for Economic Co-Operation and Development (OECD) average, which as per the “Rates of Value-Added Tax (General Sales Tax)” table, updated July 2016, reflects an unweighted average rate of 19.1%.   
• From an income tax perspective, there is to be no increase in individual income tax rates for lower earners on a nominal basis, however, on an inflation adjusted basis, lower income earners will bear slightly higher income taxes.

Introduction of a separate tax category for the super-rich, including a “solidarity tax”

Budget 2017 responded to this need, with a new marginal income tax “bracket” of 45%, for individuals earning over R1.5 million per year. While no separate “solidarity tax” has been proposed, the objective of reducing the overall after-tax earnings of the top 10%, is addressed by this separate tax category.

The government must introduce investment tax credits to encourage local procurement of machinery and equipment

No specific investment tax credits for local procurement were proposed.

Increase in tax on financial transactions, including an increase on capital gains tax above a certain limit

Dividends tax is to set to increase from 15% to 20%, which will impact on shares held by South African individuals and trusts. Given the new marginal income tax “bracket” of 45%, the effective maximum rate for capital gains tax for individuals is set to increase from 16.4% to 18%.

In dealing with tax evasion the government should conduct lifestyle audits on public representatives and individuals in the wealthy bracket

No specific mention of this issue was made in the Budget Speech or Budget Review document. However, this is more of an enforcement aspect, which would fall within the domain of SARS, and not the Finance Minister. It remains to be seen whether this will be a key focus of SARS, going forward.

The government must consider introducing tax incentives for Small, Medium & Micro Enterprise businesses

Government has been adapting the venture capital company regime to encourage investment in small and medium-sized enterprises, and further amendments have been proposed in this respect.  

In addition, it has been proposed that there will be transitional measures and relief from administrative penalties for micro businesses growing into small and medium-sized enterprises, given that there are separate tax regimes for these business categories.

Patricia Williams and Neli Sibambo, Tax at Bowmans.

How to smartly approach investing in innovation

That innovation is important and necessary for survival goes without saying. While there is no universal solution for organisations looking to improve their ability to generate, develop, and disseminate new ideas, some strategies are superior to others.

The process of innovation should continuously introduce new value or benefits to your customer. If you’re not doing that, you can expect to be disrupted. Without investing in innovation, you will always be susceptible to competition. The right strategy requires time, funding and a process to create the innovation required for future growth.

Securing a competitive edge is one goal of innovation; the other is finding new markets as well, allowing a business to move both vertically and laterally across markets. In order to future-proof themselves, organisations need to objectively evaluate their strengths and weaknesses before embarking on a strategy of innovation. So instead of the tired old SWOT analysis, an evaluation of how well the business performs in three stages of innovation: Ideation, Creation and Diffusion. A business needs to understand its own internal dynamics first and ultimately where it wants to go.

An innovation value chain offers a comprehensive framework for doing just that. By breaking innovation down into the three phases of idea generation, conversion, and diffusion, the strategy encourages organisations to look at ways to improve their weaker areas first, either through collaboration, outsourcing or acquisition. Google’s approach is to manage the innovation process and budget allocation operating on the 70/20/10 model. 70 percent of projects are dedicated to core business, 20 percent of projects are related to core business, and 10 percent of projects are unrelated to core business. This staggered approach ensures they are able to keep the lights on while searching for the next breakthrough.

Crucially, businesses should look at innovation as a long-term process rather than a knee-jerk reaction to a changing environment. A helpful starting point is listening to customers and beginning the innovation process from there. Customer centricity is key, so talk to your customers, listen to their needs and views. Don’t create an exclusive innovation team that operates in isolation. If they are not collaborating with the rest of your organisation, it’s a major problem, innovation shouldn’t be the exclusive function of one team or executive, rather it should be inclusive, transparent and allow ideas to come from anyone. Don’t shoot down ideas without using some metric or model to validate the potential of the idea.

To be sure, finding the right balance for innovation to succeed is a challenging prospect for organisations. Looking for external help while ensuring the innovation process is funded and staffed appropriately. I think every organisation has the ability to be innovative. Partner with a company in a different industry and create an innovation exchange programme. Swap employees for a couple of days, let them become immersed in different world – their new perspectives and opinions may surprise you.

Pierre Aurel is the Strategic Project Manager at e4.

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