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This sub-section identifies and discusses the possible pitfalls within the SBC tax incentive regime, which could point to the gaps left and areas of concern that may need to be addressed. The sub-section is in line with the first research question as well as the first and second aims of the study. The pertinent problems of the tax incentives for SBCs may be as a result of the manner in which the tax incentives were designed or implemented. After a close inspection and a detailed look into the tax incentives for SBCs, the study has identified numerous possible pitfalls with the SBC tax incentives and these are discussed below.

4.2.3.1 The South African Income Tax Act does not define several terms and phrases used in the Small Business Corporation tax incentives

The Act does not provide definite definitions of some terms and phrases which are very crucial to the implementation of the tax incentives. The following terms and phrases are not defined in the Income Tax Act of South Africa, yet they are inherent to the SBC tax incentives: plant and machinery, ‘process of manufacture or similar processes, implements, utensils, and articles. SARS (2018d: 22 - 29) acknowledges the lack of definitions of the above terms and phrases in the Act and has provided guidelines on their respective meanings from either the ordinary English dictionaries or case law.

Without undermining case law, Slapper and Kelly (2009: 126) provided a long list of disadvantages of case law as a source of law and among them was ‘uncertainty’:

“This refers to the fact that the degree of certainty provided by the doctrine of stare decisis is undermined by the absolute number of

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cases that have been reported and can be cited as authorities. This uncertainty is increased by the ability of the judiciary to select which authority to follow through use of the mechanism of distinguishing cases on their facts.”

Slapper and Kelly (2009: 126)

The above is an indication that it is possible for case law to create an element of uncertainty. This means that any of the undefined terms may be easily misunderstood and a taxpayer may wrongly claim and deduct an allowance for which it does not qualify. Also, a taxpayer may not claim at all for an allowance for which it would indeed qualify. Uncertainty also has the potential of creating a situation where an opportunistic taxpayer may choose to take advantage of even the slightest loophole in a tax system (Nathan-MSI Group 2004: 3 - 9).

4.2.3.2 The incentive is not beneficial to SBCs with no taxable income

Normal tax is paid on taxable income; therefore if there is no taxable income (especially in the start-up years of the company), there is no tax to be paid. In this case, the tax incentive of a reduced tax rate for SBCs makes no difference and neither does it accord any tax benefit to the SBC. Even if accelerated capital allowances are claimed and the SBC still has a loss, no benefit is received.

In 2014, 47 per cent of the total active population of SBCs had no taxable income (DTC 2014: 17). This means that 47 per cent of the total population of SBCs that were included in SARS records for2014, did not benefit at all from the tax incentive. The government aims to provide support to small businesses through small business tax incentives. In as far as the government is concerned; a successful small business regime contributes immensely to the Gross Domestic Product as well as the creation of more employment opportunities.

The above statistic (in the previous paragraph) from the DTC means that nearly half of the total number of SBCs are not receiving this tax incentive support from the government and therefore, the objective of creating more jobs cannot be achieved.

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Indeed the smaller SBCs that may have no taxable income need more support from the government to ensure that they expand, but it seems that they may not get any support from the current SBC incentive regime.

4.2.3.3 Complications surrounding the definition of a SBC and the requirements to be met

Section 12E defines a SBC and the requirements to be met (refer to paragraph 2.2.2). The complexity of the definition of SBCs is mainly centred around the holder of shares requirement in Section 12E(4)(a) as also pointed out by the DTC (2014: 19). Section 12E(4)(a) prohibits any part of the share capital or members’ interest of a SBC from being held by a juristic person such as another company. It adds that contravention of the requirement would lead to disqualification of an entity from being a SBC for the year of assessment, even if it was for one day only that the requirement was not met. Indeed the holding, transfer, and ownership of shares involve a set of documentation or a certain set of records thereof. However, this is information that a taxpayer can decide to keep away from the tax authorities and choose not to declare it. The taxpayer’s intention in such a case would be to avoid disqualification or seeking to comply at all costs.

As identified by the FIAS (2015: 40) on the lack of simplicity of the South African tax legislation, a complex tax system undermines the benefits of the incentive and increases compliance costs. The IFC (2009: 4) noted that a system of tax that is transparent with set rules saves investors’ time negotiating with a government that approves them on a case by case basis. This kind of a system also reduces the opportunities for administrative corruption.

4.2.3.4 The high costs associated with compliance and administration of the incentive

High costs are incurred by both the SBC (to comply) and the tax authorities (for the successful administration of tax incentives related to SBCs). The SBC has to hire professional advisors to prepare the books of accounts and deal with any other

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technical matters relating to compliance. Chamberlain and Smith (2006: 43) noted that 25 per cent of bookkeeping time is spent on compliance, whereas DTC (2014: 18) identified that the SBC tax incentive had cost SARS R1.3 billion per annum to administer. Further to this, a considerable amount of the benefits of the incentive may be legally claimed by taxpayers who were not the specific target of the incentive.