FINANCIAL ASSISTANCE TO DIRECTORS

A2_bA company lending money to its directors may not be as simple a process as it may initially appear to be – not even in the case of so-called “one-man” companies. There is various requirements in the Companies Act, 71 of 2008, to be adhered to, as well as certain potential pitfalls in the Income Tax Act, 58 of 1962, that one should be aware of.

Section 45 of the Companies Act regulates the lending of money by companies to their directors. The scope of the provision also extends much further than a loan itself: it covers any form of “financial assistance” to directors, which specifically includes “lending money, guaranteeing a loan or other obligation, and securing any debt or obligation”.

The board of directors of a company must authorise the financial assistance to be provided to a director, and the board resolution to this effect must be circulated to all shareholders as well as trade unions representing employees of the company. The company’s board must further be satisfied that the financial assistance is fair and reasonable to the company, and further that the company will be solvent and liquid thereafter. They must also ensure that this is not in contravention of the company’s Memorandum of Incorporation. If in breach of any of these conditions, the directors may potentially be held personally liable for any damages.

From a tax perspective, a director of a company is by definition also an employee of that company. This means that the director may be liable for tax on a fringe benefit if a loan is extended to him or her which does not bear market-related interest rates. For purposes of the Income Tax Act, this will be the case where the loan bears interest at less than the repo rate plus 100 basis points (see paragraph 11(1) of the Seventh Schedule to the Income Tax Act). The value of any such fringe benefit will be included in the director’s gross income for tax purposes and taxed accordingly.

Fringe benefits are not the only potential tax concern for companies with loan accounts in favour of themselves against a director. Quite often directors are also shareholders in a company (which is especially the case for small and medium-sized companies). In this case, an interest free loan, or one with interest below the repo rate plus 100 basis points, will give rise to a deemed dividend in the hands of the director-shareholder. Effectively, the deemed dividend will be the interest charged too little. This amount will be calculated on an annual basis, and attract dividends tax at 15% (section 64E(4) of the Income Tax Act) which will be for the director’s account.

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. (E&OE)

FINANCIAL ASSISTANCE AND THE COMPANIES ACT

A4_bOne of the more significant changes that the “new” Companies Act, 71 of 2008, brought about was that a company may now provide financial assistance to prospective shareholders to subscribe for shares in that company. In other words, it may lend persons money to enable them to subscribe for shares in the lender (although other forms of financial assistance is also contemplated – see below). Previously, in terms of section 38 of the now repealed Companies Act, 61 of 1973, this was not allowed.

In terms of section 44 of the “new” Companies Act, financial assistance by a company would include extending a loan, guarantee or the providing of security to enable a person to obtain funding for purposes of acquiring shares in that company. Section 44 seeks to regularise such instances of financial assistance however, and this would extend beyond the mere granting of a loan to a would-be shareholder. The wide definition of “financial assistance” makes it clear that the section covers various scenarios and also specifically where financial assistance by a company is provided to anyone not only for the purpose of enabling him or her to subscribe for shares in that company, but also if the assistance is to enable shares to be acquired in a related company.

The purpose of the provision is quite clearly to protect existing shareholders. For example: if a company were to lend money to a prospective shareholder who is subsequently unable to repay the assisting company, that company would have effectively diluted the shareholding interests of the existing shareholders (who would have paid cash for their shares), whilst the new shareholder who is unable to repay the company still has an interest left in the company (and indirectly therefore to the cash subscription proceeds of the other shareholders).

Notwithstanding the potential negative effect of allowing shares to be subscribed for in a company on loan account, it is foreseeable that such financial assistance may be required from time to time for genuine commercial purposes and transactions that would otherwise not have been feasible. B-BBEE transactions are an excellent example of this.

For a company to give financial assistance to a would-be shareholder, the directors of the company must be satisfied that the financial assistance is fair and reasonable to the company, and further that the company will be solvent and liquid thereafter. They must also ensure that this is not in contravention of the company’s Memorandum of Incorporation. If in breach of any of these conditions, the directors may potentially be held personally liable. Typically, the shareholders of the company must also approve thereof by way of a special resolution.

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. (E&OE)

TAX RATES ANNOUNCED IN THE BUDGET

A3_bOn 24 February 2016, Min. Pravin Gordhan tabled National Treasury’s annual budget. While it contained a few surprises (both for what it said and that which it did not), the focus in studying the budget has always been the new tax rates proposed.

Below we set out the new rates that will apply going forward. The two most significant changes are the increase in the capital gains tax inclusion rate, as well as the introduction of yet another transfer duty scale for properties purchased with a value in excess of R10 million.

It is important to note that although not approved by Parliament as yet, the below rates are unlikely to be changed.

Income tax rates for individuals for the 2016/2017 tax year:

Taxable income (R) Rates of tax (R)
0 – 188 000 18% of each R1
188 001 – 293 600 33 840 26% of the amount above 188 000
293 601 – 406 400 61 296 31% of the amount above 293 600
406 401 – 550 100 96 264 36% of the amount above 406 400
550 101 – 701 300 147 996 39% of the amount above 550 100
701 301 and above 206 964 41% of the amount above 701 300

Interest Exemptions from Income Tax (unchanged):

2017
Person younger than 65 R23 800
Person 65 and older R34 500

Medical credits available to be deducted against an income tax liability:

  Per month   2017

For the taxpayer who paid the medical scheme contributions   R286

For the first dependant   R286

For each additional dependant(s)   R192

The following rebates will apply for individuals against their tax liability calculated in accordance with the above:

Cumulative Rebates from Income Tax for Individuals:

Tax Rebate
Primary R13 500
Secondary (65 and older) (unchanged) R7 407
Tertiary (75 and older) (unchanged) R2 466

Income Tax for companies is still levied at 28%, whilst the rate is retained at 41% for trusts.

Small Business Corporations are not taxed at a flat rate of 28%, but according to the below table for tax years ending between 1 April 2016 and 31 March 2017:

Taxable income (R) Rate of tax (R)
0 – 75 000 0%
75 001 – 365 000 7% of the amount above 73 650
365 001 – 550 000 20 395 21% of the amount above 365 000
550 001 and above 59 150 28% of the amount above 550 000

Capital gains tax is calculated by including 40% (previously 33.3%) of an individual’s net capital gains (less R40,000) in their taxable income to be used for calculating their income tax liability (see table above). The inclusion rate for ordinary trusts and companies are increased to 80% (previously set at 66.6%).

The VAT rate has been retained at 14%. The same applies to donations tax and estate duty, both still levied at 20%.

Transfer duty applicable to individuals:

Value of the property (R) Rate
0 – 750 000 0%
750 001 – 1 250 000 3% of the value above 750 000
1 250 001 – 1 750 000 15 000 6% of the value above 1 250 000
1 750 001 – 2 250 000 45 000 8% of the value above 1 750 000
2 250 001 – 10 000 000 85 000 11% of the value above 2 250 000
10 000 001 and above R937,500 13% of the value exceeding R10 000 000

Turnover tax rates:

 Taxable turnover (R) Rate of tax (R)
0 – 335 000 0%
335 001 – 500 000 1% of the amount above 335 000
500 001 – 750 000 1650 2% of the amount above 500 000
750 001 and above 6 650 3% of the amount above 750 000

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. (E&OE)

WITH PROPOSED TAX CHANGES TO TRUSTS, ARE THEY STILL WORTH WHILE?

A1_bProposed tax changes by the Davis Tax Commission are threatening the taxation of trusts and people are starting to wonder if they should move assets out of trusts and if they should still consider a trust in their financial planning at all. Some fundamentals around these entities should be carefully considered before making rash decisions or disregarding the possibility of using a trust at all.

The Davis Tax Commission recently released an interim report to highlight some of their proposals with regard to the wide term of “wealth tax” that they were mandated, amongst others, to investigate and consider. Within this consideration the taxation of trusts was looked at in more detail and some relatively drastic proposals have been made in this regard.

The question has therefore been raised whether trusts still have any use at all and therefore one should not necessarily discuss the proposed changes but look at some fundamentals around trust that remain. Some of these may be affected by legislation and case law, but other are relatively fixed benefits.

What are the fixed benefits?

These benefits are core and fundamental to the reasons and purpose of establishing a trust and have been around in law for many decades. One of these is that trusts ensure the smooth hand over of assets, known as inter-generational wealth transfer. When an individual passes away, assets owned by the deceased, must be dealt with by the executor of their estate. Only once the executor has dealt with the deceased estate can the assets be passed on to the heirs. This is a time consuming exercise and in some circumstances can place the surviving spouse in a financial predicament. Assets that are owned by a trust do not form part of the deceased’s estate, which means that the surviving spouse or children can still access assets (including funds) whilst the estate is being wound up. The fact that the assets are owned by the trust significantly simplifies the winding up of the estate.

Furthermore trust also allow for the protection and management of assets for persons that are unable to or unwilling to manage these themselves. Children under the age of eighteen may not inherit directly from anyone, which means that either the assets must be sold and the funds transferred to the guardians fund (a government institution) or alternatively they must be held in trust until the child reaches the age majority (or any age above the age of majority determined and specified by the deceased in their will). People with mental conditions are unable to look after themselves, specifically in respect of their financial affairs, their initial caregivers may also not be around forever and therefore special trusts can be set up to ensure the needs of people suffering from mental conditions are taken care of.

By transferring assets to a trust during your lifetime will ensure a solution to the abovementioned situations where individuals, irrespective of their age, are unable to administer and manage their own financial affairs. Carefully selected trustees can then continue to manage these assets for the nominated and selected beneficiaries.

What are the variable benefits?

Tax benefits are variable and as is evident from the Davis Commission proposals these will change from time to time. Although most people want to know the tax benefits of trusts what should be kept in mind is that nothing should ever really be done for tax benefits that may exist at any time and point because tax laws change yearly in South Africa. However, even with the proposed changes to the taxation of trusts there are a couple which remain, but once again these are mainly aimed at long term estate planning and result in individuals saving on some taxes in the event of death.

Death triggers a capital gains (CGT) event and therefore you will have to pay CGT in your estate on certain assets. If however these assets are held in trust this will not be the case. This ensures a tax saving in your estate and also ensures that you don’t have a liquidity problem as a result of the taxes payable. The same goes for estate duty in the event that this would be payable, as assets held in trust do not form part of your estate. You will also save on the executor’s fee, as the executor of your personal estate will not handle any assets held in trust.

By holding assets in trust you are also afforded creditor protection as assets held in trust do not form part of an insolvent’s estate and hence cannot be attached. Section 12 of the Trust Property Control Act states; “Separate position of trust property – Trust property shall not form part of the personal estate of the trustee except in so far as he as trust beneficiary is entitled to the trust property”. This should not be seen as blanket protection as there are a number of situations where due to bad trust administration the courts have made decisions to include trust property in the personal estate of individuals.

Trusts are therefore still a good planning tool to consider, regardless of proposed changes to their taxation and there are still fixed and variable benefits afforded to them. So don’t discard them anytime soon.

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. (E&OE)