WHAT’S THE BUZZ ABOUT BUSINESS RESCUE?

A3_bIf a company/close corporation is in financial trouble and all possible avenues to save the business have been exhausted, there is one last option available to save the business: it can lodge an application for business rescue at the CIPC. In order to qualify for business rescue proceedings, the business must satisfy the requirements as set out in the next paragraph.

A company/close corporation will only be considered as a business rescue candidate if all three the following requirements are met:

  • The decision to start business rescue proceedings must be taken before any liquidation proceedings have been instituted against the business.
  • The business is financially distressed.

A business is seen as financially distressed if:

– It seems reasonably unlikely that the business can pay its debts in the normal course of business for the next six months, or

– It seems reasonably likely that the business will be insolvent in the next six months.

  • There seems to be a reasonable chance of rescuing the business.

What is the aim of a business rescue plan?

The aim of placing a company/close corporation under business rescue is to give the business some breathing space to implement the business rescue plan and give the business a fair chance to become a going concern again.

Alternatively, if the business is liquidated despite the business rescue proceedings, the aim is to hopefully have a higher return available for the creditors and shareholders than would have been the case if the business was liquidated before undertaking any business rescue proceedings.

To give a business the maximum chance of recovering its finances and to continue operating as a solvent enterprise, the business rescue plan normally restructures a business’ assets, liabilities and equity, as well as its way of doing business.

Who can be appointed as a business rescue practitioner?

There is a list of licensed business rescue practitioners available on the CIPC’s website.

What does a business rescue practitioner do?

The appointed business rescue practitioner will investigate the business’ situation and propose a business rescue plan. After the business rescue plan has been approved by the creditors and shareholders, the business rescue practitioner will implement the plan. The reason why the creditors and shareholders must approve the business rescue plan is that they will withhold their rights against the business to claim payment as long as the business is operating under the business rescue plan.

After implementing the business rescue plan, the business rescue practitioner will temporarily oversee and manage the business together with the current management.

The business rescue practitioner also takes over dealing with the creditors and shareholders. In addition, the business rescue practitioner will communicate with registered trade unions which represent employees of the business. If there are employees who are not members of any registered trade union, the business rescue practitioner will deal with these employees or their representatives as well.

The first step to start with a business rescue is for a business to file a notice with the CIPC that it wants to start with business rescue proceedings. The rest of the business rescue process and the business rescue documents which are required to be submitted to the  CIPC, is set out on the CIPC’s website.

This article is a general information sheet and should not be used or relied upon 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:

THE IMPACT OF THE NEW BBBEE CODES OF GOOD PRACTICE ON YOUR BUSINESS

A4_bThe compilation and verification of a scorecard for an entity in terms of the Broad-Based Black Economic Empowerment (BBBEE) Act is done according to the Codes of Good Practice (the Codes) issued by the Department of Trade and Industry (the dti). The Codes have been amended and the new Codes were gazetted on Friday 11 October 2013. These changes will have a significant effect on the BBBEE strategy of businesses and careful consideration will have to be given to adjustments in this area.

Major changes to the previous Codes include:

1. The seven elements on the scorecard are reduced to five elements and the weighting of each element has been adjusted as follows:
      • Ownership (25 points weighting)
      • Management Control (15 points weighting)
      • Skills Development (20 points weighting)
      • Enterprise and Supplier Development (40 points weighting)

2. Socio-Economic Development (5 points weighting)The total score will now amount to 105 instead of the previous 100.

3. The elements Ownership, Skills Development and Enterprise and Supplier Development are now categorised as priority elements, which means that certain minimum requirements are set for these elements. Large enterprises are required to comply with all the priority elements, whereas Qualifying Small Enterprises (QSEs) have a choice to comply with Ownership and one of the remaining priority elements.

4. If the minimum requirements set for priority elements are not met, the actual level obtained will be discounted by one level.

5. The limits for Exempt Micro-Enterprises (EMEs) have been adjusted to enterprises with an annual turnover of between R0 and R10 million (unless a sector charter applies). EMEs will still be deemed to be level four contributors.

6. QSE limits have been adjusted to enterprises with an annual turnover of between R10 million and R50 million (unless a sector charter applies).

7. EMEs and QSEs with black ownership of more than 51% will automatically qualify as level two contributors.

8. EMEs and QSEs with black ownership of 100% will automatically qualify as level one contributors.

9. Start-up enterprises will still be measured as EMEs during the first year following the formation of the enterprise.

There will be a twelve-month period from 11 October 2013 to 10 October 2014 during which businesses may choose to have their scorecard compiled and verified under either the old Codes or the new Codes. The purpose of this is to give businesses a chance to align and implement their BBBEE strategy to comply with the new Codes. Sector charters also have to align to the new Codes, but it is unclear whether it will be possible or even required to do this during the twelve-month period.

It is crucial to seek expert advice when adjusting any entity’s BBBEE strategy in order to avoid costly mistakes and ensure maximum benefit for the business, while properly complying with the relevant BBBEE legislation. For instance, enterprises that previously relied on an annual Socio-Economic Development grant in order to obtain a required BBBEE level will have to significantly adjust this amount.

Only qualified verification agents accredited under IRBA or SANAS may conduct independent verifications and issue the applicable certificate.

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.

WILL SARS ALLOW YOU TO DEDUCT YOUR COMPANY/CLOSE CORPORATION’S ASSESSED LOSS?

A2_bUnder normal circumstances SARS will allow a taxpayer to carry forward the previous tax year’s assessed loss and set it off against the current tax year’s taxable income. However, there are certain circumstances under which SARS will not allow a taxpayer to carry forward the previous year’s assessed loss and the assessed loss will be lost for set off against future taxable income as well.

If the following two requirements are not met, SARS may not allow a business to carry forward its assessed loss to the current tax year:

Requirement 1: Carrying on a trade during the current year of assessment (the “trade” requirement)

The onus rests on the company/close corporation to prove to SARS that it was indeed trading during the current tax year. In deciding whether the taxpayer carried on a trade, SARS will take into account, amongst others, the following factors as they apply to the taxpayer’s specific business:

a)  The amount and type of expenses incurred during the tax year

b)  The extent of the business activities

c)  The nature of its general business activities

d)  Whether the business activities were actively pursued

e)  The number of transactions entered into during the tax year

The following aspects are not necessarily enough to prove that a trade has been carried on:

a)  An intention to trade in the future

b)  Activities to prepare for future trading

c)  Holding meetings

d)  Preparing financial statements

Requirement 2: Earning income from trading (the “income from trade” requirement)

A company/close corporation may indeed have traded (and incurred expenses) during a tax year, but the related income will only be realised in the following or a later tax year due to the type of industry in which the business operates. Once again, the onus rests on the business to prove to SARS that it was actually trading in the current tax year despite the fact that no income was earned.

SARS acknowledges that it is possible that a business may have carried on a trade without earning an income in the same tax year. Take a property rental company for instance. The company could have been actively advertising and marketing available rental properties without finding any suitable tenants. This would result in a loss for the tax year as expenses was incurred but no income earned in the same period. In this case it is clear that a trade was carried on and SARS should allow the set off of an assessed loss in the current tax year. However, SARS will only consider allowing the set off of the assessed loss if:

  • It was incidental that no income was earned during the current tax year despite the fact that the business was actively trading; or
  • No income was earned during the current tax year as a result of the business cycle or nature of the trade in which the business operates.

As can be seen from the above discussion, the deduction of assessed losses is a grey area. The onus rests on the business to prove to the satisfaction of SARS that it meets the “trade” and “income from trade” requirements as set out above. SARS will assess each individual business based on its unique facts and circumstances, taking into account the abovementioned factors to determine if the business will be allowed to carry forward its assessed loss.

This article is a general information sheet and should not be used or relied upon 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:

 

VAT: THE DIFFERENCE BETWEEN STANDARD-RATED, ZERO-RATED AND EXEMPT SUPPLIES

A1_bThere are three categories of supplies that can be made by a VAT vendor: standard-rated, zero-rated and exempt supplies. Output tax must be levied on all supplies except exempt supplies. The VAT Act gives specific guidelines for zero-rated and exempt supplies but these fall outside the scope of this article. Please contact your tax practitioner for more information.

The following simplified formula is used to calculate the amount of VAT that a registered VAT vendor have to pay to SARS or can claim as a refund from SARS :

Output VAT levied on standard-rated and zero-rated supplies* – Input VAT claimed on qualifying expenses = Net VAT due to/(refundable by) SARS

* A supply is defined as the provision of a product or service by a VAT vendor in return for payment in cash or otherwise.

Standard-rated supplies

Standard-rated supplies are supplies of goods and services on which output VAT is levied at a rate of 14%. The input VAT incurred on purchases of goods and services to generate standard-rated supplies can be deducted from output VAT payable to SARS.

Example 1:

  1. XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
  2. The inventories were sold for R10 000 (VAT included).
  3. All inventory sales qualify as standard-rated supplies.

Net VAT due to/(refundable by) SARS will be calculated as follows:

Output VAT levied on standard-rated supplies (R10 000 x 14/114) R1 228
Less: Input VAT on purchases to make standard-rated supplies (R7 000 x 14/114) (R860)
Net VAT due to/(refundable by) SARS R368

Zero-rated supplies

Zero-rated supplies are supplies of goods and services on which output VAT is levied at a rate of 0%. The input VAT incurred on the purchase of goods and services to generate zero-rated supplies can be claimed against output VAT payable to SARS.

Example 2:

  1. XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
  2. The inventories were sold for R10 000 (VAT included).
  3. All inventory sales qualify as zero-rated supplies.

Net VAT due to/(refundable by) SARS will be calculated as follows:

Output VAT levied on zero-rated supplies (R10 000 x 0/114) R nil
Less: Input VAT on purchases to make zero-rated supplies (R7 000 x 14/114) (R 860)
Net VAT due to/(refundable by) SARS (R 860)

Exempt supplies

Exempt supplies are not subject to VAT. No output VAT, either at 14% or at 0%, is levied on exempt supplies. Input VAT incurred on expenses to make exempt supplies cannot be claimed against output VAT due to SARS.

Example 3:

  1. XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
  2. The inventories were sold for R10 000.
  3. All inventory sales are exempt supplies for VAT purposes.

Net VAT due to/(refundable by) SARS will be calculated as follows:

Output VAT levied on exempt supplies R nil
Less: Input VAT on expenses incurred to make exempt supplies (R nil)
Net VAT due to/(refundable by) SARS R nil

Combination of standard-rated, zero-rated and exempt supplies

Where a VAT vendor makes standard-rated supplies and/or zero-rated supplies and/or exempt supplies, input VAT must be apportioned in the same ratio as the three different types of supplies stand to each other.

Example 4:

a.   ABC Distributors made the following supplies for VAT purposes (VAT included where applicable):

Standard-rated supplies R 60 000 60%
Zero-rated supplies R 10 000 10%
Exempt supplies R 30 000 30%
Total supplies R100 000 100%

b.     Expenses incurred in the making of total supplies amounted to R85 000 (VAT included).

Net VAT due to/(refundable by) SARS will be calculated as follows:

Prorata Output VAT levied on standard-rated and zero-rated supplies
[(60 000 x 14/114) + (R10 000 x 0/114)]
R7 368
Output VAT on exempt supplies R nil
Less: Apportioned input VAT on expenses to make standard-rated and (R7 307)
zero-rated supplies [(R85 000 x 60% x 14/114) + (R85 000 x 10% x 14/114)]
Less: Apportioned Input VAT on exempt supplies R nil
Net VAT due to/(refundable by) SARS R 61

Accounting software can be set up so that VAT is automatically recorded correctly for standard transactions. However, a computer programme will not be able to classify unique transactions for VAT purposes. Therefore it is still important that accounting staff is trained to handle VAT correctly, especially where grey areas exist.

If you would like more information about this topic, feel free 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. 

Reference List:

  • VAT 404 – SARS Guide for Vendors