Tuesday, 6 August 2013

So why wouldn’t we want to slash our tax liability and increase business?

In an uncertain environment then are some certainties on which South African businesses can base their strategies 

ANC Government and its transformation agenda will be around for a considerable  time;
Constant pressure to reduced permanent employees;
 Limitless pool of potential young talent.

How to use this to substantially reduce our tax liability and open the doors to more business?

Government aims to achieve industry transformation through the Broad- Based Black Economic Empowerment (B- BBEE) scorecard. Businesses relying on Government or State Owned Enterprises (SOE) are required to maintain their B-BBEE scorecard Contributor status Level: companies whose goods or services are purchased from companies engaged in Government or SOE work also need to have favourable B- BBEE scorecards.

The easiest area on the B- BBEE scorecard in which to achieve maximum points is that of training:  this is also where the potential to minimise both tax liability and permanent headcount lies.

A scheme known as Learnerships was introduced to address the gap between unemployed youth (who lack the skills and experience needed for employment) and business (whose growth is severely hampered by a lack of skilled and experienced people). A Learnership is a fixed term employment contract in which an employer agrees to give an individual training and experience over a defined period (usually a year, could be more).

Let’s consider a case study:

Our company employs 155 people whom we paid a total of R 9 300 000 last year. In that same period we achieved a pre-tax profit of R15 million. 

How can we use Learnerships to achieve maximum B-BBEE scorecard points AND minimise tax liability?

For the maximum B-BBEE scorecard points available in the training pillar we need to engage learners in accordance with the following profile:

Number of learners: 5% of the permanent headcount of 155 =  8 Learners

These must all be Black, 50% of them need to be women and 50% of those women need to be disabled.


8 learners, 4 of whom need to be women, 2 of whom need to be disabled.

Provided that the Learnership expenditure on the above  group meets or exceeds 3% of our payroll, we achieve the maximum 20 B-BBEE scorecard points available in the training pillar.

3% of R 9 300 000 = R 279 000

In my experience this will be more if there are 8 learners.
Learnership expenditure will be made up of training fees and learner subsistence allowance. The annual figures below represent industry averages, could be slightly higher or lower:

Course fees per learner                                         R 30 000
Learner subsistence allowance                            R 24 000
                                                                                   R 54 000

R 54 000 X 8 learners =  R 432 000

Don’t panic! most of this money comes from external sources:

1.     For each learner, there is a R60 000 tax allowance, that is, we are allowed to reduce our pre-tax profit by R 60 000 per learner.
At a 28% corporate rate, this equates to cash       R   16 800
2.     Average SETA funding (cash)                        R     5 000
3.     Recruitment fee saved                                     R   10 000
                                                                                     R   31 800

R31 800 X 8 learners                                R  254 400

Net effective expenditure (R 432 000 – R254 000)  R 177 600

So, by effectively spending R 14 800 per month, we achieve maximum B- BBEE points and gain an extra 8 pairs of hands for 50% of the day. There is no legal commitment to employ anyone at the end of a Learnership but, since we’ve had a year or so to train and assess them, we may well do so.

So, why wouldn’t we want to use this opportunity?