ADMINISTRATIVE PENALTIES FOR CORPORATE INCOME TAX (CIT) TO BE IMPOSED

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Dear Taxpayer

SARS will be imposing administrative penalties from December 2018 for outstanding Corporate Income Tax (CIT) returns.

Administrative penalties will be imposed on companies that receive a final demand to submit a return. In terms of Section 210 of the Tax Administration Act of 2011, non-compliance with regards to non-submission of required CIT returns may be subjected to a penalty, as follows:

(1) If SARS is satisfied that noncompliance by a person referred to in subsection (2) exists, excluding the non-compliance referred to in section 213, SARS must impose the appropriate ‘penalty’ in accordance with the Table in section 211.
(2) Non-compliance is failure to comply with an obligation that is imposed by or under a tax Act and is listed in a public notice issued by the Commissioner, other than:
(a) the failure to pay tax subject to a percentage based penalty under Part C; or
(b) non-compliance subject to an understatement penalty under Chapter 16.

The penalties range from R250 to R16 000 per month that non-compliance continues, depending on a company’s assessed loss or taxable income. According to our records your company has been identified as having one or more CIT returns outstanding. We request that you submit your return to SARS before the end of November 2018 to rectify your non-compliance and prevent penalties being imposed.

Please note that it is compulsory for registered companies to submit their income tax returns. If a company is dormant, it is still required to submit any outstanding returns prior to 2018 to prevent a penalty being imposed. The criteria for the exception in 2018 are set out in Notice 600 of 15 June 2018, which is available on the SARS website.

More information
Visit the SARS website on www.sars.gov.za for more information.

Sincerely

SOUTH AFRICAN REVENUE SERVICE
September 2018

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)

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WHEN SHOULD FINANCIAL STATEMENTS BE AUDITED, REVIEWED OR COMPILED?

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The Companies Act of South Africa (the Act) requires all companies to prepare financial statements within 6 months after the end of its financial year. A very popular question among business owners with regards to financial statements is whether the statements should be independently audited, reviewed or compiled. In determining the engagement type, the Act prescribes the following criteria to be applied:

Audited financial statements

  1. Any profit or non-profit company that, in the ordinary course of its primary activities, holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R5 million;
  2. Any non-profit company, if it was incorporated:
    • directly or indirectly by the state, a state-owned company, an international entity or a company; or
    • primarily to perform a statutory or regulatory function in terms of any legislation, a state-owned company, an international entity, or a foreign state entity, or for a purpose ancillary to any such function;
  3. Any other company whose public interest score in that financial year is:
    • 350 or more; or
    • at least 100, but less than 350, if its annual financial statements for that year were internally compiled.

How to calculate your public interest score, to determine if you exceed 350 points or not:

  1. a number of points equal to the average number of employees of the company during the financial year;
  2. one point for every R1 million (or portion thereof) in third-party liabilities of the company, at the financial year end;
  3. one point for every R1 million (or portion thereof) in turnover during the financial year; and
  4. one point for every individual who, at the end of the financial year, is a member of the company, or a member of an association that is a member of the company.

Independent review of financial statements

The Act prescribes that an independent review of a company’s annual financial statements must be performed if the following apply and the company does not select to be voluntarily audited:

If, with respect to a company, every person who is a holder of, or has a beneficial interest in, any securities issued by that company is not a director of the company, that financial statements should be independently reviewed.

A company and its directors may choose to be voluntarily audited or reviewed if they wish to engage in an assurance engagement, although it has not been prescribed by the Act.

Compiled financial statements:

If none of the above-mentioned requirements has been met, the financial statements may be compiled.

With compilations, or compiled financial statements, the outside accountant converts the data provided by the client into financial statements without providing any assurances or auditing services.

If you need any assistance with your engagement in financial statements, do not hesitate to contact our friendly staff.

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)

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THE BASICS OF CREATING A LAST WILL & TESTAMENT

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Who your property is passed on to depends on whether you have a valid will or not. If you do have a valid will, then your property will be divided according to your wishes stated therein. If you die without a will (called “intestate”), then your property will be divided amongst your immediate family according to the laws of intestate succession. 

How can I create a Will?

If you are older than 16, you have the right to create a will, to state who you would want your property to go to when you die. In order for your will to be valid, it needs to be compiled in the proper way.

  1. According to the law, you have to be mentally competent when you compile your will; this means that you must understand the consequences of creating a will and that you must also be in a reasonable state of mind when you do so.
  2. You must make sure that your will is in writing in order for it to be valid.
  3. Two people older than 14 years must witness the creating of your will (these witnesses cannot be beneficiaries).
  4. You have to initialise every page of the will and then sign the last page. The witnesses must also initialise and sign the will.
  5. You can, and should, approach a professional to help you draw up your will to avoid creating an invalid will.

You can appoint an executor in your will to divide your property amongst your loved ones. An executor is the person who will make sure that your property is divided according to your wishes, as set out in your will, and he/she will also settle your outstanding debts. If you don’t choose an executor yourself, then the court will appoint someone, which is usually a family member.

What are the risks of not having a Will?

If you don’t have a valid will when you die, your property will be divided according to the rules set out by the law. These rules state that a married person’s property will be divided equally amongst their spouse and children. If you don’t have a spouse or any children, then your property will be divided between other family members. If you also don’t have any blood relatives, then the property will be given to the government. You might think that you do not need a will, as your family will divide your possessions amongst each other, but you must keep in mind that delays in dealing with your estate could affect your family negatively; they might be relying on their inheritance for an income.

  • The beneficiaries of your estate will be determined according to the laws of intestate succession, if you die without a will.
  • This law determines the distribution of your assets to your closest blood relatives, meaning that your assets may be sold or split up against your wishes.
  • Some of your assets could be given to someone in your family that you did not intent to benefit from your estate.
  • Without a will, you cannot leave a specific item to a specific family member or friend.
  • If you live with someone but are not married to them, the law will not necessarily recognise him/her as a beneficiary of your estate, unless you have left a will naming them as a beneficiary.

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)

References:

  • Western Cape Government. (2017). Making a Will. [online] Available at: https://www.westerncape.gov.za/service/making-will [Accessed 22 Jun. 2017].
  • co.za. (2017).Drafting a will and setting up a trust. [online] Available at: https://www.momentum.co.za/wps/wcm/connect/momV1/f150ba2e-3724-4b42-9265-332106cb6b83/drafting+a+will_E+vs+2+%2807032013%29%5B1%5D.pdf?MOD=AJPERES [Accessed 22 Jun. 2017].
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SPECIAL TRUSTS

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The Income Tax Act[1] includes specific provisions for “special trusts”. These trusts are taxed on the same sliding scale applicable to natural persons, which could be lower than the current 45% flat rate applicable to conventional trusts. Capital gains tax (“CGT”) is also lower within a special trust, at a maximum rate of 18% compared to 36% for ordinary trusts.

These trusts fall into two categories. The first is, trusts created solely for the benefit of one or more persons with a “disability”[2], where such a disability incapacitates such a person or persons from earning sufficient income for their maintenance or from managing their own financial affairs (type-A special trust). When the trust is created for the benefit of more than one person, all persons for whose benefit the trust is created, must be relatives of each other.

The special trust must not provide for the possibility of any beneficiary who does not have a disability for as long as the person(s) with the disability is alive. The trust will be taxed as a normal trust from the commencement of the year of assessment in which the last living beneficiary with a disability dies.

The second is a testamentary trust created solely for the benefit of relatives of the deceased person (type-B special trust). These relatives should be alive on the date of death of the deceased person and the youngest of the relatives should be under the age of 18 years.

Apart from not being taxed at a different rate, special trusts are subject to all other provisions of the Income Tax Act applicable to ordinary trusts for income tax and CGT purposes. The only difference is that special trusts do not qualify for the tax rebates, medical tax credits or the interest exemption applicable to natural persons.[3] Also, type-A trusts[4] are entitled to certain CGT exclusions applicable to natural persons. These include the annual CGT exclusion (R40,000), the primary residence exclusion, the personal-use asset exclusion and the rules relating to compensation for personal injury, illness and defamation.[5]  Furthermore, the type-A trust will continue to be treated as a special trust for CGT purposes, until  the disposal of all the assets held by the trust or two years after the date of death of the last living beneficiary of the trust with a disability.[6]

[1] No 58 of 1962

[2] As defined in section 6B(1) of the Income Tax Act.

[3] See sections 6, 6A and 6B and 10(1)(i) of the Income Tax Act

[4] Additional definition in paragraph 1 of the Eighth Schedule to the Income Tax Act

[5] Paragraphs 5, 44 to 50, 53, 59 of the Eighth Schedule to the Income Tax Act

[6] Paragraph 82 of the Eighth Schedule to the Income Tax Act

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)

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CAPITAL GAINS TAX AND THE ANNUAL EXCLUSION

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With the 2018 tax-filing season for individuals in full swing, it is worthwhile looking at a common misconception regarding the determination of capital gains tax for individual taxpayers, specifically the role of the ‘annual exclusion’. Ensuring that the annual exclusion is applied accurately as determined in the Eighth Schedule to the Income Tax Act[1], especially where capital losses arise, will assist taxpayers in accurately completing their IT12 income tax returns and equally important, doing proper tax planning for the next tax year.

Apart from certain exceptions, individual taxpayers are required to calculate a gain or loss on the disposal of assets. This includes disposals of investments, property and even interests in private companies or close corporations. These gains or losses, which are calculated by deducting the base cost from the proceeds, should be aggregated to determine the potential tax exposure on the disposal.

Aggregate capital gain or loss

The annual exclusion is applied to determine the aggregate capital gain or loss for a year, which is a two-step process. Firstly, all capital gains for a year are reduced by all capital losses for the tax year, essentially a tally of all gains and losses realised during the year to arrive at a net total. Secondly, the net amount that has been determined, whether a gain or loss, is reduced by the annual exclusion of R40 000. The annual exclusion counts equally to reducing capital gains and losses. Importantly, the annual exclusion is not cumulative, unused portions are not carried forward to future years and it applies only to gains and losses from the current tax year. If the aggregated gain or loss is therefore less than R40 000 in the current tax year, disposal of assets in that year effectively have no impact on a person’s current or future years of assessment (although it is still a requirement to complete the information on the income tax return).

A person’s assessed capital loss from previous years of assessment is not, as commonly believed, reduced by the annual exclusion. Only after the aggregate gain or loss has been established, are capital losses from previous years considered.

Net capital gains or assessed losses

To arrive at a net capital gain or assessed capital loss, any assessed capital losses from previous tax years are deducted from aggregate capital gain, or added to aggregate capital losses, depending on the case. If there is still a net gain after deduction of previous losses, this amount is included in an individual’s taxable income at 40% (known as the taxable capital gain). If the aggregate capital loss of the current year is increased by the losses from previous years, this assessed capital loss is carried forward to be offset against capital gains in future years.

With the introduction of the tax-free savings account regime, it is expected that the value of the annual exclusion (which has increased from R10 000 for year of assessment prior to 2006 to the current R40 000), will not increase in future.

Fortunately, correct application of the annual exclusion is built into the eFiling system for individuals. It is however important that taxpayers understand its proper application in the unlikely event of errors on the eFiling system, and to accurately plan their capital gains exposure for future years.

[1] 58 of 1962

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)

 

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INDEPENDENT CONTRACTORS VERSUS EMPLOYEES

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For tax and legal purposes, it is important that employers distinguish between employees and independent contractors. Let us demystify the distinction.

Does being an independent contractor (as opposed to a salaried employee) make it possible to have a huge legal saving on income tax? This question taxed the minds of employers, employees, and independent contractors alike for several years until the court case ITC 1718, 64 SATC 43 and the Circular Minute No. 22 of 1999, issued by SARS.

Before 1999, employers employed employees, some at the maximum tax rate of 45% while the corporate rate was 30% at that time. Many structures were put into place in which employers and employees would agree that the employees would resign and on the same date be appointed as “independent contractors”. An ex-employee then formed a company of which he or she was the only director and employee and rendered the same service under the same conditions to the ex-employer. The employee paid R45 000 in tax on gross remuneration of R100 000 and the “independent contractor” company paid R30 000 in tax on the same amount of R100 000. By implementing this structure there was a R15 000 tax saving for the ex-employee and the new company could also reduce its taxable income by claiming certain tax-deductible expenses. (These expenses could not be deducted by salaried employees.)

This practice came to an end after SARS issued Circular 22 and several changes were made to the Fourth Schedule to the Income Tax Act. These were aimed at preventing employees from operating in the guise of independent operators. Whilst the aim of flushing out employees from the thickets of so-called independence is both understandable and laudable, in doing so the legislation has made life difficult for thousands of genuine independent contractors and those who use their services.

The latest changes were issued by SARS in Interpretation Note 17 (issue 4) dated 14 March 2018.

This article will specifically focus on individuals who are South African residents but will not deal with companies, non-residents or labour brokers.

To fully understand the extent of this topic, it is recommended that some of the definitions in the Income Tax Act be thoroughly read and understood.

“Employee”, “employer” and “remuneration”

It is the responsibility of the employer to determine whether the provisions of exclusionary subparagraph (ii) of the definition of “remuneration” are applicable and whether payments are subject to employees’ tax. Not only is this responsibility set by the provisions of the Fourth Schedule, but it is also the employer that is in the best position to evaluate the facts and the actual situation.

An employer that has incorrectly determined that a worker is an independent contractor is liable for the employees’ tax that should have been deducted, as well as concomitant penalties and interest. The employer has the right to recover the tax paid from the employee.

There are two statutory tests to determine whether a person rendering services is an employee or an independent contractor, and they are both conclusive in nature. Note that the second test overrides the first test.

The first test

The first test is a provision deeming that a person will not carry on a trade independently if both parts of the test are satisfied.

The first part

The first element is that the services or duties are required to be performed mainly (which is a quantitative measure of more than 50%) at the premises of the client. The “client” referred to must be carefully considered. The statutory tests refer to the premises of either the person:

  1. by whom the amount is paid or payable; or
  2. to whom such services are rendered or will be rendered.

This means that if the services are rendered mainly at the premises of either of these parties, who are not necessarily the same person, this part of the statutory test is satisfied. This type of arrangement may, for example, occur with third party arrangements such as waitrons receiving tips, or with labour brokers.

The second part

The second element of the test is whether the worker is subject to the:

  1. control of any other person as to the manner that the worker’s duties are or will be performed, or as to the hours of work; or
  2. supervision of any other person as to the manner that the worker’s duties are or will be performed, or as to the hours of work.

The control-or-supervision part of this test refers to “any” person. This is wide, and could include the payer of the amount, the recipient of the service or any other person who has a contractual right to control or supervise the person in respect of those specific services.

If either (i) or (ii) above applies (that is, control or supervision), the second element of the first test is satisfied. It is not necessary for both control and supervision to be applicable in a particular situation.

If the first test is met, the person is deemed not to be carrying on a trade independently, with the result that the amount paid is deemed to be “remuneration” and will be subject to employees’ tax, unless the second test is met.

The second test

A person who employs three or more full-time employees, who are not connected persons in relation to him or her and are engaged in his or her business throughout the particular year of assessment, is deemed to be carrying on a trade independently.

This test is the overriding test in subparagraph (ii) of the exclusions from the definition of “remuneration”. It will take precedence over the first test, even if the requirements of the first test have been satisfied, and over the common law position. A “connected person” in relation to a natural person means any relative and any trust of which the natural person or the relative is a beneficiary. “Relative” in relation to any natural person means the spouse of the person or anybody related to him or her or to the spouse within the third degree of consanguinity, or any spouse of anybody so related. For the purpose of determining the relationship between any child referred to in the definition of a “child” in section 1(1) of the Act and any other person, the child is deemed to be related to its adoptive parent within the first degree of consanguinity.

In the event that the second test is satisfied, the person will be deemed to be carrying on a trade independently, and the amount earned will not be “remuneration” as defined and will consequently not be subject to employees’ tax.

It is possible that a person could meet the first test, and be deemed not to be carrying on an independent trade, but also meet the second test and then be deemed to be carrying on an independent trade. As stated above, the second test overrides the first test.

From above it follows that:

  1. A person rendering services to an employer is a person who qualifies to be an independent contractor if he or she also renders a service to another company (employer) and he or she:
  • does not have to perform the service mainly at the premises of the client;
  • is not subject to the control of any person as to the way in which the duties are or will be performed, or as to the hours of work; and
  • employs three or more full-time employees, who are not connected persons in relation to him or her and are engaged in his or her business throughout the particular year of assessment.

If all three these conditions are met, the independent contractor will qualify as such and no employees’ tax should be deducted from the amount paid to him or her.

If neither a. and b. are satisfied but c. applies, the conditions are still met. If a. is satisfied but not b., the conditions are still met because both a. and b. must be met.

  1. Working part time for two or more employers
  • Should someone render services for more than one employer or client, the above test must be applied to each separate client.

It might happen that for one client someone might qualify but for some of the other clients

not. One client might insist that the work must be done on the client’s premises and that the contractor is subject to control. If the contractor does not have three or more full-time employees, the contractor is deemed not to be independent and for this client he or she will be an employee and employees’ tax must be deducted from payment for the services rendered. Other clients might not insist on work being done at their premises and they also do not have control over the work. For such clients the independent contractor provisions will apply, and no employees’ tax must be deducted.

  1. Retired and semi-retired persons rendering services
  • In this current day and age people live longer and so it happens that many people are still capable of doing very good work after “retirement age”. If such a person is rendering services to one or more clients or employers, the same test per employer must be done as mentioned in paragraph 1 above.

There is a big difference between the tax treatment of “independent contractors” that prevailed before 1999 and what is allowed in 2018 and for that reason, expert advice should always be sought before employers do their planning.

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)

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CA’s BEHAVING BADLY: THE SAICA PROFESSIONAL CONDUCT CODE EXPLAINED

The accounting profession is under pressure at the moment to improve public perceptions on whether they, and more specifically chartered accountants, are still behaving ethically.

“Since the widespread reports of various chartered accountants’ unethical behaviour, it has become apparent to me that people want clear-cut, black-and-white rules instructing accountants on what is allowed and not allowed in professional relationships. They gasp at the concept of ‘professional judgement’ as an allowance for members to justify unacceptable behaviour. Make no mistake, the South African Institute for Chartered Accontants (Saica) Code of Professional Conduct does hold its membership to a very high standard of ethical conduct, and it is correct for it to do so,” says Michael Dorfan, chairman of the body’s ethics committee.

The code is principles-based and it insists on the application of professional judgement when assessing risks to objectivity in appearance and mind and to avoid situations where the intent of a client in providing benefits to the professional gives rise to perceptions of or actual conflicts of interest. It requires that decisions should only be taken after applying the conceptual framework, which means that each member should assess the ethical risks before taking any actions and ensure appropriate safeguards are in place, so that a reasonable and informed third party will be unable to accuse a member of breaching an ethical fundamental principle as explained by the code.

The fundamental principles in the code are as follows:

  • Integrity – to be straightforward and honest in all professional and business relationships
  • Objectivity – to not allow bias, conflict of interest or undue influence of others to override professional or business judgements
  • Professional competence and due care – to maintain professional knowledge and skill at the level required to ensure that a client receives competent professional services based on current developments in practice, legislation and techniques
  • Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships
  • Professional behaviour – to comply with relevant laws and regulations and avoid any conduct that discredits the accountancy profession.

The code further requires that the greater the public interest in the outcome of the accountant’s or auditor’s service, the more important the transparency around threats to independence, and an increased application of thought into judgements made will be demanded from the professional.

Therefore, not only is the code based on the abovementioned principles, but those adhering to it also need to consider the reasonable and informed third party test when deciding on what to do.

A professional accountant acting in an audit capacity for example will always need to ensure that the client does not shower the accountant with expensive, lavish gifts or treatment beyond what would be the expected norm. The client may not pay for any of the accountant’s or his/her close relatives’ accommodation or other large expenses as this will create perceptions.

One should ask questions for example: could any behaviour or actions displayed infringe on perceived independence between the professional accountant and the client that might cause dismay if exposed publicly?

It is important to be open with those charged with governance, i.e. those representing the public interest, like the audit committee about any potential conflicts that may exist and that may impact outsider perceptions.

At all times the relationship between an auditor or assurance provider and the client must remain professional and never cross an important line where a reasonable and informed third party would be in a position to accuse the accountant of being compromised by having benefited unduly from the client.

Do chartered accountants still have values?

Looking at the number of Saica members that were disciplined in the last few years, versus the total membership base, it is a small number, yet it is still a black mark on a white sheet. Those responsible for bringing our profession into disrepute need to be dealt with appropriately.

With close on 46,000 members, the ongoing scandals involving Saica members has brought into focus the need to communicate how the institute deals with those members who have breached the code. “As some changes have already been made in this regard, as we need to be open about how we deal with unethical behaviour and be seen to be adopting a zero tolerance approach to those who breach the code,” he says.

In 2017, 229 complaints received against members and trainees were investigated. 109 were then cleared of any wrongdoing, nine members were suspended for 6-12 months, 77 were fined, and two were excluded from Saica membership. With regards to the remaining cases, members were either cautioned, reprimanded, or disqualified from applying for membership or associateship.

Based on the above statistics with 120 members and trainees being disciplined in 2017, and with 265 members currently in the disciplinary process pipeline, it is unfair to paint all chartered accountants with the same brush.

Some internal questions worth deliberating are possibly: What does the public expect in relation to what Saica expects of its members? Is training in ethics up to scratch? Are we disciplining members that have breached the code and ensuring they are appropriately dealt with in an efficient and transparent manner that the public trust in the profession is not being damaged? Are people aware there is a place where whistleblowers can make a complaint against an unethical Saica member? Is the public informed about the robustness of our disciplinary processes?

In response to these questions, it is important to communicate that Saica does regular training of members around ethical standards and the application of ethics. Newsletters and other resource tools are regularly issued to guide members on new standards and requirements. Members also have access to video recordings, webinars and information on the Saica member website. The members making up the institute should play a role in exposing any bad behaviour of fellow CAs to ensure the institutional reputation is sustained and the public interest is always served in doing so.

Saica also has its own disciplinary mailbox, discipline@saica.co.za which are monitored by the legal team.

The communications team also monitors the media for any exposure which might allude to the misconduct of members – these alleged incidents are shared with the legal team.

Complaints process

Saica’s formal complaints submission process allows the public or other CAs(SA) to submit confidential affidavits that address complaints against members accused of breaching the code.

All complaints are referred to the legal team who will engage with complainants to clarify uncertainties or ambiguities. Members of the disciplinary panel remain anonymous to outsiders to protect the integrity of the disciplinary process.

Every complaint goes through a gather-and-collate-evidence phase and thereafter to the professional conduct committee (PCC), an independent committee separate from Saica for examination and analysis, and where found appropriate, a sanction is applied. If the complaint is complex and difficult to deal with, it flows up through to a disciplinary committee for examination.

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)

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THE STRUGGLE OF SAVING

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We live in a time of ever-increasing living costs and financial pressure. Fuel price hikes. Food price increases due to the drought. High interest rates. Rising taxes. It is becoming more and more difficult to save, and for some people it often feels like an accomplishment just surviving from payday to payday. This struggle from month to month makes it easy to forget the importance of saving for our future.

Healthier lifestyles and medical breakthroughs are contributing to people outliving their retirement funds forcing them to be dependent on others. We do not realise how large our future financial liabilities will be, and go on the assumption that we will be okay when retirement comes. The scary truth is that we probably won’t be.

According to National Treasury, 94% of South Africans are not saving enough for their retirement. Surveys show that South Africans allocate only about 15% of their income towards savings; this has been consistent since 2015. This low savings rate, coupled with lower expected investment returns thanks to the slow growing economy, is not enough for people to settle down with at retirement.

Personal financial management should involve preparation for the future. Our spending and savings patterns should reflect our perceptions of our entire lives. We may not be able to control investment returns or how long we can save for, but we can control how much we can save.

Behaviourally, as humans, we tend to distort information and struggle (or make excuses) in our decision-making, particularly when it comes to our savings decisions. We tend to select the default or easy option, telling ourselves that by at least saving something we should be okay. This is however not enough. Our own financial wellbeing should be priority, and we should not allow our emotions or lack of self-control to interfere with it.

Debt – the danger of living beyond your means

It is an unavoidable fact that we live in a consumerist society which values a pleasure-seeking way of life funded by debt. The reality is that a growing number of people from all ages are living beyond their means. It is a trap that is so easy to fall into, especially when we allow our emotions to trump rational decision-making.

South Africa’s household debt as a percentage of disposable income is currently a shocking 72.5%, which means that for every rand earned, nearly three quarters is spent on debt.

It is crucial to have a grasp on your debt, and to make its repayment a priority. As the cost of debt will always exceed returns earned on savings, it makes sense to repay your debt before you start working on your savings plan. Don’t incur unnecessary and additional debt and prioritise its repayment, starting with the most expensive.

Tips to improve your financial health:

  1. Have a good look at your budget, and differentiate between your wants and needs. This will assist you in cutting out unnecessary spending.
  2. Focus on your spending and saving goals. Set deadlines to achieve these goals and pursue them rigorously. Keep track of where your money is going and make sure to stay aligned with your goals.
  3. Pay yourself first – make the goals you have set for yourself a priority.
  4. Seek out professional financial advice – a financial planner can help you get the most out of your money, and assist you in making sure that your hard-earned savings are growing and working for you.

On savings and taxes

When Benjamin Franklin said that nothing in life is certain besides death and taxes, he had a point. Taxes can however be dealt with by reviewing one’s savings and investment vehicles, and ensuring the way you are saving is tax efficient.

There are various tax-efficient savings vehicles available for us as South Africans to make use of, including retirement annuities, unit trusts and tax-free savings accounts. These vehicles offer great tax breaks that can really help you to get the most out of your savings.

Retirement Annuities (RAs) are particularly tax efficient to encourage longer-term saving. Contributions are tax deductible up to a set limit and the growth in your RA is not subject to tax on interest, capital gains tax or dividends tax.

TFSA (Tax-Free Savings Accounts) are the next most tax-efficient savings vehicle. Introduced by government in 2015, it was aimed at encouraging consumers to get into the habit of setting aside fixed amounts to save each month, instead of exhausting their income on spending. Through TSFA’s you are able to save up to R33,000 a year, completely tax-free, up to a lifetime limit of R500,000. This means you pay no tax on the growth of your savings, including dividends, capital gains or interest. As with most savings funds, they should ideally be allowed to mature over time to get the most benefit out of compounding growth.

TFSAs are an ideal vehicle for topping up your retirement savings or saving toward specific goals, depending on your needs and savings objectives.

Financial freedom is something that I’m sure we all want. Even though we live in hard times, the truth is that it is available to everyone. By making use of the tools available to us, and dedication to our goals month after month, we can take control of our financial health and make our money work for us.

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)

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BREAKING THE MOULD ON TRADITIONAL CA JOB OPTIONS

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With the spotlight on the ethics and integrity of the major players in the auditing sector, landing an opportunity to do your training as a chartered accountant (CA) at a Big Four firms may no longer be all it’s cracked up to be.

In fact, the job market for young CAs has changed in the last decade and the top jobs of the future look set to be quite different from what they’ve been in the past.

As the world becomes more technology-driven is the ‘traditional’ approach still best-positioned to provide you with the skills you’ll need for the future? So, what can new CAs do to future-proof their careers? The most important first step is to choose the right firm to complete your training – and consider whether a non-traditional option might be a good fit for you.

According to the South African Institute of Chartered Accountants (SAICA), there are currently 9,500 CA trainees. The vast majority – 8,885 – are completing their training at traditional auditing firms, compared to 615 who have opted for a non-traditional approach. For graduates looking to differentiate themselves from the majority, this might be a sensible option to consider.

Three questions to help you find the right firm

  1. Is innovation expected?
    An innovation mindset is not for everyone, but for those who enjoy finding new solutions for new challenges, a traditional accounting approach may be stifling.
  1. Do you want to find a niche?
    The predictable, rote aspects of accounting will be the first to be affected by artificial intelligence, and these are often the tasks delegated to clerks at big firms. Being exposed to a wider range of work in your first years of work will enable you to find a niche sooner than you might have done if you’d been stuck doing one type of work.
  1. Who will you learn from?

    A key question to ask yourself is ‘who will I learn from?’ What does the management structure look like, and will you be able to access senior executives to gain insights or bounce ideas off? Doing your training at a smaller, non-traditional firm will provide greater access to people at all levels of seniority, whereas the ‘Big 4’ tend to have firmly established hierarchies.

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)

 

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WHAT SHOULD YOU CONSIDER WHEN INVESTING IN A BUSINESS

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You have worked hard for many years, and have finally saved enough funds and mustered the courage to take the big leap that you have been dreaming about for such a long time… you are going to invest in your own business.

You have found the perfect business and is excited about your new journey, when you suddenly realise, however, that you have never been in this situation, and suddenly have no idea what to do next.

The first step

It is important to understand what you wish to gain out of your investment. Some people may solely invest in a business for financial gain, while for others it may be fulfilling a life-long dream, or to chase a very specific passion, such as having the opportunity to jump out of an airplane every single day through your newly acquired skydiving school, for instance.

Although motivation will differ for each person and will likely include a number of factors, it is important to understand what drives your decisions, in order to invest smartly.

Start with the end in mind

Once you understand the why behind your investment decision, it is a good principle to start with the end in mind. Ask yourself where do I want to be in the next three to five years (skydiving every day, the richest person in my street, having loads of free time, etc.) and how you will be able to leverage your business to get you there.

Good questions to ask might include –

  1. Is the business scalable (the ability to multiply a business model);
  2. Is the business labour/time intensive;
  3. Do you have adequate and necessary skills to manage the business;
  4. Are you aware of all the risks that you are assuming through investment;
  5. Is the price that you are willing to pay for the business substantiated and reasonable;
  6. Etc.

Practical considerations

In practical terms, there are a number of ways in which to invest in a business, primarily including acquisition of a going concern, as opposed to equity/members interest in an existing entity. It is also important to understand the advantages/disadvantages of the structure in which you choose to invest. You might decide to invest as a sole proprietor, through a company, a corporate structure or a trust (etc.) for instance.

The above considerations can have a major influence on a variety of factors, including statutory risk, tax consequences, contracting procedures, etc. and if the process is not approached correctly, it can cause many unnecessary headaches in the long-run.

Summary

Investing in a business, is no doubt always a very exciting prospect which, if approached correctly, can have a profoundly positive impact on a person’s life. It can be a precarious process, however, if not negotiated carefully.

It is therefore recommended to find a credible and experienced partner, to help guide you through the process, and even to further strategically aid and assist you post the 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)

 

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