Offshore companies and doing business in South Africa – A companies act perspective

According to the most recent statistics released by the South African Revenue Service, South Africa remains a net importer of goods and services. Put differently, one could say that South Africans are more often clients in cross-border transactions than they would be the service provider. Many of our clients operate in this space, including foreign incorporated companies which are doing business in South Africa. This article is aimed at those specific clients of ours: those clients doing business in South Africa through companies incorporated outside of South Africa.

Section 23 of the Companies Act, 71 of 2008, regulates when foreign companies are required to register as “external companies” in South Africa. In terms of that section an external company must register with CIPC within 20 business days after it first begins to conduct business, or non-profit activities, in South Africa. The question is then when will the company in question be considered to be conducting business here?

A foreign company is, by virtue of the provisions of the Companies Act, regarded as conducting business in South Africa if either it is a party to at least one employment contract in South Africa, or if it is conducting such activities for a 6-month period “as would lead a person to reasonably conclude that the company intended to continually engage in business or non-profit activities within the Republic.” (section 23(2)(b)) Therefore, having even one employee in South Africa requires a company to register.

Certain exclusions may apply and where the Act is explicit that certain activities should not be considered to establish sufficient enough a presence in South Africa to deem the company to be one conducting business here (and therefore required to register with the relevant authorities). However, these exclusions are illuminating in the sense that it presents a rather low bar of activity (such as having shareholders’ meetings here or maintaining a bank account), therefore potentially hinting that the bar for being considered to conduct business in South Africa and therefore required to register as an external company may not be very high.

In terms of section 23, any foreign company required to register as an external company in South Africa must maintain an office in this country. Moreover, failure to adhere to the requisite registration requirements may ultimately lead to a company being notified that it is no longer allowed to carry on business operations in South Africa. Although this article does not consider the implications of registering as external company, we also wish to alert affected clients thereto that this legislative registration requirement may have certain tax and exchange control related implications inherent to them, and on which advice should be taken to manage these requirements in a sensible and responsible manner.

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.  Errors and omissions excepted (E&OE)

Posted in Business | Tagged , , | Comments Off on Offshore companies and doing business in South Africa – A companies act perspective

Final and diluted legislation in relation to low interest loans and trust

A1The renewed focus by National Treasury on the taxation of trusts was widely anticipated and it came as little surprise earlier this year that the first version of the Draft Taxation Laws Amendment Bill, 2016, introduced what will become the new section 7C of the Income Tax Act, 58 of 1962.

Much has since been written about the new provision, and many commentators have debated its merits, essentially attributing onerous tax consequences to low interest loans provided to trusts. The final version of the new provision, due to become effective 1 March 2017, has now been published by Treasury, and which will be incorporated into the Income Tax Act as soon as passing through the relevant legislative processes.

The final version contains quite a few significant changes to the initial proposal, although the aim of section 7C is still focused on attacking interest free loans to trusts.

To recap: loans extended by persons to connected party trusts at less than prime – 2.5% are potentially deemed to have donated an amount to that trust equal to the difference between interest that was actually charged and the amount of interest that would have been charged at a rate of prime – 2.5%. It is unlikely that such deemed donations will have any direct income tax consequences for the trust, although indirectly donations to trusts may cause certain receipts by a trust to be taxed in the hands of any donors in terms of the so-called “tax back” provisions contained in section 7 of the Income Tax Act.[1] The obvious consequence of section 7C though is the potential incidence of donations tax.

In this regard, the first notable exception to the final version of section 7C is that the annual R100,000 exemption from donations tax may now be utilised against the deemed donation – said exemption was previous expressly excluded from being utilised against the deemed donation triggered by section 7C. Although this does not address the indirect income tax consequence highlighted above in relation to the application of the “tax back” provisions in the Act, it does significantly negate any potential donations tax consequences, while also removing the direct income tax consequence of the previous proposal in terms of which the creditor will have been deemed to have received an interest accrual in its own hands (and which would have been subject to income tax).

A further notable change to the final version of section 7C is that a long list of potential exemptions are now provided for where section 7C will not apply (although these are quite focussed and potentially of limited application only). It is finally also noted that the final proposed legislation makes it clear that the provision applies to loans already existing as at 1 March 2017, where doubt existed in terms of the previous proposal whether the provision would only have applied to “new” loans entered into on or after section 7C comes into effect.

The final version of section 7C presents a much diluted and less threatening version of the initial proposed legislation presented by Treasury earlier this year, and taxpayers will be relieved to learn of the significant concessions since been made. That being said, the provision still has the capacity to significantly increase the ultimate tax bill of a number of trust related structures, and our clients are once again encouraged to have their prevailing accounts reviewed to ensure that their affairs are structured appropriately.

[1] To the extent that a person donates an amount to the trust, income received by the trust as a consequence of that donation is deemed to accrue to the donor, and not the trust.

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.  Errors and omissions excepted (E&OE)

Posted in Tax | Tagged , , | Comments Off on Final and diluted legislation in relation to low interest loans and trust

Removing directors of a company

a2The Companies Act, 71 of 2008, requires that the business and affairs of any company be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that the Companies Act or the company’s Memorandum of Incorporation provides otherwise (section 66(1)). The Companies Act further requires that a company must have at least one director (section 66(2)), and further that only natural persons may serve in that capacity (section 69(7)(a)).

Those individuals occupying the position of directors of a company are therefore responsible for managing the affairs of the company and they do so as custodians on the shareholder’s behalf. It should be remembered that the directors do not own the company: the company rather is owned by the shareholders and the directors serve therefore to promote the interests of the company, and indirectly therefore the economic interests of the shareholders.

Quite often, in the case of private companies, the directors and shareholders may be the same individuals. However, where the directors have no or limited shareholding interest in the company itself, it may happen that the shareholders may wish to move to have certain directors removed and replaced on the company’s board if e.g. the company’s financial performance or operations otherwise are not satisfactorily conducted according to the shareholders’ liking.

Naturally, a director may be requested to resign under amicable circumstances. However, where a director refuses to resign (and may perhaps have the backing of other shareholders), the question becomes what remedies the aggrieved shareholders still have? It is possible to have these matters regulated in terms of the company’s Memorandum of Incorporation specifically to dictate under which circumstances a director may be removed from the board of a company. It could also be agreed with the director initially by way of a clause in the appointment contract.

Irrespective of whether the Memorandum of Incorporation or an appointment contract addresses the matter specifically, a director may always be removed by way of a majority vote at an ordinary shareholders’ meeting (section 77(1)). Before the shareholders of a company may consider such a resolution though, the director concerned must be given notice of the meeting and the resolution, and be afforded a reasonable opportunity to make a presentation, in person or through a representative, to the meeting, before the resolution is put to a vote (section 77(2)). In terms of procedures not entirely different from that as applied to shareholders, the directors may among themselves too, resolve to remove a director from the board of a company (sections 77(3) & (4)).

It is important for directors to realise that they serve at the pleasure of shareholders. It is likewise necessary for shareholders to know that they have remedies against directors who do not deliver on their mandate, and that keeping directors in check amounts to good corporate governance.

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.  Errors and omissions excepted (E&OE)

Posted in Company | Tagged , , | Comments Off on Removing directors of a company

Financial assistance to directors

a1A 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 are 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.  Errors and omissions excepted (E&OE)

Posted in Tax | Tagged , , | Comments Off on Financial assistance to directors

Dire provisional tax penalties on underestimation of income

Provisional taxpayers are generally those taxpayers who earn income from sources other than a salary. In other words, PAYE is not deducted from these other sources of income on a monthly basis and paid over to SARS. As is the case with PAYE, provisional tax presents a cash flow mechanism to National Treasury through which to gather prepayments of an ultimate tax liability throughout a tax year on income which is not subject to the PAYE regime and which would otherwise only have been paid some time later when an annual income tax return is ultimately submitted. This can be as much as a year later.

To this end, provisional taxpayers are required to submit an estimate of their annual taxable income on a six-monthly basis. In the case of natural persons, provisional tax estimates are required to be submitted to SARS by way of a provisional tax return at the end of August each year, and again by the end of February. Legal persons similarly are required to submit estimates of taxable income at the end of the first 6 months of their financial years and again on the final day of the financial year.

For the first sixth-month estimate to be submitted an estimate is required to be made by the taxpayer of the estimated amount of taxable income that will be earned for the full year of assessment: half the amount of tax due on that estimated amount is required to be paid over to SARS at that date already, albeit after taking into account any amounts of PAYE also already deducted, where salary income is also earned. For the second provisional tax return, an estimate should again be submitted, and the tax on such estimate again be paid over (after taking into account any amounts of PAYE already deducted during the year as well as the first provisional tax payment already made).

The potential for manipulation by taxpayers is obvious and a legislated remedy is required to ensure that provisional taxpayers do not simply always submit an estimate of Rnil, thereby delaying the payment of amounts to SARS until the tax return for the applicable year itself is ultimately submitted. To this end, the Fourth Schedule to the Income Tax Act, 58 of 1962, makes provision for penalties to be levied where it appears at ultimate assessment date that a taxpayer has underestimated its taxable income for provisional tax purposes. For taxpayers earning more than R1 million in taxable income, taxpayers are allowed some leeway in that an estimate should at least have been 80% of the actual taxable income ultimately determined. This recognises that taxpayers are unlikely at year end to be able to accurately estimate their actual taxable income for the year already. However, if the estimated taxable income proves to be less than 80% of the actual taxable income, a 20% penalty is levied on the difference between the tax payable on 80% of the actual taxable income and the tax payable on the estimated amount returned by the taxpayer.

Similarly, taxpayers earning less than R1 million taxable income are subject to the same 20% penalty, but within a 90% margin of accuracy instead of 80%. These taxpayers are afforded additional relief though in that they are permitted to submit as an estimate a factor of their last assessed taxable income without running the risk of incurring a penalty, even if this amount ultimately is less than 90% of the actual taxable income determined.

Interestingly, no underestimation penalty exists for first provisional tax estimates, however SARS may query estimates submitted and require taxpayers to submit revised first provisional tax estimates. Where second provisional tax estimates are concerned though, taxpayers should take care in preparing estimated taxable incomes which are to be submitted for provisional tax purposes as failure to do so could lead to a significantly increased tax charge when the tax year is ultimately assessed by SARS.

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.  Errors and omissions excepted (E&OE)

Posted in Tax | Tagged , , | Comments Off on Dire provisional tax penalties on underestimation of income

Are retirement annuities still useful?

Retirement annuities are often misunderstood and many people, or their parents, have had bad experiences with them in the past. This sentiment often relates to the investment performance and possibly also the charges related with these products. Some facts need to be considered before you discard this very useful investment vehicle for yourself.

When talking about financial planning and investments it is not uncommon that people say and hold opinions such as “I don’t like retirement annuities, they are terrible investments!” Usually it has to do with the performance and people can’t understand how after 10 years of contributing to a retirement annuity (RA), it is worth less than the amount they have put in.

This sentiment leads to a variety of discussion points, ranging from the fact that an RA is an investment vehicle or product wrapper, not an investment strategy or fund itself, to the fact that returns achieved are as a result of the underlying asset classes invested into, and will thus vary from one RA to the next.

What is meant by an investment vehicle or product wrapper?

Simply put often an investment vehicle, or product wrapper, has been created by legislation and usually tax legislation. Well at least that is the case for RA’s.

The government has for a long time been concerned that people do not save enough money for retirement, and ultimately people that are unable to work due to old age become a burden on the state. The state therefore has to address this and has therefore created specific tax treatments for RA’s in order to encourage people to use them to save for retirement specifically.

The idea is not to get too technical here, as the purpose of this information is not to go deeply into the tax benefits of RA’s save to say that the product wrapper known as an RA is merely one that carries these tax benefits. Briefly however, the contributions that are paid towards an RA are deductible from your gross income, the growth within the product is tax-free, and on retirement there are certain tax-free portions and thereafter different (more beneficial) tax rates for the lump sum benefits which do get paid out. You should get more information on this from your financial advisor.

What is meant by a fund?

If one understands that the RA is merely the product wrapper used and that this has nothing to do with the investment funds chosen for the actual money that is invested in this wrapper then we can start talking about investment performance. It should now be clear that the two are separate matters. Although it did not necessarily work this way in the past, but most modern RA’s now have a choice of funds the same, or at least very similar, to the funds used to make any other investment. One can even get an RA with a managed stock portfolio as an underlying investment.

The choice of funds is now up to you, with guidance from your financial advisor. The underlying assets of the fund must be matched to the objectives you are trying to achieve and your risk profile as an investor. As the objective of RA’s – retirement, is something that will usually only happen many years down the line you have the time available to use a lot of equity in your portfolio. Equity will give you the best returns over a longer period of time.

So by choosing the right underlying investment portfolio for your product wrapper, in this instance the RA, you would find that the investment performance of your RA should be no different had you invested in the fund directly and not used an RA, except that you have added tax benefits, which can actually boost your returns. You now have the tax benefits of the RA product wrapper and the performance of the fund you chose to invest in. Now your only hurdle is choosing the right underlying investment.

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.  Errors and omissions excepted (E&OE)

Posted in Investments | Tagged , , | Comments Off on Are retirement annuities still useful?

Proof required for Income Tax Returns – Individuals

Following the conclusion of your tax year, documents will be issued to you that must be retained for tax purposes.

The following documents should, if applicable, be submitted to the accountant who completes your tax return and should be available if the South African Revenue Service (SARS) requests them:

1. IRP5 and IT3 certificates
IRP5 and IT3 certificates reflecting salary, annuities, pension and other income received.

2. Interest received – local and foreign
IT3 certificates reflecting the interest received for the year relating to savings accounts, cheque accounts, fixed deposits and other investments.

3. Dividends received – local and foreign
Details and/or proof of dividends received.

4. Bequests and donations received
Details and/or proof of bequests and donations received.

5. Capital gain or loss
The following information is required:

  • Was the asset your residential property?
  • Return on the sale of the asset.
  • Base cost of the asset, i.e. the purchase price if purchased after 1 October 2001, or a capital gain valuation of the asset.

6. Other income
Details and/or proof of other income (e.g. partnership income).

7. Medical fund contributions

  • Medical fund contribution certificate.
  • Proof of payment of claims not covered by your medical fund and paid by yourself.

8. Annuity fund contributions
Annuity fund contribution certificates.

9. Travel allowance
If you wish to claim expenses against your travel allowance, the logbook for the tax year is required, together with the following information concerning the vehicle for which you received the travel allowance:

  • Make and model
  • Year of manufacture
  • Purchase price
  • Registration number
  • Kilometre reading on the first day of the applicable tax year (being 1 March in the case of individuals)
  • Kilometre reading on the last day of the tax year (being 28 February of the following calendar year)

If you kept a record of travel costs incurred during the year, proof of the following is required:

  • Fuel and oil consumption
  • Repairs done
  • Insurance and licence fees
  • Lease/Instalment agreement

10. Income protector
Contribution certificates.

11. Donations
Proof of deductible donations.

12. Other information
Details of any other action or event that may influence your tax liability.

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.  Errors and omissions excepted (E&OE)

Posted in Tax | Tagged , , | Comments Off on Proof required for Income Tax Returns – Individuals

The 2016 tax season is open

As is the case every year, the Commissioner for SARS recently published the annual notice to officially ‘open’ the 2016 tax season. Individuals are now able to file their annual income tax returns for the 2016 year of assessment (which ended on 29 February 2016) from 1 July.

In the recent Government Gazette No. 40041 (dated 3 June 2016) the persons required to file annual income tax returns for the 2016 year of assessment was announced. The following time frames will apply:

  • For a company, within 1 year of its year-end (for example, a company with a financial year end of 31 March 2016 is required to submit its 2016 tax return by 31 March 2017);

For all other taxpayers (including natural persons and trusts), returns are to be submitted at the latest by:

  • 23 September 2016 for persons still making use of manual hard copy returns;
  • 25 November 2016 for persons (excluding taxpayers registered for provisional tax) making use of SARS’ eFiling system; and
  • 31 January 2017 for all provisional taxpayers making use of SARS’ eFiling system.

As was the case in previous years, companies may only file returns using eFiling – manual returns are no longer allowed in terms of the above SARS notice.

Various criteria are listed which, if met, means that a person is obliged to submit a return to SARS. For example, all companies, whether incorporated in South Africa or not, are obliged to submit returns if South Africa is the place from which the company is effectively managed. Non-tax resident companies, but which were incorporated in South Africa, must also render returns, as well as non-tax resident companies incorporated outside of the Republic and earning income from a South African source.

Taxpayers (excluding companies) are required to submit returns if they carried on any trade in South Africa during the 2016 tax year. This does not include the mere earning of a salary. A variety of other factors are listed in terms of which non-company taxpayers are required to submit returns. The primary exemption from the requirement to submit a return for tax resident natural persons though is if the person earned only a salary from a single employer during the year which did not exceed R350,000, and income from interest for that person was also less than R23,800 (or R34,500 if the person is older than 65).

Quite a number of taxpayers are therefore potentially exempt from the requirement to submit an income tax return, even if registered for income tax purposes. However, even though it may in terms of the notice not be required to submit a tax return, it may still be beneficial to do so. Natural person taxpayers are often under the unfortunate impression that the completion of a return necessarily gives rise to the incidence of tax. This is of course not so and many may have suffered tax consequences during the year already by having amounts deducted from salaries in the form of pay-as-you-earn contributions deducted from their salaries. This of course amounts to a mere cash flow mechanism introduced to ensure a steady supply of cash to the fiscus and which contributions are set-off from the annual tax liability when the annual tax return submitted is assessed. However, the opportunity to negate this is presented through the completion of a tax return and claiming deductible expenses in the form of e.g. medical aid or pension fund contributions. The principle in this regard is that all income is taxable irrespective of whether a return is completed or not. However, deductions can only be claimed by completing a tax return and natural persons specifically should jump at the opportunity to do so.

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.  Errors and omissions excepted (E&OE)

Posted in Tax | Tagged , , | Comments Off on The 2016 tax season is open

Are retirement annuities still useful?

A2_bRetirement annuities are often misunderstood and many people, or their parents, have had bad experiences with them in the past. This sentiment often relates to the investment performance and possibly also the charges related with these products. Some facts need to be considered before you discard this very useful investment vehicle for yourself.

When talking about financial planning and investments it is not uncommon that people say and hold opinions such as “I don’t like retirement annuities, they are terrible investments!” Usually it has to do with the performance and people can’t understand how after 10 years of contributing to a retirement annuity (RA), it is worth less than the amount they have put in.

This sentiment leads to a variety of discussion points, ranging from the fact that an RA is an investment vehicle or product wrapper, not an investment strategy or fund itself, to the fact that returns achieved are as a result of the underlying asset classes invested into, and will thus vary from one RA to the next.

What is meant by an investment vehicle or product wrapper?

Simply put often an investment vehicle, or product wrapper, has been created by legislation and usually tax legislation. Well at least that is the case for RA’s.

The government has for a long time been concerned that people do not save enough money for retirement, and ultimately people that are unable to work due to old age become a burden on the state. The state therefore has to address this and has therefore created specific tax treatments for RA’s in order to encourage people to use them to save for retirement specifically.

The idea is not to get too technical here, as the purpose of this information is not to go deeply into the tax benefits of RA’s save to say that the product wrapper known as an RA is merely one that carries these tax benefits. Briefly however, the contributions that are paid towards an RA are deductible from your gross income, the growth within the product is tax free, and on retirement there are certain tax free portions and thereafter different (more beneficial) tax rates for the lump sum benefits which do get paid out. You should get more information on this from your financial advisor.

What is meant by a fund?

If one understands that the RA is merely the product wrapper used and that this has nothing to do with the investment funds chosen for the actual money that is invested in this wrapper then we can start talking about investment performance. It should now be clear that the two are separate matters. Although it did not necessarily work this way in the past, but most modern RA’s now have a choice of funds the same, or at least very similar, to the funds used to make any other investment. One can even get an RA with a managed stock portfolio as an underlying investment.

The choice of funds is now up to you, with guidance from your financial advisor. The underlying assets of the fund must be matched to the objectives you are trying to achieve and your risk profile as an investor. As the objective of RA’s – retirement, is something that will usually only happen many years down the line you have the time available to use a lot of equity in your portfolio. Equity will give you the best returns over a longer period of time.

So by choosing the write underlying investment portfolio for your product wrapper, in this instance the RA, you would find that the investment performance of your RA should be no different had you invested in the fund directly and not used an RA, except that you have added tax benefits, which can actually boost your returns. You now have the tax benefits of the RA product wrapper and the performance of the fund you chose to invest in. Now your only hurdle is choosing the right underlying investment.

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.  Errors and omissions excepted (E&OE)

Posted in General | Tagged , , | Comments Off on Are retirement annuities still useful?

Succession planning

A1_bOwning a business requires careful succession planning and is part of your estate planning as you have to determine who will succeed you, or who will purchase your shares, or who will be entitled to the income after your death. The future ownership of your business is at stake.

A Partnership automatically dissolves upon the death of a partner and the remaining partners will then have to dissolve it and divide the assets amongst them.

In the case of a Company the shareholders may agree that:

  1. The remaining shareholders have a right of first refusal to purchase the deceased shareholder’s shareholding, as opposed to dealing with it in a will.
  2. The future of ownership of shares can be regulated by a written agreement between shareholders that is referred to as “buy and sell” agreement and has an influence at the death of a partner or shareholder.
  3. The buy and sell agreement compels the executor of the deceased to offer the shares at a pre-determined price, and life policies between shareholders normally cover the purchase price.
  4. The remaining shareholders are the beneficiaries of the policy on the life of the deceased and use it to purchase the shares, normally pro rata to the shares they already own.
  5. Buy and sell policies fall outside the deceased estate and are not subject to estate duty provided that three requirements are met:
  • None of the premiums should have been paid by the deceased;
  • The shareholder relationship must have existed at the time of death;
  • A written agreement must exist.

6.When the skill and knowledge of a partner is essential for the survival of the business,     “key man insurance“ can be taken out on the life of such a partner or shareholder. The   premiums are paid by the business and the benefit is paid to the business to prevent financial loss or to appoint and train a replacement.

In the case of a “sole proprietor”, succession planning is dealt with in the Last Will and Testament.

  1. All the value of the business vests in the deceased estate.
  2. Planning is essential as the business terminates at death, although the executor may sell it as a going concern.
  3. It is a good idea to grant a right of first refusal to an associate, who can purchase the business and intellectual capital at the time of the death.
  4. A life policy can provide for cover on the life of the owner, with the associate being the beneficiary, and the proceeds at time of the death utilised to purchase the business.
  5. It deserves no debate that planning increases the benefit for the estate as opposed to closing the business down, where the assets will be worth far less.

Continued succession planning must be part of your business strategy to ensure your hard work benefits the right people.

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.  Errors and omissions excepted (E&OE)

Posted in Business | Tagged , , | Comments Off on Succession planning