BUDGETS: ARE THEY WORTH THE EFFORT?

A3_bA lot of small businesses are managed by the owner, especially in the early years of a business’s existence. As the owner is intimately involved in the day to day operations of the business, it is easy to keep control of expenses. As a business grows, however, it may become necessary to appoint employees to assist the owner in running the business.

It is inevitable that a time will come where the owner will have to delegate certain financial powers to employees and trust them to spend the business’s money wisely. This is where a budget and the budgeting process can be of immense value.

To put it simply, a budget is a financial plan for a certain period in the future based on a combination of the current financial position and a projection of expected income and expenses for said period. Combining a business’s income, expenses and financial goals into one overall plan will give a clear picture of where the business is at in financial terms and how to proceed to reach those goals.

Drawing up a budget requires that the owner and/or management think about goals for the business and how to finance them. If there is more than one goal, the goals will have to be prioritised to determine which goal(s) the focus will be on for the period of the budget.A thorough budget should ensure that the business have sufficient capital available when needed for large expenditure items like replacing expensive equipment or taking on new business ventures. Including the financial implications of future growth and expansion in the budget will ensure that the business has capital on hand to allow it to make quick decisions about opportunities for expanding operations.

Budgeting can help you to determine in advance when you will need money and how much, thus preventing crises due to a shortage of funds. It is especially important for businesses with seasonal business cycles to have a safety net for the months when business will be slow.

A budget acts as a guide to help employees understand what the owner’s priorities for the business are. Typically a budget will set targets for expenses and income for each department or cost centre. It is, however, important that the targets are realistic and achievable, and that each manager knows what the owner’s expectations are for the period of the budget.

During the process of drawing up a budget each expense item is put under the microscope. It is the ideal opportunity to determine which expenses are essential and which ones can be eliminated.

A budget can assist management in controlling expenditure by establishing boundaries in order to eliminate spending that is not in line with the business’s plans for the future. Limiting spending on expenses which are not part of the plan ensures that money is allocated to the important areas.

Using a budget enables the owner and management to measure their actual progress and performance against the budget. If they see that they are deviating from budgeted figures they can take appropriate action or, if the budget was unrealistic, the budget might have to be adjusted. A budget is a flexible tool and needs to be adjusted if it does not work or if the circumstances on which the budget is based, changes.

As market conditions, technology and employment requirements change all the time, a budget will have to be reviewed regularly to be of any real value.

Knowledge is power and drawing up a budget will give the owner detailed knowledge of the current position, potential destinations and possible ways to finance the journey from where the business is now to where it can go. To answer the question posed in the heading of this article, whether budgets are worth the effort needed to draw them up, the answer would be a resounding “Yes”!

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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THE IMPORTANCE OF THE INDEPENDENT TRUSTEE

A4_bA well-known court case, Land Bank of South Africa vs JL Parker and Two Others (the Parker case) irrevocably changed the requirements for independent trustees to be appointed and placed renewed focus on the duties and responsibilities of all trustees.As a result of the Parker case, most Masters of the High Court now require an independent trustee to be appointed in addition to the trustees who are beneficiaries of the trust, and therefore will not issue a Letter of Appointment without at least one independent trustee being appointed. An independent trustee will be a person who is not related to the founder, the other trustees or the beneficiaries.

This independent trustee does not necessarily have to be a professional person but it must be someone who fully realises the responsibilities he or she is accepting when agreeing to act as a trustee, and is qualified in the view of the Master of the High Court to act as a trustee.

All trustees (independent or not) are charged with the responsibility to ensure that the trust functions properly to the greatest benefit of the beneficiaries. These responsibilities include, but are not limited to:

  1. ensuring compliance with the provisions of the trust deed;
  2. ensuring compliance with all statutory requirements;
  3. conducting of proper trustee meetings;
  4. recording of proper minutes of all meetings and decisions by the trustees;
  5. proper maintenance and safekeeping of minute books.

It is clear that a person who is appointed as an independent trustee must have the necessary experience and expertise to properly execute these duties as well as to add value to the trust. In many cases, the trustees who are not independent do not have sufficient knowledge of and experience in the proper administration of trusts. Furthermore, they might also lack expertise in utilising the vehicle of the trust in order to maximise the benefit for the beneficiaries.

This expertise includes negotiating and entering into business contracts, holistic tax and succession planning, and ensuring the optimal growth of the trust assets. It is in the best interest of the trust that this person also has sufficient knowledge of the impact of statutory requirements, such as compliance with relevant tax law and the effect of changes in legislation on the trust.

All trustees assume significant responsibility when accepting an appointment as a trustee and careful consideration must be given before accepting such an appointment. Any breach of fiduciary duties by any trustee, including the independent trustee, will result in significant exposure for the trustees. Furthermore, any action taken by the trustees on behalf of the trust while the proper number of trustees is not appointed by the Master of the High Court will be null and void.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

SARS: PROCEDURE TO CHANGE BANKING DETAILS FOR PAYE (PAY AS YOU EARN)

A2_bIf the banking details of an employer, as defined for Employees’ Tax (PAYE) purposes, changes, the employer must request SARS to change its banking details, otherwise SARS can impose a fixed penalty in terms of the Tax Administration Act. A fixed penalty is based on the amount of the assessed loss or taxable income of the employer for the preceding tax year.

Channels through which a change in banking details may be requested

Banking details for PAYE can only be changed:

  • In person at a SARS branch or
  • Via eFiling.

SARS will not accept requests for change of banking details by telephone, fax, email, post or SARS dropbox.

Persons allowed to request a change in banking details

Only the following persons may request a change in banking details for PAYE purposes by submitting the relevant documentation, as set out in Table 1 and Table 2 below, to a SARS branch:

  • The employer (if the employer is an individual), or a representative employer who must be a natural person e.g. accounting officer, member of a close corporation, treasurer, partner, etc. This person must already be registered on the SARS system as the official representative of the legal entity he/she represents.
  • Only under certain exceptional circumstances*:
  • A tax practitioner who is registered with a controlling body and SARS, and can present a valid power of attorney.
  • A representative with a once-off mandate e.g. bookkeeper, auditor, director, tax practitioner or an employee of the tax practitioner, attorney, etc. The representative with the once-off mandate must be linked to a tax practitioner on eFiling in order to change the employer’s banking details on eFiling.

*Circumstances accepted by SARS as exceptional and which requires alternative/additional documentation to be submitted:

– Employer passed away

– Employer is incapacitated or terminally ill

– Employer is in prison

– Business is under liquidation

– Employer/business is more than 200km from SARS branch

– Representative employer is temporarily outside RSA

– Representative employer is terminally ill 

Documentation required for change in banking details

Table 1:

The following documents must be submitted to SARS by the employer/representative employer requesting the change of banking details:

DOCUMENT DESCRIPTION DOCUMENT DETAILS
Employer/Representative employer
a) Identification: Valid original ID/temporary ID/passport/driver’s licence/asylum seeker certificate Original plus one certified copy
b) Proof of physical business address (See Table 2 for list of documentation that SARS will accept as proof) One copy
c) Proof of residential address (See Table 2 for list of documentation that SARS will accept as proof) See Table 2
d) Letter of appointment from the employer if the request is received from the representative employer One original
Tax practitioner/Person with a mandate
e) Power of attorney One original
If employer is a company/close corporation
f) Memorandum of Incorporation (MOI) One copy
g) Proof of banking details:Not more than 3 months old and shows account holder’s legal name, account number, account type and branch code
– Bank statement with original bank stamp on it,
or
One original
– ABSA eStamped statement, or One original
– If client opened a new bank account and has
not received a bank statement yet: Letter from
the bank on bank letterhead with original bank
stamp showing date on which bank account
was opened
One original
h) Proof of physical business address of employer (See Table 2 for list of documentation that SARS will accept as proof of physical business address) See Table 2

Table 2:

SARS will accept any of the documents below as proof of residential address or physical business address:

DOCUMENT DESCRIPTION NOT OLDER THAN
1. Municipal account 3 months
2. Student fee account 3 months
3. Co-op statement (farmers only) 3 months
4. Medical aid statement 3 months
5. Bond statement from bond holder 6 months
6. Telephone account 3 months
7. Licence for motor vehicle 1 year
8. Court order 3 months
9. Subpoena 3 months
10. Traffic fine 3 months
11. Documents for payout of pension or UIF 3 months
12. Life insurance policy 1 year
13. Short-term insurance policy 1 year
14. Health insurance policy 1 year
15. Funeral policy 1 year
16. Investment statement for shares or unit trusts 1 year
17. Current and valid lease/franchise contract N/A
18. Form CRA01 (Confirmation of Entity Residential Address): – To be completed if none of the above documents are available – If proof of residence is in the name of a third party: A certified copy of the third party’s original ID/passport/driver’s licence OR temporary ID/passport/driver’s licence must be supplied Not supplied

The above requirements place an additional administrative burden on taxpayers. However, it is clearly to the benefit of both SARS and the taxpayer to ensure that banking details are not changed illegitimately at SARS. If you need more information or professional assistance regarding the above, please contact our offices.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

Reference List:

  • SARS Guide PAYE-MTD-28-G01 – Change of banking details for employers

SELLING OF ASSETS BY INDIVIDUALS: WHEN WILL IT ATTRACT CGT?

A1_bIndividuals who are residents for the purpose of the CGT Act (Capital Gains Tax), are liable for CGT on the disposal of South African and foreign assets. In addition, non-residents who dispose of immovable property or other assets of a permanent nature in South Africa are liable for CGT as well. As a disposal is the event that can trigger a taxpayer’s liability for CGT, it is important to know what type of transactions SARS will view as a disposal. The following actions are considered to be a disposal for CGT purposes:

  • Selling of an asset
  • Donating an asset
  • Destruction, scrapping or loss of an asset
  • Abandonment of an asset
  • Change in the use of an asset

Please note: The above actions are not a complete list of what constitutes a disposal. Please contact your tax adviser for more detailed information.

The rule of thumb is that if an asset is disposed of it will be subject to CGT, except if the capital gain/loss is specifically excluded. A capital gain/loss on any of the following disposals will not trigger CGT:

a) Disposal of a primary residence

The capital profit/loss on the disposal of a primary residence will not be taxable for CGT purposes if all the following requirements are met:

  • The proceeds are not more than R2 000 000, and
  • It is owned by a natural person (not by a company, close corporation or trust), and
  • The owner or his/her spouse normally lives in the house as their main residence, and
  • More than 50% of the house is used for private purposes.

It is also useful to know in which circumstances, upon disposal of a primary residence, a capital profit/loss, or a portion thereof, will be taxable for purposes of CGT. If any one of the following circumstances are present the capital profit/loss, or a prorata portion thereof, will be taxable for CGT purposes:

  • If the proceeds is more than R2 000 000, the amount of the capital profit/loss exceeding R2 000 000 will be taxable.
  • When a property is bigger than 2 hectares, the portion of the capital gain/loss relating to more than the first 2 hectares, will be taxable.
  • Where a person or his/her spouse did not live in a primary residence for any period after 1 October 2001, the primary residence exclusion will not be allowed for that time period.
  • If any part of a primary residence was used for trade purposes (e.g. if you used your study to run a business from), the portion of the primary residence exclusion relating to the part of the primary residence used for business purposes will be taxable.

b) Disposal of personal use assets

The disposal of personal use assets which are owned by a natural person and not used for trade purposes, will not give rise to a liability for CGT. Some examples of personal use assets which are excluded for the purpose of calculating a potential CGT liability, are the following:

  • Personal belongings used more than 50% for personal purposes, for example a car, a caravan, an art collection or household furniture.
  • The capital gain/loss on the disposal of a boat up to a maximum length of ten metres and which was used for private/personal purposes.
  • Aircraft with an empty weight of 450 kilograms or less.

Please note: The above-mentioned circumstances is not a complete list of exclusions on the disposal of personal use assets. Please contact your tax adviser for more detailed information.

c) Disposal of an interest in a small business

The exemption of the capital gain/loss is limited to R1 800 000 if:

  • The gross asset value of the small business is less than R10 000 000, and
  • The individual is:
  • a sole proprietor or partner or has held 10% or more of the shares in the small business for five years or more, and
  • is at least 55 years old, and
  • suffers from ill-health or infirmity, or is deceased.

d) Disposal of assets in a registered micro business, provided that the
assets were used for business purposes

e) Receiving lump sum payments from certain approved retirement funds

f)  Receiving the proceeds from certain endowment or life insurance
policies

  • Second-hand policies are not excluded unless they are pure risk policies with no investment/surrender value.

g) Compensation received for personal illness or injury

h) Winnings and prizes from certain games and competitions e.g. Lotto winnings

Although the above exclusions are very specific, it is still possible to plan a transaction in such a way that will minimise the taxpayer’s liability for CGT.  If you need more information on this topic, please do not hesitate to contact us for professional assistance and advice.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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