Changes to bad debt allowance

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Most South African businesses are at some point in time exposed to credit risk in the form of bad debts. Although taxpayers would undoubtedly prefer to recover the debts, the Income Tax Act[1] provides for some relief in cases where debts have become bad, or doubtful.

Not only does section 11(a) provide for the deduction of losses actually incurred in the production of income, section 11(i) and 11(j) are specifically aimed at a deduction or allowance for bad and doubtful debts respectively. These two provisions are, however, contentious mainly for two reasons. Firstly, there is no guideline in the Act, or clear test that has been established in case law, for when a debt is only considered to be bad, or “doubtful”, or has, in fact, become “bad”. This is an important consideration since it determines whether taxpayers can claim a permanent full deduction of the amount in terms of section 11(i), or merely an allowance in respect of section 11(j), that must be included in taxable income again in the subsequent year.

Secondly, the value of the allowance that taxpayers can claim in respect of “doubtful” debts has been a topic of dissent between taxpayers and SARS. Traditionally, taxpayers have claimed a 25% allowance in respect of such debts but some taxpayers, especially in the retail and unsecured debts market, have been challenged by SARS on the reasonability of the allowance. Recently, however, there has been an effort from the legislature to provide some certainty around the bad debts regime, at least in respect of the second value of allowances for “doubtful” debts.

Since 1 January 2018, banks can claim 25% of an impairment loss calculated in terms of the International Financial Reporting Standards (IFRS). In the Draft Taxation Laws Amendment Bill 2018, the legislature looks to extend this rate of allowance to other taxpayers as well, and specifically as follows:

  • Companies reporting in terms of IFRS: 25% of the loss allowance relating to impairment as calculated in IFRS 9 (excluding lease receivables); and
  • Companies that do not report in terms of IFRS: 25% of the face value of doubtful debts that are 90 days past due date.

Although the proposal to provide certainty is welcomed, some tax practitioners have made representations to National Treasury on the different treatment of taxpayers that report in terms of IFRS, and those who do not.

Whereas IFRS 9 makes provision for either a general or a simplified approach (or a combination thereof) that may be applied across a group of financial assets (debts) and that can also consider historical information, taxpayers that do not report in terms of IFRS 9 will be required to make an individual assessment of each debt to determine if such a debt is 90 days or more in arrears. This could cause practical difficulties where debtors have different terms or when payments are due (e.g. 30 days after invoice date or 30 days after statement date), especially where taxpayers have a significant number of low-value debtors.

It is suggested that there should not be any distinction between taxpayers that report in terms of IFRS 9 and taxpayers that do not, but rather that the guidance of IFRS 9 can be used to determine any impairment, even for taxpayers that do not report in terms of IFRS 9. This will also remove any inconsistent treatment of taxpayers, depending on the financial reporting framework that they are subject to. The suggestion is, therefore, that any taxpayer not reporting in IFRS may elect to apply IFRS 9 in determining its section 11(j) allowance. Submissions are currently being considered by National Treasury.

  • [1] 58 of 1962 (‘the 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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Interest free loans with companies

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The latest annual nation budget presented in Parliament proposed the dividends tax rate to be increased with almost immediate effect from 15% to 20%. The increased rate brings into renewed focus what anti-avoidance measures exist in the Income Tax Act[1] that seeks to ensure that the dividends tax is not avoided.

Most commonly, the dividends tax is levied on dividends paid by a company to individuals or trusts that are shareholders of that company. To the extent that the shareholder is a South African tax resident company, no dividends tax is levied on payments to such shareholders.[2] In other words, non-corporate shareholders (such as trusts or individuals) may want to structure their affairs in such a manner so as to avoid the dividends tax being levied, yet still have access to the cash and profit reserves contained in the company for their own use.

Getting access to these funds by way of a dividend declaration will give rise to such dividends being taxed (now) at 20%. An alternative scenario would be for the shareholder to rather borrow the cash from the company on interest free loan account. In this manner factually no dividend would be declared (and which would suffer dividends tax), no interest accrues to the company on the loan account created (and which would have been taxable in the company) and most importantly, the shareholder is able to access the cash of the company commercially. Moreover, since the shareholder is in a controlling position in relation to the company, it can ensure that the company will in future never call upon the loan to be repaid.

Treasury has for long been aware of the use of interest free loans to shareholders (or “connected persons”)[3] as a means first to avoid the erstwhile STC, and now the dividends tax. There exists anti-avoidance legislation; in place exactly to ensure that shareholders do not extract a company’s resources in the guise of something else (such as an interest free loan account) without incurring some tax cost as a result.

Section 64E(4) of the Income Tax Act provides that any loan provided by a company to a non-company tax resident that is:

  1. a connected person in relation to that company; or
  2. a connected person of the above person

“… will be deemed to have paid a dividend if that debt arises by virtue of any share held in that company by a person contemplated in subparagraph (i).” (own emphasis)

The amount of such a deemed dividend (that will be subject to dividends tax) is considered to be effectively equal to the amount of interest that would have been charged at prime less 2.5%, less so much of interest that has been actually charged on the loan account.

It is important to also appreciate that the interest free loan capital is not subject to tax, but which would also have amounted to a once-off tax only. By taxing the interest component not charged, the very real possibility exists for the deemed dividend to arise annually, and for as long as the loan remains in place on an interest free basis.

  • [1] 58 of 1962
  • [2] Section 64F(1)(a)
  • [3] Defined in section 1 of 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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Usufructs created upon death: What happens now?

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A usufruct is a limited real right in property. The usufruct construct takes the form of a common-law personal servitude, which, as a limited real right, grants the holder (the usufructuary) the right to use someone else’s property, including the fruits. Typical examples include where someone is granted the right to use a house, or the right to receive interest on a loan account or dividends on shares. While the right to use the asset is granted to a person, the ownership, or bare dominium of the property, does not transfer to the usufructuary. The usufructuary merely receives the right to the enjoyment of an asset. The use of usufructs has several tax consequences, one of which occurs when a usufruct is created upon death.

A usufruct created under a testament will trigger a part-disposal for capital gains tax (CGT) purposes in the hands of the testator if the usufruct is bequeathed to the surviving spouse while the bare dominium is bequeathed to another person, such as a family trust. In these circumstances, there will be a disposal of the bare dominium to the deceased estate while there will be a roll-over to the surviving spouse.

When the testator directs that a usufruct is to be created upon his or her death and neither the usufruct nor the bare dominium in the asset is bequeathed to a surviving spouse, there will be a disposal of the full ownership in the asset to the deceased estate and the executor will dispose of the usufruct to the usufructuary and the bare dominium to the bare dominium holder.

Usufructs created upon the death of a person (i.e. where someone is granted a usufruct of an asset which the deceased owned) must be valued (to “split” the market value of the total ownership between the usufruct portion and the bare dominium portion). This valuation involves determining the present value of the annual right of use at 12% a year over the expected life of the person receiving the benefit, or when the right of enjoyment is a lesser period, over that lesser period. If the asset subject to the usufructuary interest cannot reasonably be expected to produce an annual yield of 12% on the value of the asset, SARS must decide, on application by the taxpayer; such sum as reasonably represents the annual yield. This could, for example, be the case where a usufructuary is granted the usufruct over a loan account, and 12% interest (in the current economic circumstances at least) cannot be expected to be a fair representation of the annual yield.

On an oversimplified basis, where a usufruct is created upon death, and the bare dominium is bequeathed to a trust, subject to a usufruct by a surviving spouse, the following tax consequences will ensue:

A split of the market value (and base cost) of the property is required, in line with the above valuation. There will be a deemed disposal of the bare dominium in the deceased’s hands at market value at the date of death. Since the usufruct has been left to a spouse, there is a roll-over in respect of that asset.

The tax consequences of a usufruct created upon death are very complex, and advice the correct treatment thereof should be obtained from a specialist in the field.

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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Kom ons kyk terug na korporatiewe beheer

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Die einde van 2019 het aangebreek. Ons het dit dus goedgedink om ʼn kort opsomming vir u te gee van die belangrike onderwerpe wat gedurende die jaar aangeraak is.

CIPC JAARLIKSE OPGAWES

In terme van Artikel 33 van die Maatskappywet No. 71 van 2008 (“die Wet”), word daar van alle maatskappye en beslote korporasies vereis om jaarlikse opgawes by die “Kommissie vir Maatskappye en Intellektuele Eiendom” (“CIPC”) in te dien.

Die doel van die jaarlikse CIPC-opgawe is om te bevestig dat:

  • ʼn entiteit nog in besigheid is;
  • ʼn entiteit handeldryf; en
  • ʼn entiteit in die nabye toekoms nog handeldrywend gaan wees.

Jaarlikse opgawes kan slegs elektronies op die CIPC webtuiste ingedien word en binne die volgende voorgeskrewe tydperke. In die geval waar ʼn entiteit dormant is, word daar steeds van die entiteit verwag om ʼn jaarlikse opgawe by die CIPC in te dien ten einde deregistrasie te vermy.

Gedurende Februarie 2016, het CIPC ‘n program geloods om eXtensible Business Reporting Language (“XBRL”) te loots wat sal dien as ‘n digitale vorm van finansiële verslaggewing vir entiteite in Suid-Afrika. Entiteite wat deur wetgewing verplig is om hul finansiële state in te dien saam met hul jaarlikse opgawe, sal dit dus in XBRL formaat moet indien.

DIE AARD VAN BESLOTE KORPORASIES

‘n Beslote korporasie het nie aandeelhouers nie, maar het lede. ‘n Beslote korporasie is ‘n afsonderlike regspersoon en staan onafhanklik en verwyderd van sy lede. ‘n Beslote korporasie kan uit tussen een en tien lede bestaan. Die beperking op die aantal lede in ‘n beslote korporasie beklemtoon die Wetgewer se bedoeling dat beslote korporasies bestem is vir kleiner ondernemings, waar die verhoudings tussen die lede soortgelyk is aan dié van vennote.

Slegs natuurlike persone mag lede van ‘n beslote korporasie wees en geen regspersone mag ‘n ledebelang in ‘n beslote korporasie hou nie. ‘n Maatskappy of beslote korporasie kan dus nie ‘n lid van ‘n beslote korporasie wees nie. ‘n Beslote korporasie mag wel ‘n lid van ‘n maatskappy of vennootskap wees – ‘n beslote korporasie kan selfs die beherende aandeelhouer van ‘n maatskappy word.

‘n Trustee van ‘n trust, hetsy ‘n inter vivos of testamentêre trust. kan in die hoedanigheid van trustee lid van ‘n beslote korporasie wees. Daar bestaan egter sekere beperkings op die toelating van ‘n trustee van ‘n trust inter vivos om ‘n lid te wees, soos die vereiste dat geen regspersoon ‘n begunstigde van sodanige trust kan wees nie.

PBO’S NPO’S EN NPC’s

Daar bestaan baie verwarring rondom die onderskeid tussen ‘n ‘Openbare Weldaadsorganisasie (“PBO”)’, ‘Nie-winsgewende Organisasie (“NPO”)’ en ‘n ‘Nie-winsgewende Maatskappy (“NPC”)’. Alhoewel daar soortgelyke karaktereienskappe tussen hierdie liefdadigheid-entiteite bestaan, en alhoewel hulle in ‘n sekere mate met mekaar verbind is, is elkeen van hierdie tipe entiteite verskillend van die ander een en dien elkeen ‘n ander doel.

Elk van die voornoemde entiteite word ook by verskillende regerings-organisasies en departemente geregistreer, wat die onderskeid verder beklemtoon.

‘n NPO word gedefinieer deur die Nie-winsgewende Organisasie-Wet No. 71 van 1997 as ‘n trust, maatskappy of enige ander assosiasie van individue wat gestig word vir:

  1. ‘n publieke doel en;
  2. waarvoor die inkomste en eiendom nie verdeel word onder die direkteure of lede andersins as vir die verkryging van redelike vergoeding vir dienste gelewer aan die entiteit nie.

‘n NPC word gedefinieer deur die Maatskappy Wet No 71 van 2008 (“die Wet”) as “‘n maatskappy wat:

  1. geïnkorporeer word vir openbare voordeel soos vereis word deur item 1(1) van Skedule 1 van die Wet en;
  2. waarvan die inkomste en eiendom nie verdeel word onder die direkteure, beamptes of persone wat enigsins verbind is tot die maatskappy nie.” ‘n Organisasie moet aansoek doen om geregistreer te word as ‘n NPC by die Kommissie vir Maatskappye en Intellektuele Eiendom (“CIPC”). Die organisasie sal dan dieselfde eienskappe en voordele hê van ‘n privaat of openbare maatskappy. ‘n NPC kan geregistreer word met of sonder lede.

Die Inkomstebelastingwet 58 van 1962 (“die Inkomstebelastingwet”) definieer ‘n PBO as enige organisasie wat:

  1. ‘n nie-winsgewende maatskappy, trust of assosiasie van persone is soos gedefinieer in artikel 1 van die Wet wat geïnkorporeer of gevorm is in terme van wetgewing; of
  2. enige tak van ‘n maatskappy, assosiasie of trust wat geïnkorporeer of gevorm is en wat vrygestel is van inkomstebelasting waarvan die hoofdoelwit is om een of meer openbare belang aktiwiteite te dryf waar –
    • sulke aktiwiteite uitgevoer word op ‘n nie-winsgewende manier met ‘n filantropiese bedoeling; en
    • hierdie aktiwiteite nie bedoel is om direk of indirek enige belanghebbende persoon of werknemer van die organisasie ekonomies te bevoordeel nie, andersins as vir betaling van redelike vergoeding vir die werknemer of belanghebbende persoon se diens aan die maatskappy, en
    • die aktiwiteite wat deur die organisasie uitgevoer word vir die voordeel is van die wyer publiek.

DIVIDENDVERKLARINGS

Ingevolge Artikel 46 van die Wet, moet die direksie van die maatskappy die dividendverklaring goedkeur per skriftelike resolusie.  Die direkteure moet ook verklaar dat die solvensie- en likiditeitstoets toegepas is, soos vereis in Artikel 4 van die Wet, en dat hulle redelikerwys bevind het dat die maatskappy solvent en likied sal wees vir die 12 maande wat volg op die datum van die dividendverklaring.

Die dividend moet aan die aandeelhouers van die maatskappy uitbetaal word, proporsioneel tot hul aandeelhouding in die maatskappy, nadat die direksie die dividendbelasting in ag geneem en teruggehou het.  Die dividendbelasting is betaalbaar aan die Suid-Afrikaanse Inkomstediens (“SAID”) teen die laaste werksdag van die maand wat volg op die verklaring van die dividend.

DIREKSIE VERGADERINGS

Die Maatskappywet 71 van 2008 (“die Wet”) spesifiseer dat ‘n maatskappy en maatskappy aangeleenthede bestuur moet word onder die beheer van ‘n raad van direkteure, wie die bevoegdhede moet hê om al die magte en funksies binne die maatskappystruktuur te kan uitoefen. Die algemene magte van die raad van direkteure word gereguleer deur die Wet en mag ook beperk word in terme van die maatskappy se Memorandum van Inkorporasie (“MOI”).

Daar word van die direkteure van ‘n maatskappy vereis om hul magte op so manier uit te oefen om uitvoering te gee aan effektiewe bestuur van die maatskappy deur middel van besluite en resolusies wat goed gekeur moet word by direksie vergaderings.

Die vergaderings moet behoorlik belê word deur ‘n kennisgewing van die vergadering wat aan elke lid van die direksie gegee moet word en ‘n behoorlike quorum wat teenwoordig moet wees voordat enige vergadering kan voortgaan en daar op enige aangeleentheid besluit mag word.

‘n Direksie vergadering mag enige tyd byeen geroep word deur ‘n direkteur wie gemagtig is deur die raad van direkteure om so te doen. Onderhewig aan die maatskappy se MOI, wat ‘n groter of laer persentasie kan voorskryf, moet ‘n direksie vergadering byeengeroep word as ten minste 25% van die direkteure een vereis in die geval waar die maatskappy 12 of meer direkteure het, of deur ten minste 2 direkteure waar die maatskappy uit minder as 12 direkteure bestaan.

Indien u graag meer wil uitvind oor enige van die onderwerpe wat aangeraak was in terme van Korporatiewe beheer aangeleenthede, kontak gerus vir Arné Bester (pty@asl.co.za) in ons Korporatiewe Beheer Afdeling.

Hierdie artikel is ʼn algemene inligtingsblad en moet nie as professionele advies beskou word nie. Geen verantwoordelikheid word aanvaar vir enige foute, verlies of skade wat ondervind word as gevolg  van die gebruik van enige inligting vervat in hierdie artikel nie. Kontak altyd ʼn finansiële raadgewer vir spesifieke en gedetailleerde advies. (E&OE)

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Misconceptions about the roles and responsibilities of the auditor

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The public is seeking answers after the spate of corporate collapses and significant financial losses, and auditors have come under intensive scrutiny and criticism. Some believe that this may be due to an expectation gap that has developed between the users of the financial statements that are subject to the audit and the auditors who have clear roles and responsibilities.

Should auditors have seen the early warning signs of these collapses? But, is this the role and responsibility of the auditor? Is it fair that the auditing profession is being slated for these corporate shortcomings? The current state that the profession finds itself in may very well be as a result of a lack of understanding of the role and responsibilities of an auditor.

An audit is not a guarantee against all things that can go wrong in the operations of an entity. According to the International Standards on Auditing (ISA), the auditor’s opinion does not assure the future viability of the entity or the efficiency or effectiveness with which management has conducted the affairs of the entity. An audit also does not assure the company’s financial status, including items of a financial, risk, management or regulatory nature.

There is a significant amount of focus on whether the level of audit quality has improved since the global financial crisis. However, the question is whether a poor level of audit quality was responsible for this global financial crisis to begin with; or was this rather as a result of a market crisis; or even perhaps a failure of corporate governance?

This is also true for the more recent corporate collapses that the market has seen. What was the actual cause of these collapses? Was an audit failure the root cause of the collapse, and if so, was the root cause of the audit failure a gap in the standards or human/behavioural error? Or was this a failure of corporate governance, which could have included unethical behaviour of parties involved?

Lessons learnt

Management is ultimately responsible for preparing financial statements, and having a system of internal controls necessary to achieve this. An important lesson learnt from the financial crisis is that an audit performed in accordance with the desired level of audit quality cannot be expected to compensate for weaknesses in management taking responsibility and being accountable. A quality audit can also not be expected to address flaws in the business model or the implementation of an inadequate risk management process.

All CAs(SA), including members in public practice (MIPP) and members in business (MIB) should take equal responsibility and should be equally accountable in terms of complying with the fundamental principles of an audit. Both MIPP and MIB are subject to the same standards of professionalism and ethics. As an example, auditors must be diligent in performing their work in accordance with the relevant codes, standards and laws and regulations. Similarly, preparers of financial statements, boards of directors, and the management and employees of organisations must be ethical in their business dealings.

A positive outcome of the corporate collapses was that it highlighted that the general public expects auditors to communicate more. The general public expects the communication of the auditor to provide a glimpse into the inside operations of an entity and where necessary, early warning signs of failures.

Management’s responsibilities

In addition to the misconceptions highlighted above, certain preparers of financial statements believe that the auditor is responsible for ensuring that the entity arrives at the right answer in finalising the preparation of the financial statements. However, this is the responsibility of management. The financial statements subject to audit are those of the entity, prepared by management of the entity with oversight from those charged with governance. The auditor is only responsible for expressing an opinion on the preparation and fair presentation of the financial statements. In many instances, management and the audit committee are at the forefront of this expectation; yet they maintain a strong view that auditors are independent.

The ISAs do not impose responsibilities on management and do not override laws and regulations that govern their responsibilities. However, an audit in accordance with ISAs is performed on the premise that management have acknowledged certain responsibilities that are fundamental to the conduct of the audit. The audit of the financial statements does not relieve management or those charged with governance of their responsibilities.

Furthermore, the auditor’s report includes a statement of management responsibilities, where it is stated that the directors are responsible for the preparation and fair presentation of the financial statements and such internal controls as the directors determine necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Management is therefore responsible for the design and implementation of a system of internal controls necessary to enable the preparation of financial statements that are free from material misstatement.

Current weaknesses of an audit

Although an audit does have the effect of reducing the cost of capital, since the audit only deals with historical financial information, audited historical financial information is of less relevance and little value to capital markets. Investors are more interested in facts that have an impact on the share price and organisational value than on annual reports that include financial information on the past performance of the entity.

In terms of the requirements of the ISAs, the auditor must obtain an understanding of the entity’s business strategy and system of internal controls. There is however, no requirement for the auditor to communicate these in the auditor’s report. This information may be useful to the market and perhaps more transparency around reporting on these will enhance the perceived value of an audit.

There is a tension between the need for the auditor to ask the difficult questions and exercise professional scepticism in assessing management’s response thereto and maintain positive relations with the entity as a business client. The existence of an independent audit committee relieves this tension to some extent.

The increased complexities of accounting standards as well as the drive towards auditing towards a single set of standards to achieve a consistently high audit quality have resulted in a disproportionate amount of time being spent on compliance. This has hindered professionals with questioning minds from either entering the profession or, once in the profession, from using their initiative in determining the best audit approach.

The future of auditing profession

An audit performed in accordance with the applicable pronouncements, including relevant quality control standards and the respective Codes of Conduct of the South African Institute of Chartered Accountants (Saica) and the Independent Regulatory Board for Auditors, is designed to enhance the degree of confidence of the intended users about whether the financial statements fairly present, in all material respects of the financial position, financial performance and cash flows for the period under review.

For the auditing profession to remain relevant in serving the public interest by enhancing the trust and credibility of financial information, it is imperative that the profession continues to perform audits that achieve the desired level of audit quality.

A question has been raised as to whether an audit invented today would take the same form as the audit as we know it today.

In terms of the current scope of an audit as prescribed by the ISAs, the auditor is not responsible for the detection of fraud. Is it time for the scope of an audit to be amended to include this? Should the nature of an audit transform to a continuous process which is performed throughout the period? Should the auditor focus on forward-looking information that is of more relevance to the capital markets?

It is time for the difficult questions to be raised by the stakeholders and answered by the auditing profession. If the current nature and scope of the audit of historical financial information needs to change to meet the expectations of the stakeholders, regulators and other professional bodies need to invest the time in understanding the needs of the market, including the expectations and take the appropriate action to address these needs.

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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7 Ways to make better decisions

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We all make decisions every day. But as you become responsible for more people or projects, your decisions become weightier. It can be difficult to trust that you’re making the best choice. Here are some strategies to consider.

  1. Look at the problem from every side  

    When you’re faced with a difficult choice, try examining the problem from different angles and perspectives. Assume that you might not have all the facts and set out to find them, even if that means re-examining what you think you already know. Try to imagine how someone else would think about the choice at hand and how you would frame the choice and the options if you had to explain them to an outsider. I find it helps to try not to frame options as positive or negative at the start, as this can colour the way you view potential choices, sometimes at the expense of a good decision.

  2. Beware your bias

    We all have biases, but we can work to overcome these by becoming conscious of them. Experts suggest checking whether you’re making a decision based on confirmation bias (executing a choice based on an opinion that supports your presupposed beliefs). To help with this, you might get perspectives outside of your own – not just from people who think like you do, but people who will challenge your thinking too. This is why management teams need to include people with diverse personalities – it means that you’re more likely to see problems from different angles.

  3. Consider the data

    Evidence-based management (EBM) advocates using data to support decisionmaking. Of course, it’s important that the evidence you’re basing decisions on is up to date and reliable. You wouldn’t make the same offer on a car that’s driven 100 km as one that’s driven 100 000 km, and the same goes for business. We should always try to use the best data available to us to drive our choices. Again – we should be careful of only examining the data that supports our own opinions. We need to also look for evidence that counters it. Do thorough research and avoid the temptation to cherrypick facts.

  4. Recognise resistance to change

    Often, decisions are made based on the status quo because it’s easier to keep doing what you have been doing than to make a change. It’s important to recognise this and to ask yourself whether you would choose the same course of action if you weren’t already on this course. For example, if I were to pitch a solution to an existing client again, would I do it the same way? Or would I change my approach? If the latter, how should that shape the way I am working with that client now? And, importantly, how I approach potential future clients?

  5. Let go of past mistakes (and wins!)

    It’s easy to think that what didn’t work before won’t work again, or that you can replicate a good decision. But the past is gone, and every decision needs to be evaluated in a context that is specific and current. Things may have changed, even if it doesn’t look like it at first glance. Come to terms with unsuccessful past decisions, learn from them, and don’t hang on too tightly to past successful ones.

  6. Keep perspective

    Choosing between two cover options on a presentation does not require the same level of probing as choosing between two potential hires. Learn which decisions you can delegate, which ones you can make quickly, based on intuition, and which ones require a deeper thinking process. Be guided by what’s at stake. Don’t be afraid to take time to decide on weightier issues, but also avoid the trap of overthinking them. If you’re in doubt, seek counsel from someone you trust.

Not every decision will be perfect and is a process. Part of leadership is acknowledging just that.

  • www. accountancysa.org.za
  • AUTHOR l FR (Rhys) Robinson PhD, Executive Director, Infinitus Reporting Solutions (Pty) Ltd

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)(E&OE)

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Does your SME owe SARS money?

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Many entrepreneurs and business owners live in fear of the South African Revenue Services (SARS). In most cases, this fear is compounded by a lack of knowledge and failure to understand what is required. Yet most of the anxiety – and the stress of paying outstanding taxes – can be quite easily avoided.

“The major concern for most business owners and indeed, taxpayers, is that they will go to jail for not paying their taxes,” says Tyronne Nel, tax consultant to SME. TAX, an SME accounting and advisory firm.

This is a major misunderstanding. Under current legislation, SARS treats the failure to submit the correct forms (PAYE, VAT, etc) as a criminal act, whilst failure to pay is a civil act.

“Often, we see that clients don’t submit the forms because they haven’t got the money,” says Nel.

“Yet if you don’t put the form in, that’s a criminal offence – and the reason is that they can send someone in to physically collect you to fill in the forms. On the other hand, not making payment is a civil act. So you’ve got to view SARS as another creditor on your books, although of course, they want to be first in line.”

In addition, many business owners and entrepreneurs aren’t aware that there are various routes to take if you do owe SARS money. They are naturally intimidated by what appears to be a ‘pay first, argue later’ approach taken by SARS, yet Nel says that the authority is in fact very open to negotiation and fair settlements.

“If you’ve done your bookkeeping accurately and everything is in order, SARS will allow you to pay it off or give you a compromise agreement,” explains Nel. “They want to keep your small business open.”

Know your options

According to Nel, there are two primary options for business owners who are looking to reach a settlement with SARS.

The first is the Voluntary Disclosure Programme (VDP) that SARS offers. This is a good option for businesses and individuals who owe SARS money, but have not declared it (i.e. by not submitting PAYE, VAT or Income Tax Returns). Business owners can now declare these amounts under the VDP – and save by not being charged interest or penalties for late filing.

“SARS assumes that you are honest from the start,” says Nel.

“So the minute your VDP application is submitted, it absolves you from any criminal prosecution and interest on the debt you owe. So you effectively just owe on the capital that’s outstanding.”

The second settlement route is offered through the Tax Administration Act, which deals with the waiving of taxes owed to SARS – and also compromises on debt owed by individuals, trusts, close corporations and companies. SARS may be willing to write off or reduce taxes, penalties, interest and even additional tax owed to SARS under this Act.

“The most important thing is to stay up to date with your books, and ensure that you understand what is required from SARS,” adds Nel. “If it’s done right and on a monthly basis, then bookkeeping is the cheapest part of running your business. If you have the data, everything else flows from there. You can make the right calls, because you know where you stand.”

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 importance of saving for retirement

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Preparing for retirement requires seeing the bigger picture years before it becomes necessary. It should be one of the most important concerns for working individuals, yet many people are not making the necessary provisions for their old age. When you start a new job or enter the workforce for the first time, the last thing you think about is saving for retirement, however, saving for retirement as soon as possible is essential to ensure that you live comfortably in your old age. For many, though, saving for retirement can seem like too complex a task. With some assistance, this doesn’t need to be the case.

How far away you are from retirement doesn’t matter; you should start saving and refrain from spending any of this money on other things. As a rule of thumb, it is recommended to save 15% of your gross income, over a period of 40 years, between the ages of 25 to 65. Remember, you will also need to develop a financial plan for major life events – both the expected and unexpected ones. This could include anything from medical needs to changing family dynamics.

When thinking about your financial future, it’s important that you make retirement planning a top priority. Today, it’s even more important to start planning for retirement early on, as fewer employers are offering pensions and retirement savings. This means that retirement is now more challenging than ever, with traditional pension plans becoming few and far between. Recently, the responsibility of saving for retirement has shifted from the employer to the employee.

Another reason why it is important to start saving for retirement as early as possible is that longer lifespans have led to people outliving their savings. For example, if you live up to 78 years old, you will be in retirement for a long time. Longer life expectancies also lead to more money spent on healthcare.

If you have not started saving for retirement yet, it’s not too late. Make sure to work with your financial advisor or a trusted financial professional to help you to set out new savings goals so that you can get back on track. With the proper preparation and planning, you can have a comfortable retirement.

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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Confidence in auditing profession is looking up

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There’s been a slight improvement in the perception of shareholder governance and the strength of auditing and accounting standards, according to the World Economic Forum’s Global Competitiveness Report.

This can be attributed to a number of factors.

The strength of auditing and accounting standards increased its score from 64.6 to 67.5 and South Africa’s ranking improved six points from 55 in 2018 to 49 out of 141 countries surveyed. Shareholder governance also improved from a score of 60 to 67 and the country is now ranked 37, up from 56 in 2018.

“The collapse of some high profile companies highlighted the lack of regulation and oversight of the broader financial reporting chain and emphasised the importance of the contribution of those charged with governance to prevent business failures through appropriate and effective controls. While we may continue to see high profile business collapses, there is nevertheless some of hope that we are moving in the right direction.

Positive developments

“The public conversations in the last year have refocused the broader accounting profession’s attention on the combined assurance model, a need for comprehensive regulation of the financial reporting chain and the importance of educating investors on the roles of each function in the financial reporting process. Investors are therefore more informed and taking greater interest in governance processes, which is a positive development.

“We have also seen visible initiatives and collaboration from the profession which focuses shareholders and audit committees’ attention on concerns around the independence of external auditors and audit quality, as well as on measures to strengthen the financial reporting chain,” said Bernard Agulhas, CEO of the Independent Regulatory Board for Auditors (IRBA).

The IRBA has been clear in stressing that the external auditor, as the final line of defence, comes in at the end of a process in which there are various role-players, each with responsibilities to implement controls and measures to prevent fraud, corruption and malfeasance. That said, there’s also a need for the auditor to increase the amount of work on the audit as it relates to the identification of fraud.

During the year, exposure drafts for new standards around audit quality have been issued. These new standards, once adopted, will address key areas such as quality at an audit firm and engagement level including requirements for the firm and the engagement teams to respond with appropriate measures to address any identified quality risks, as well as defining new requirements for the appointment and eligibility of engagement quality reviewers, the level of performance of the engagement quality review and documentation of the review process.

Other initiatives

In other initiatives to restore confidence in auditing, the IRBA put out a call for audit firms to produce transparency reports to assist, inter alia, audit committees. Some audit firms have published audit firm transparency reports, which provide insight into their quality management systems, firm structures, and inspection results. The current transparency reporting process is voluntary, and it is expected that mandatory transparency reports for certain firms will be prescribed in future.

To assist committees in considering audit quality during their appointment and reappointment decisions, the IRBA has identified a set of audit quality indicators (AQIs). These are a set of comparable measures covering independence, review, workload and training, which supports comparison between firms and may assist in benchmarking. The AQIs are available from firms and have also been submitted by the firms to the IRBA to enhance its regulatory understanding of quality risks that firms face, and to provide feedback to the market in the form of a feedback report.

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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Different VAT supplies and how it affects your VAT return

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There are a few instances where VAT is not charged at the standard rate of 15%. In the following newsletter, we distinguished between the different supplies that attract VAT but does not necessarily have the impact of a standard rate supply.

Denied Supplies

The VAT Act provides for certain expenses where input VAT is denied, even if the expense is incurred in the course of conducting an enterprise and if there are no input VAT consequences there will ultimately be no output VAT consequences. The following circumstances are common instances where input VAT will be denied:

  • Acquisitions of a motor vehicle:

When a motor vehicle is purchased by a vendor, who is not a motor car dealer or car rental enterprise, the input VAT on the purchase will be considered a denied supply.

The definition of “motor vehicle” includes all vehicles designed primarily for the purposes of carrying passengers. This definition covers ordinary sedans, hatchbacks, multi-purpose vehicles and double cab bakkies. A single cab bakkie or a bus designed to carry more than 16 persons will qualify for input VAT purposes.  Any repairs and maintenance to vehicles, irrespective of the type of vehicle, will also qualify for the claiming of input VAT, as long as the cost is separately identified and invoiced.

  • Fees and Club Subscriptions:

Input tax in terms of subscriptions/membership fees to sport, social, recreational and private clubs are denied supplies. Input VAT may, however, be deducted on subscriptions to magazines and trade journals which are related in a direct manner to the nature of the enterprise carried on by the vendor.

However, fees for membership of professional bodies and trade organisations paid on behalf of employees are not denied supplies and SARS allows an input VAT to be claimed. Trade unions are exempt in this regard.

In the case of denied supplies, no VAT may be claimed, and no output VAT needs to be declared, thus these supplies don’t need to be declared on your VAT return.

Zero-Rated Supplies

A zero-rated supply is a taxable supply, but VAT is levied at 0%. Vendors who make zero-rated supplies are still able to deduct input tax on goods or services acquired in making of the zero-rated supplies.

Zero-rated supplies include certain basic foodstuffs such as brown bread and maize meal, certain services supplied to non-residents, international transport services, municipal property rates and more.

Although a zero-rate supply is levied at 0%, it is still a taxable supply and should be declared separately on the VAT return.

Deemed Supplies

A vendor may be required to declare an amount of output tax even though they have not actually supplied any goods or services. Deemed supplies will generally attract VAT at either standard rate or zero rate.

Two common examples of deemed supplies at standard rate are trading stock taken out of the business for private use and certain fringe benefits received provided to employees.

The deemed supply will be declared on the VAT return under either your standard rate or zero-rate codes.

Notional input VAT

A VAT vendor may in certain circumstances deduct a notional input VAT credit in respect of secondhand goods acquired from non-vendors where no VAT is actually payable to the supplier.  Second-hand goods exclude animals, certain mineral rights and goods containing gold or consisting solely of gold.

The following requirements must all be met for a notional input credit to be deductible in respect of secondhand goods:

  • Goods must be previously owned and used (as per the second-hand good definition in section 1 of the Act) and
  • Goods must be used to generate taxable supplies and
  • The seller must be a resident non-vendor and
  • Goods must be located in South Africa and
  • There must be no actual VAT levied on the transaction.

It is important to keep all the documentation for all types of supplies for VAT purposes and to have it available as SARS may require it to confirm VAT transactions.

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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