The relationship between audit quality and audit fees


Due to recent high-profile corporate failures in South Africa, questions are being asked about the relationship between auditor independence, the amount of fees and audit quality. There is a perception in various circles that lower audit fees equate to lower audit quality, writes Thandokuhle Myoli, Saica project director: assurance.

In this article, we aim to educate readers about some of the key determinants of the level of an external audit fee. These include the size and complexity of the entity being audited, the level of audit quality and the independence of the prospective auditor

Those charged with governance, including audit committees, need to be aware of the risks relating to fee pressure. This article highlights some of the areas that those responsible for the appointment or reappointment of auditors should consider when making their decision and points out what some of the threats to auditor independence are.

The relationship between assessed risks of material misstatement, the auditor’s work effort and the audit fee

The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, through understanding the entity and its environment, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement (RoMM) (ISA315 par.3). RoMM may be affected by a number of engagement-specific factors such as the nature of the industry that the client operates in, including regulatory requirements, investment and financing activities, the complexity of the audited entity’s transactions, profitability, the going concern status of the company and ownership structure.

The higher the RoMM for an audit engagement, the more work effort that can be expected in order to reduce the risk to an acceptable level. Therefore, there should be a correlation between the RoMM, the work effort and the audit fees for an audit engagement.

The auditor’s knowledge of the entity and its industry may also have an impact on the level of the audit fee. Initial engagements may be expected to have higher audit fees as the auditor may spend more time obtaining an understanding of the entity and its environment. As the years progress, the time spent on obtaining an understanding of the entity may reduce due to the auditor’s history with the entity. In this regard, those charged with governance, including audit committees, should be wary of auditors charging extremely low fees on initial appointments as this could create threats to the auditor’s independence. This could result in a situation where the fee is so low that it might be difficult for the auditor to perform the audit in accordance with applicable technical and professional standards.

A more complex audit where there are a relatively high number of identified RoMM that have been assessed as significant requires auditors with higher skills and more experience, and more time to be allocated to the audit, which should logically result in higher fees. These experienced audit team members are engaged at higher rates due to their level of experience and competence.

Another example is where RoMM relate to complex, specialised areas where the auditor may need to engage with experts in obtaining sufficient appropriate audit evidence. This may also have the effect of increasing the audit fee even further due to the specialised nature of the services provided by the experts, the time they spend on the engagement and the rates they charge to the auditors, required in order to achieve high audit quality.

The relationship between audit quality and fees

The Framework for Audit Quality, issued by the International Auditing and Assurance Standards Board (IAASB), has noted that there is a relationship between the quality of an audit and the quality and quantity of resources used in its performance (which should be reflected in the audit fee). A quality audit is likely to have been achieved by an engagement team that:

  • Exhibited appropriate values, ethics and attitudes;
  • Was sufficiently knowledgeable, skilled, and experienced and had sufficient time allocated to perform the audit work;
  • Applied a rigorous audit process and quality control procedures that complied with law, regulation and applicable standards;
  • Provided useful and timely reports; and
  • Interacted appropriately with relevant stakeholders.

The above indicates that the mindset of those responsible for the appointment of auditors should be on maximising quality rather than minimising costs. This could ensure that sufficient, appropriate resources are allocated to the audit, which, in turn, may improve audit quality. For the auditor, there is a direct link between the costs involved in gathering sufficient appropriate audit evidence and the fees charged by the auditor.

The relationship between auditor independence and fees

Fees may have an impact not only on audit quality, but they may also have an impact on the independence of the auditor. The objectivity of the auditor may also be impaired where the auditor is forced to reduce the extent of audit procedures to be performed due to a lower audit fee.

The IRBA Code is based on the International Ethics Standards Boards for Accountant’s (IESBA) Code of Ethics for Professional Accountants (Including International Independence Standards) (the IESBA Code). The IESBA has identified fees as an area that requires their attention and have recently published proposed revisions to the fee-related provisions of the IESBA Code, which will result in amendments being made to the IESBA Code, and therefore to the IRBA Code. The proposed amendments are aimed at strengthening the provisions addressing fees. Both extant codes focus on three main areas: the relative size of fees, overdue fees and contingent fees.

Based on the review of the proposed amendments by the IESBA on fees, the following have been identified as some of the potential areas where threats to auditor independence as a result of fees may arise:

  • Level of audit fees: Unduly low or unduly high fees can impact the level of the self-interest threat and might create an intimidation threat to independence.
  • Proportion of fees for services other than audit to audit fee: There is a reasonable perception that a high ratio of fees for services other than audit to audit fees creates threats to independence (particularly, threats to independence in appearance).
  • Fee dependency: When the total fees generated from an audit client by a firm represent a large proportion of the total fees of that firm, the dependence on that client and concern about losing the client create a self-interest or intimidation threat.

What should the audit committee consider?

Section 94(7) (a) of the Companies Act, (No. 71 of 2008) explicitly outlines the duties of the audit committee when it comes to the appointment of registered auditors. These include:

  • Nominating the appointment of an auditor and ensuring that the nominated auditor is independent of the company;
  • Determining the fees to be paid to the auditor and the terms of engagement;
  • Determining the nature and extent of any non-audit services that the auditor may provide to the company and pre-approving the proposed agreements related to such services with the auditor; and
  • Ensuring that the appointment of the auditor complies with all relevant legislation relating to the appointment of auditors.

Section 94(8) also provides a comprehensive list that audit committees should consider when assessing whether a registered auditor is independent of a company. These include:

  • Ascertaining that the auditor does not receive any direct or indirect remuneration or benefit from the company except as auditor or as permitted in terms of legislation;
  • Consider compliance with other criteria relating to independence or conflict of interest prescribed by the IRBA; and
  • Consider whether the auditor’s independence has been prejudiced as a result of previous appointments; whether as auditor or any other consultancy, advisory or other work undertaken by the auditor.

The IRBA has issued a Feedback Report on audit quality indicators (AQIs). AQIs are qualitative or quantitative measures of audit quality that allow stakeholders to assess these indicators year-on-year internally, across engagements and across firms. AQIs are a tool that can be used by those charged with governance, including audit committees, when overseeing and assessing the quality of auditors to be appointed or reappointed. AQIs include aspects such as results of regulatory and other inspections, the independence of the auditors as well as the reputation of the firm. The competence and experience of the engagement team members, and the extent of investment that the audit firm has made in technology and in improving its audit methodology are other factors that those charged with governance, including audit committees, can consider when appointing or reappointing the auditors.

Audit firm transparency reports, provided by some audit firms, also give audit clients an indication of the auditors’ commitment to audit quality. These reports usually contain information about the firm’s policies and procedures on aspects such as:

  • Firm structure;
  • Human capital;
  • Engagement related information; and
  • Quality management.

After the robust interrogation of the factors identified above, a suitable audit fee should be determined. The fee should be determined based on a clear process and criteria that emphasise audit quality. This will ensure that audit quality remains the focus of the discussion rather than the fee itself.


Audit firms that retain or win audit appointments by using unrealistically low fees act to the detriment of the audit profession as audit quality is likely undermined. Sustained audit quality is what should give firms the edge in the audit market, not charging low audit fees in order to gain or retain clients.

Where audited entities put pressure on auditors by placing a restriction on the audit fee, this creates a threat to one of the fundamental principles of the IRBA Code that auditors have to abide by professional competence and due care.

While there is a clear understanding that audit firms are profit-oriented entities, commercial interests should not triumph over ethical requirements. Ethics continues to be the cornerstone that holds the auditing profession together. In order for the profession to keep its esteemed reputation in society and for the public to retain its trust, it is critical that its members uphold the highest level of ethics. Unrealistically low audit fees that blur the lines of professional competence and due care, without a clear relationship to audit quality is one of the surest and shortest paths that will lead to the destruction of a noble and trusted profession whose primary mandate is the protection of the public’s interest.

About Saica

The South African Institute of Chartered Accountants (Saica), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 46,000 members and associates who are chartered accountants [CAs(SA)], as well as AGAs(SA) and ATs(SA), who hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in every sphere of commerce and industry, and who play a significant role in the nation’s highly dynamic business sector and economic development.


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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Budget 2020 highlights


“Ex Africa Semper aliquid novi,” winning requires hard work, focus, time, patience and resilience. Finance Minister Tito Mboweni delivered his National Budget Speech on 26 February 2020, leaving South African taxpayers pleased by the implementation of tax relief on personal income tax, but disappointing those who indulge in alcoholic beverages and heated tobacco products.

The 2020 Budget Speech focused on economic growth, education, health, social development, small businesses and job creation. Minister Mboweni appears to have gone out of his way to implement measures to avoid the slowdown of economic growth.

Some of the significant tax proposals in this year’s Budget as tabled by the Finance Minister are highlighted below:

Personal Income Tax

  • Personal Income Tax Rates and Rebates: While the primary, secondary and tertiary rebates will increase by 5.2% for 2020/2021 the tax-free threshold will increase by almost 5% from R79,000 to R83,100. Personal income tax rates are adjusted to support economic growth and provide relief for taxpayers.
  • Medical Scheme Fees Tax Credits: The medical credits have increased from R310 to R319 for the first two persons covered by the scheme, and R215 for each additional member. This below inflation adjustment is in line with the announcement in the 2018 Budget Review to reduce the medical scheme fees tax credits to help fund the rollout of national health insurance (NHI).
  • Foreign Remuneration Exemption: The foreign remuneration exemption which becomes effective on 1 March 2020 and has initially been set at R1 million will now be capped at R1,25 million. The Minister indicated that Government wants to encourage South Africans working abroad to maintain their ties with South Africa; the concept of financial emigration will therefore be phased out by 1 March 2021.
  • Tax-free Savings Accounts: The annual limit on contributions to tax-free savings accounts will increase by R3,000 to R36,000 effective 1 March 2020.

Corporate Income Tax

  • Tax Base and Rate: The corporate income tax rate remains unchanged at 28% for now. However, Government intends to restructure the Corporate Income Tax structure over the medium term by broadening the tax base, through minimizing tax incentives and introducing limitations to interest deductions and assessed losses carried forward, and reducing the rate to encourage investment and expansion as well as South Africa’s competitiveness as an investment destination.
  • Limitation of Interest Deductions: It has been proposed to limit interest expense deductions to 30% of earnings for years of assessment commencing on or after 1 January 2021. Consultation for the design of the limitation will commence shorty and a discussion document is expected to be made available on National Treasury’s website on 17 April 2020.
  • Corporate Tax Incentives: The section 12I (industrial policy projects) will not be renewed beyond 31 March 2020. The urban development zone incentive will be extended for a year while being reassessed. A sunset date of 28 February 2022 is proposed for incentives relating to airport and port assets, rolling stock and loans for residential units. Government intends to review all other incentives to determine whether they should be extended.
  • Limitations on assessable losses: It is proposed that assessable losses carried forward be limited to 80% of taxable income for years of assessment commencing on or after 1 January 2021. Companies would therefore have to pay tax on at least 20% of its taxable income.

Value Added Tax

  • Rate: contrary to speculation and expectations, the VAT rate was not increased.
  • Electronic Services VAT: The definition of “telecommunication services” for purposes of the electronic services regulations will be updated to eliminate the unintended non-taxation of certain services under the electronic services regime, while intermediaries who are required to collect and account for VAT on behalf of non-resident suppliers of electronic services will now be able to apply to SARS to account for the VAT on the payments rather than the invoice basis.
  • VAT Treatment of Transactions under Corporate Reorganization Rules: The provisions of section 8(25) of the VAT Act which allows for the transfer of a business as a going concern if transferred under the corporate reorganization rules will be reviewed to eliminate unintended limitations where the corporate reorganisation rules do not apply in respect of the transfer of certain assets.

Other Indirect Taxes

  • Transfer Duty: the threshold for transfer duty has been adjusted; property valued at R1 million or less will no longer be subject to transfer duty.
  • Excise duties: to comply with the Department of Health’s policies, there are plans to tax heated tobacco products such as “hubbly bubby or hookah”. The rate will be 75% of the rate of the cigarettes. Electronic cigarettes, also known as vapes, will be taxed from 2021. There have also been increases on excise duties applicable to cigarettes, beers, ciders, wine and spirits, in line with inflation. Excise on piped tobacco, cigars, and sparkling wine went up by above inflation.
  • Fuel levy: has increased by 25 cents, 16 cents is for the general fuel levy and 9 cents for Road Accident Fund levy, to adjust for inflation.
  • Plastic bags levy: Government has proposed a more focused spending on climate change mitigation through carbon tax, increasing the plastic bag levy to 25 cents and through other measures. National Treasury will consult on extending the current levy on plastic bags to all single-use plastics used for retail consumption, including plastic straws, utensils and packaging in 2021.
  • Carbon tax: The carbon tax rate will increase by 5.6% for 2020 from R120 per tonne of carbon dioxide equivalent to R127 per tonne of carbon dioxide equivalent.
  • Export tax on ferrous metals exports: Government will consult with affected industries on the introduction of export taxes on scrap metal, which could replace the current price preference system. Proposed export taxes will apply to ferrous metals at the rate of R1,000 per tonne, aluminium at R3,000 per tonne, red metals at R8,426 per tonne, and other waste and scrap metals at R1,000 per tonne. Consultation will begin immediately, to be concluded by the end of May 2020, for consideration in the annual tax bills.

Exchange control

  • It was announced that there will be a noteworthy exchange control relaxation that will be phased in over 12 months (to be implemented by 1 March 2021), more for individuals than corporates. The intention appears to be to change the current system whereby no capital outflows are allowed unless expressly permitted, to a system whereby cross-border transactions will be permitted unless specifically prohibited.

Other Noteworthy Proposals:

  • In an attempt to encourage growth of small businesses in South Africa, government proposes to review the small business tax regime, the VAT threshold and turnover tax.
  • Government has now allocated R230 billion over the next 10 years to achieve the restructuring of the electricity sector in South African to ensure a stable electricity supply. Finance Minister Mboweni stated that it would soon be possible for municipalities in who are in a financially good standing to purchase electricity from independent power producers.
  • Government has allocated R16.4 billion to settle South African Airways debts, with the hope that this intervention will lead to a sustainable airline.
  • SARS recently published draft diesel refund rules and notes to the Customs and Excise Act for public comment. The draft presents a provisional outline for the review of the diesel refund administration to facilitate further industry engagements during 2020. The reform proposals and legislative framework will be refined further, based on the outcome of the engagements.
  • In line with the World Customs Organisation’s stance on knowledge sharing by customs authorities to enhance compliance with customs and excise legislation, it was announced that the Customs and Excise Act be amended to provide for the publication of tariff determinations and rules prescribing the circumstances in which such publication may take place, the kind of information that may be published and the manner of publication. This will be a first for South Africa.
  • The Tax Administration Act provides that SARS may withhold a refund until such time that the refund is verified, inspected or audited. It is proposed that this provision be extended to include criminal investigations, which will, by implication, extend the period for which no refunds are given by SARS.
  • There is a proposal to amend the anti-avoidance provision regarding change of residence. When a company ceases to be a resident, there is a deemed disposal of its assets that triggers capital gains tax. Despite these rules, residents that hold shares in the company could subsequently dispose of the shares and qualify for a participation exemption for the sale of company shares. It is proposed that amendments be made to the legislation to close this loophole.
  • The participation exemption rules for foreign dividends do not contain a similar limitation for general foreign dividends exemption rules (in the Income Tax Act). This limitation denies tax exemption for foreign dividends if there is a deductible expense or reduction that is determined directly or indirectly with reference to a dividend. For example, where a resident owns 20% of the shares in an unlisted foreign company, no tax is imposed on the foreign dividends, even though these dividends arose from amounts that previously qualified for a tax deduction. To address this concern, it is proposed that changes be made to the legislation.
  • It is proposed that the definition of an “affected transaction” in the transfer pricing rules be refined. Transfer pricing rules apply if a taxpayer or a controlled foreign company enters into a transaction with a non-resident “connected person”, on terms and conditions that are not at arm’s length, and derives a tax benefit from that transaction. In the case of a transaction between a controlled foreign company and a non-resident “connected person”, a tax benefit may not be derived by the foreign company, but may be derived by a South African resident shareholder as a result of a lower inclusion of controlled foreign company net income for the resident. To address this situation, it is proposed that the legislation be amended to refer to a tax benefit that may be derived by a person, in relation to a controlled foreign company, that is a resident.

Minister Mboweni said it was hoped that the Budget would restore the confidence of the public, grow the economy and improve the employment and education challenges in South Africa.


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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How technology is influencing the financial world


Accounting has moved from pen and paper to the cloud, monthly payments can be done through online banking apps, and big purchases like houses and other property can be completed using cryptocurrency. For a business to be successful, it is important that it keeps up with the tech and digital world, which has shown financial and time efficiency. The added advantage it that bulky computers, heavy stacks of coffee-stained documents and long queues are a thing of the past.

Clouds now manage your information

Personal information, including security, is no longer stored on the ground where everyone else would have been able to access it. As businesses have transferred everything to the cloud. If systems have evolved accordingly to manage and keep abreast of current trends.

There is always opportunity to make the cloud system faster, to become more innovative and to add features that enable efficiency in a competitive marketplace. Information is readily available and up-to-date, and the improves financial decision-making speed.

You can be everywhere by being right where you are

Tech efficiency has evolved so much just by providing a solution to what people don’t have time to do. Business owners no longer have the time to rush out of the office to make it to the bank on time, and as such, tech has provided apps for services that were time sensitive.

With this comes safety. Deposits of large sums can now be cashless, through streamlined payments. Other advantages of conducting online payments are integrated billing and mobile payments, right from where you are.

Coffee won’t mess on your files

The need to print documents has decreased significantly due to the ease of storing them on internal and other tech software. Tax submissions are also catered for electronically because they can be calculated and completed by cloud accounting systems and submitted online. You can also make payments through faster online invoicing.

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 ethical behaviour


For citizens, even for those of us with no aspirations in a career in law enforcement, morality and integrity are important characteristics to demonstrate. We instinctively know that it is good to be moral and act with integrity, but by coming to an understanding of the reasons for morality and integrity, we will be motivated to champion such behaviour. Among the reasons to be moral and integral, regardless of occupation are to:

  • Make society better. When we help make society better, we are rewarded with also making better own lives and the lives of our families and friends. Without moral conduct, society would be a miserable place.
  • Treat everyone equally. Equality is a cornerstone of most Western democracies, where all individuals are afforded the same rights. This is not possible without the majority of citizens behaving in a moral manner.
  • Secure meaningful employment. Often employers will look at a person’ past behaviour as a predictor of future behaviour. Someone who has a history of immoral behaviour will have difficulty securing employment in a meaningful job, as that person may not be trusted.
  • Succeed at business. If you are employed in an occupation in which there you must rely on others, your moral conduct will determine the degree of goodwill that you receive from others. Businesses that have a checkered moral history are typically viewed with caution and are unlikely to attract new customers through word of mouth, and therefore are unlikely to prosper. This is especially the case where social media ­­makes customer reviews readily accessible.
  • Lessen stress. When we make immoral decisions, we tend to feel  uncomfortable and concerned about our decision making. Making the right moral decision, or taking a principled perspective on an issue, reduces stress.

Ultimately, ethics is important not so that “we can understand” philosophically, but rather so we can “improve how we live” (Lafollette, 2007). By being moral, we enrich our lives and the lives of those around us. It’s especially important to live a moral life when we are young, as it is helpful to exercise and practise these concepts before being confronted with more complex issues. Lafollette (2007) theorizes that ethics is like most everything else that we strive to be good at; it requires practice and effort. Practising and making an effort to make moral decisions throughout life will pay dividends when we are faced with serious moral dilemmas. Furthermore, having insight into “…historical, political, economic, sociological and psychological insights…” (Lafollette, 2007, p.7) allows us, as decision makers, to make more informed decisions, which will likely result in moral decisions. In sum, the practice of being moral, allows us to work on these skills, so when we are faced with real situations that impact others, we are ready

Lafollette (2007) also emphasizes the need to understand and develop our virtues. Knowing that we ought to behave in a certain way, yet missing an opportunity to exercise moral behaviour, is an indication of the need to “sharpen moral vision.” For example we know that we ought to stay in good physical shape but often do not. This illustrates the need to be mindful of a virtue (in this case perseverance) that is important and must be developed. If, as people aspiring to become law enforcement officers, we develop the virtue of perseverance by staying in shape, we are more likely to hone that skill when we are working in law enforcement. We will be able to draw on that virtue when needed for even more serious situations, not only in law enforcement, but in other challenges that we may face in life.

Ethics is also important for those citizens who do not aspire to work in law enforcement. Successful business leaders often say that treating people morally is a very important aspect in obtaining success. A person’s reputation is of key importance for a business leader, and if a person’s reputation is damaged by poor ethical conduct, the business will also suffer. The same is true in all walks of life. Where ethics are taken seriously, and people strive to make ethical decisions and actions, personal and professional success follows.

Critics may argue that this attitude is self-serving and that some individuals act ethically only for their own self-interest to be successful or happy. Critics would add that this is not the right reason to be ethical, and therefore is not being truly ethical. A counter argument may be that the action itself can be regarded as ethical, regardless of the reason for taking the action. This perspective focuses more on the end result rather than the means to the end.

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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Everything you’ll ever need to know about death and taxes in South Africa


In South Africa, like in most countries, death and taxes go together in the form of inheritance taxes. These are taxes that the deceased estate has to pay, in addition to the personal tax of the deceased person for their final tax year.

The personal tax is levied on the income the deceased person received before their death, during the course of the tax year, whereas the inheritance taxes are levied on what they leave behind in their Will.

Capital Legacy’s CEO, Alex Simeonides, answers 8 questions that delve into the intricacies of the two inheritance taxes we face: estate duty and capital gains tax.

  1. Which taxes apply when someone dies?

Two separate taxes are levied on a deceased estate: one is Estate Duty and the other is Capital Gains Tax. Estate Duty taxes the transfer of wealth (assets) from the deceased’s estate to the beneficiaries. Capital Gains Tax is levied on any capital gain (profit) on the sale or transfer of an asset (which a deceased individual is considered to have done upon their death).

  1. What is Estate Duty?

Estate Duty is a tax paid on the ‘dutiable estate’ of a deceased individual. It is charged at a rate of 20% on the first R30 million of the dutiable estate, and 25% on anything above R30 million.

The dutiable estate comprises all the deceased individual’s property (assets and liabilities), after the allowable deductions have been made (more about that later).

  1. When is Estate Duty levied on an estate?

Estate duty is levied on the assets of deceased individuals who resided in South Africa at the time of their death (irrespective of their citizenship), and on the South African assets of deceased individuals who lived abroad.

Foreign property is considered in the calculation of the dutiable estate of an individual who resided in South Africa at the time of their death.

  1. What deductions are allowed?

Allowable deductions which influence Estate Duty calculations include debts, funeral and death-bed expenses, administration costs, property transferred to a surviving spouse, and the first R3.5 million of the value of the estate.

The first R3.5 million of the value of an estate is not subject to Estate Duty. This allowance may be added to the allowance granted to the surviving spouse of a deceased person which amounts to a total of R7 million which is not subject to Estate Duty, upon the death of the second spouse.

Deductions are also allowed for liabilities, bequests made to qualifying public benefit organisations, and assets that are inherited by the surviving spouse.

  1. What about Estate Duty on retirement planning?

If an individual died on or after 1 January 2009, any retirement annuity and pension or provident fund benefits (including lump-sums) are not considered as “property” and are therefore not subject to estate duty.

  1. Explain how life insurance impacts Estate Duty.

When a life insurance policy is paid out, the value of the pay-out is included in the value of the deceased’s estate and it could therefore impact the amount on which the estate duty is levied.

There are certain exemptions, such as:

  • When the policy falls outside of the estate in terms of an antenuptial contract.
  • When the policy had been implemented and paid for by a business partner and the proceeds are then paid to the business partner on the death of the individual whose life had been insured.
  • When the policy was not taken out by the deceased individual and will not be used to benefit a family member or business associate of the deceased.

The life insurance policies referred to above include policies where a spouse or child is nominated as a beneficiary, buy-and-sell policies, and key-person policies that conform to the conditions as set out in the Act. It is important to note that endowment policies (local and offshore) that do not pay out on the death of a life assured, but that are owned or part-owned by a deceased policyholder, will be subject to estate duty.

The surrender value of the policy must be included as property in the deceased estate.

  1. What is Capital Gains Tax (CGT) and who has to pay it?

South African residents (living or deceased) have to pay CGT on the profit (capital gains) that is made when disposing of an asset. Non-residents are subject to CGT on capital gains arising from the disposal of immovable property or an interest in immovable property in South Africa.

The Income Tax Act declares that a deceased individual will be deemed to have disposed of their assets for an amount equal to the market value of the assets, on their date of death.

However, CGT is not a separate tax but forms part of Income Tax. The inclusion rate for CGT is 40% for individuals and deceased estates, and therefore the maximum effective rate of 18% would be levied.

  1. Is any profit excluded from Capital Gains Tax?

There are some exclusions which apply to CGT. Any assets that go to the surviving spouse are exempt from CGT.

Furthermore, an exclusion of R300,000 is also applicable for the year in which the individual passed away.

Other basic exclusions include:

  • The first R2 million profit on the disposal of a primary residence (such as your house).
  • Most personal use assets (such as vehicles).
  • Retirement benefits and payments from original long-term insurance policies.
  • A small business exclusion of R1.8 million, when a small business with a market value not exceeding R10 million is disposed of (subject to certain qualifying criteria).

Staff Writer 1 June 2019

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 difference between having your annual financial statements reviewed as opposed to audited


JOHANNESBURG – With the current state of the national and global economy, companies are trying to better manage their expenses. Audit fees tend to make up a significant portion of a company’s annual expenses and therefore some businesses specifically focus on audit fees when they need to tighten their belts.

However, if a company does decide to cut its spend on audit fees, directors and shareholders should make a cost vs. benefit assessment to determine the value that an audit may add, compared to possible alternatives.

Depending on a company’s public interest score (PIS) and who the compiler of the annual financial statements (AFS) are, the Companies Act of South Africa allows a company to either have its AFS audited or independently reviewed.

The directors of a company can decide if they want to internally compile their AFS or have them independently compiled. However, companies with a PIS of between 100 and 350 need to bear in mind that this decision will also influence the type of assurance required, in accordance with the Companies Act.

The PIS of a company is calculated by taking a number of factors into consideration, such as the number of individuals with beneficial interests (i.e. shareholders), turnover for the financial year, third party liability at the end of the financial year and the average number of employees.

Should a company have a PIS of more than 350, the AFS will need to be audited in terms of the Companies Act. If a company has a PIS of below 350 and its AFS are compiled independently, the directors of that company may elect to have the AFS undergo an independent review as opposed to an audit. With that said, if a company has a PIS of above 100 and the directors prefer to internally compile its AFS, the company is required to have its AFS audited.

Certain businesses can also be exempt from having their AFS audited or independently reviewed according to Section 30(2A) of Companies Act. For this exemption to apply, the company must have a PIS lower than 350 and all of the shareholders must be directors of the company. In certain instances a company’s memorandum of incorporation (MOI) may also require it to be audited, irrespective of its PIS.

There is a number of differences between an audit and an independent review. The most significant of these include the level of assurance that one obtains, and the procedures performed by the persons conducting the audit or independent review. By comparing an audit report opinion and an independent review conclusion the significant difference is that an audit opinion provides reasonable assurance on the AFS while an independent review conclusion provides limited assurance.

An audit report states that reasonable assurance has been obtained that the AFS as a whole is free from material misstatement, while an independent review states that (based on the work performed) nothing has come to the reviewers’ attention that causes them to believe that the AFS are not fairly presented.

An independent review primarily consists of making inquiries of management and others within the company, applying analytical procedures and evaluating the evidence obtained. An audit is a much more in-depth investigation where various techniques are used to obtain the assurance required to enable the auditor to issue an audit opinion. For an independent review engagement, more experienced staff are usually made use of due to the higher complexity of the interpretations and evaluations of the results. An audit engagement uses a variety of staff with different experience due to the nature of the work. The amount of work to be performed by the auditor or independent reviewer, as well as the experience of the staff used for the engagements, will therefore have a direct impact on the fees applicable to the different assurance engagements and therefore making a review engagement less expensive compared to that of an audit.

Should the directors decide to have the company’s AFS independently reviewed, several factors need to be considered. Firstly, they need to ensure that there are no requirements from either the shareholders or any third party requiring the AFS to be audited. After that, they must ensure that the legal requirements of the MOI and the Companies Act are being adhered to.

The directors also need to be aware that they cannot move from an audit to an independent review and back to an audit in subsequent years without repercussions. When an auditor issues an opinion on a set of AFS, the opinion is applicable to balances and transactions included in the current year, the comparative balances and transactions of the previous year, as well as the closing retained earnings of the year before the previous year. If any of these prior years’ balances and transactions were not subject to an audit (i.e. an independent review), it will result in a qualification of the audit report as the auditor is unable to issue an opinion on these unaudited balances and transactions due to only limited assurance having been obtained.

It should also be noted that these types of qualifications to the audit report will also be carried forward for two consecutive years.

This qualification can be avoided if an audit is completed on the previous years’ AFS (which was initially only subject to an independent review). However, this would be inefficient and costly – seeing as it would result in the previous year’s AFS being both audited and independently reviewed.

In light of the above, it is vital that the shareholders and directors consult with their companies’ auditors to ensure that all of the current and future implications are understood before decisions regarding a change in the type of assurance engagement is made.

7 JANUARY 2020/ WIEHANN OLIVIER– Wiehann Olivier is a partner at Mazars.

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 having a well-structured Will


And why it needs to be updated every year or at least with every life event that occurs.

People often neglect to give proper attention to their Will because it forces them to face their own mortality. Yet this is one of the most important documents necessary for estate planning.

Having a well-structured Will means you are taking care of your responsibilities and ensuring that your assets are distributed in terms of your wishes when you are no longer there, says Tony Hakime, senior manager of sales and distribution at Standard Trust.

Be practical

A Will must be practical to the degree that it can be implemented. People often place restrictions on what a beneficiary is allowed to do with an asset, but in many instances, it can be quite difficult to carry out these instructions.

“One must ensure that the instructions are legally binding on the individual,” says Hakime. “You have to consider whether the beneficiaries can actually deal with the assets.”

People should also remember that the contract between the testator and a life insurance company takes precedence over a Will.

If a testator names their child as the beneficiary of a policy and leaves their estate to their spouse, the spouse may be in trouble if the estate does not have sufficient liquidity to cover the debt.

Getting it right

Hakime emphasises the importance of obtaining the services of a professional person who specialises in the drafting of Wills.

The wording is critical and getting it wrong can lead to hardship and even financial distress for the people left behind. Once you are dead, there is no opportunity to correct or amend something that is not clear.

“All too often people appoint a family friend or a family member as the executor of the estate. In many instances the master of the high court will insist on a professional person assisting the individual in winding up the estate.

“It is important that the person winding up the estate has kept abreast with changes in the relevant legislation and understands the tax implications,” says Hakime.

He points out that people with assets outside of South Africa might have a Will in the country where those assets are located. “It just makes it easier for someone on that side – a person well-versed in estate matters in that jurisdiction – to quickly attend to the administration of the estate.”

Keeping it safe

Many people choose to nominate the institution that drafted the Will as executor of the estate, and to keep the original document. If this is done, it is important that they inform their family where the document is.

If a person dies without a Will, the estate will be administered in terms of the Intestate Succession Act – and the assets will be distributed in a manner that was not of their choosing, says Hakime.

A valid Will has to be signed by the testator as well as two witnesses, and they must sign in each other’s presence. Witnesses must be at least 14 years old and may not be a beneficiary of the Will.

“The most common error is having the witnesses sign without being in each other’s presence,” says Hakime. “The act is quite specific that the witnesses must all be present at the same time when signing the Will.

“It can be difficult to prove at times, but again we encourage clients to ensure that they follow the correct sequence to eliminate any doubt about the process.”

Another error that can render a Will invalid is when amendments to the Will are not properly initialled by both the testator and the witnesses.

Review often

In South Africa there is freedom of testation and people are allowed to change their Wills as often as they please. It is good practice to review a Will at least once a year, but there are also some ‘life events’ that make a review necessary.

These include asset accumulation (a new property, valuable paintings or jewellery), getting married, having children or getting divorced.

If a testator dies within three months of the date of divorce it will be assumed that the testator intended to change the Will and any bequest to testator’s former spouse would be deemed to have lapsed. However, after three months of the date of divorce any bequest to the testator’s former spouse would take effect if the testator does not change the will.

“It only takes a few minutes to run through your Will to make sure it still contains the right information but it can make a lifetime of difference to your loved ones,” says Hakime.

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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Too many South Africans are slaves to debt


The country has 25m active credit consumers – and more than 10m are behind on their payments.

If you want to know the frustrations associated with being in debt, ask 27-year-old Muzi Mehlala (not his real name). He is over-indebted, despite the fact that he has been working for a financial administrator for the past seven years.

His salary has increased a couple of times, but he says it still doesn’t allow him to live a comfortable life.

“My salary is not enough,” he says. “I do not have the extra money lying around to buy most of my necessities.”

Clothing, furniture and cellphone accounts and a credit card are what he is a slave to.

With the interest he’s paying on the credit he has taken out, it’s no wonder he doesn’t have ‘extra money’ lying around.

He says that as a result he lives hand-to-mouth. By the end of the first week of the month most of his income is finished. He then depends on his credit card to pull him through the month.

Mehlala says he regrets the day he allowed himself to fall into the trap of credit providers.

“When I started taking credit I did not know much about credit and the impact it could have in the long term,” he says.

Credit regulator findings

Mehlala is not alone. According to the National Credit Regulator (NCR), South Africans are over-indebted – and still clamouring for more credit.

Statistics released on Friday show the total value of new credit granted in 2019’s first quarter (Q1), increased by more than 5% to over R134 billion in Q2, says the NCR’s Ngoako Mabeba.

Mabeba says one million applications for new credit were made, with 55.44% turned down.

He adds that there are 25 million active credit consumers, and 10.23 million (40%) are behind on their payments.

“There is impairment on at least one of their accounts,” he says, adding that on average a consumer has three-and-a-half accounts.

“There are 80 million accounts in South Africa, with 21 million in arrears by three months or more.”

Mabeba adds that 12.7% have adverse listings against their names, while 5.1% of consumers have judgments and administration orders against them.


So why do consumers keep adding to their debt?

According to Dr Azar Jammine, chief economist at Econometrix, credit providers lure consumers into taking credit.

“Credit providers try and entice people who are not able to buy things to do so,” he says, adding that many South Africans feel pressured to ‘keep up with the Joneses’.

“In South Africa, there are advertisements for expenditure on all sorts of items such as durable goods and electronics. A large amount is being spent on cellphones and data, which was previously not an expenditure item in people’s lives. Somehow this is treated as a priority in people’s lives, even though they realise they can’t afford it,” says Jammine.

He adds that many find themselves in debt because they lack financial education.

“Unfortunately, many in South Africa are [financially] illiterate. They are enticed into these things because they think it is a way of uplifting their wellbeing – and they are not fully aware of the consequences because they are not spelled out to them.”

Stagnant economy

The slow economy is also contributing to consumer appetite for debt, says Jammine.

“The main problem is that the economy is not growing rapidly. People are becoming unemployed and are under a lot of pressure, yet they are trying to sustain their living standards, and they must borrow money to sustain those living standards.”

He says an over-indebted country eventually harms its economy.

“The consequence of indebted citizens on the economy is that eventually you have less buying power in the economy, and ultimately that results in declining economic growth generally.”

In short, you don’t get the economic recovery you need to return to the levels that existed before the downturn.

Failure-to-launch syndrome

A 2019 financial reality survey by DebtSafe indicated that many of the 1 020 participants were indebted due to:

  • Tough economic times, so they can’t afford basic necessities (67%)
  • Education and school expenses for themselves, children and other relatives (38%)
  • Unforeseen circumstances (29%)

DebtSafe debt advisor Carla Oberholzer says 70% of the participants were females from metro cities, aged between 25 and 27.

“Most were single parents affected by the ‘failure to launch’ syndrome,” she says, explaining that they live with their parents and must look after their parents or grandparents as well, instead of focusing on their own responsibilities.

Oberholzer says the other big worries for the respondents is their income not keeping up with inflation, and not being able to save.

Stress, rage, anxiety

She says many of her clients find themselves stressed as a result of living above their means.

“What we have noticed with our clients is that they have rage and anxiety,” says Oberholzer.

She advises over-indebted consumers to start paying off their largest debt first. “It is very important that they clear their debt bit by bit, starting with the credit card with the highest instalment.

“Consumers also need to realise that paying off all their debt is not going to happen in one or two months. They need to be realistic.”

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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Expat tax exemptions: No double taxation


On 1 March 2020, an amendment to the foreign employment income exemption comes into operation. There have been misperceptions about those expatriates that will be affected by this change to the tax law.

Currently the exemption applies to South African tax residents who provide services outside South Africa on behalf of an employer for longer than 183 days during a 12 month period. In addition to this, the exemption only applies if, during the same 12 month period, a person rendered services outside South Africa for a continuous period of at least 60 days. If this criterion is met the resident is exempt from income tax on such foreign income in South Africa. The amendment now provides that a person who meets these requirements will only be exempt from income tax in South Africa up to the first R1-million of their employment income earned abroad.

It is important for expatriates to understand that the exemption only applies to South African tax residents working abroad. These are persons who are still ordinarily resident in South Africa or have been physically present in South Africa for a statutory specified number of days each year over a five year period. Expatriates who have been living abroad for many years or who have emigrated are unlikely to be affected by this law. They will only pay tax in the country where they now live and are employed.

No double taxation

South African tax residents who are affected by the new law will not now become liable for double taxation. If there is a tax treaty between the respective countries, it will eliminate double taxation. If there is no tax treaty, there are provisions in the Income Tax Act, 1962 that will allow the person to apply for a credit for the tax paid in the foreign country.

SARS will only have the right to tax income to the extent that it was not taxed in the country where the employment services were performed. For example, if a South African resident employed in Botswana earns more than R1 million per annum, that person will be taxed in Botswana at 25% on such income. If that person falls within the highest tax bracket in South Africa (i.e. 45%), to the extent that such income exceeds R1-million, that person will be taxed in South Africa on such amount at 20%. (i.e., 45% – 25% = 20%).


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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Complexities of loans between related parties


Loans between related parties are a common occurrence in the SME business environment. These loans arise due to various reasons, such as assets being sold on loan account; money being drawn out, trust distributions made or dividends declared on loan account; funding provided by stakeholders, or even loans arising in a similar way to a trading account. Loans that may initially seem simple in principle, could lead to some unforeseen tax and legal consequences.

In this article we will provide a brief overview of the most common scenarios resulting in loans between related parties that we tend to encounter and look at what the key tax and legal considerations are. It is not our intention to provide a fully comprehensive list of all the forms that loans between related parties can take, neither do we propose the tax and legal considerations listed to be all inclusive. It is intended to provide a helpful summary of some key considerations to loans commonly found in the accounting records of SMEs.

Loans by companies

In instances where companies make loans to shareholders, who are not companies, bearing interest at a rate lower than the SARS official rate of interest (currently 7.75% p.a.), a deemed dividend exists in terms of the Income Tax Act. The value of the deemed dividend is the difference between the interest charged and what interest would have been charged at the SARS official rate of interest. Where the loan is made to an individual, dividend tax at 20% of the calculated value of the deemed dividend is to be declared and paid to SARS.

Section 45 of the Companies Act permits financial assistance provided by a company (for example through providing a loan) to directors, or related parties to the directors, only if it is pre-approved by the shareholders (by means of a special resolution), and by the directors after ensuring that immediately after providing the financial assistance the company is both liquid and solvent, that the company’s Memorandum of Incorporation has been complied with, and the financial assistance is at terms that are fair and reasonable to the company. If Section 45 of the Companies Act is not complied with, the loan is considered void and the directors could be held liable for losses incurred as a result.

Loans to trusts

Loans to trusts often exist due to assets being sold to trusts on loan account. Historically most trusts charged no interest on these loans.

Section 7C of the Income Tax Act introduced legislation whereby a deemed donation exists on loans to trusts if no interest is charged, or if interest is charged at a rate lower than the SARS official rate of interest. The value of the deemed donation is the difference in interest between the amount charged on the loan account (if any) and what the interest would have been at the SARS official rate of interest.

The donation is taxed at 20% in the hands of the donor (in this case the party making the loan). Natural persons are allowed to utilise their annual donations tax exemption (first R100,000 of amount donated) against the deemed donation.

Loans between individuals

A common pitfall of loans between individuals is that the terms of the loan are not clearly agreed in writing between the parties, especially in the case of loans between family members. It is well advised to ensure that a proper loan agreement is drafted and signed between the parties, inclusive of key terms to the loan such as repayment terms, security offered and interest charged.

Some important considerations are:

  • If it is the intention of the parties that the loan would never be called or settled, the full value of the loan should be treated as a donation by the party giving the loan. This would attract donations tax at 20%. Natural persons are allowed to utilise their annual donations tax exemption against the donation.
  • If it is the intention that the loan will be repaid, it remains part of the estate of the person providing the loan in the event of his/her death. It will attract estate duty at 20%.
  • If it is agreed that interest would be charged, the requirement to register as a credit provider in terms of the National Credit Act should be considered.

Loans to employees

A loan to an employee bearing no interest, or bearing interest at a rate lower than the SARS official rate of interest leads to a taxable benefit in the hands of the employee. The value of the taxable benefit is the difference in the amount of interest charged compared to what interest would have been charged at the SARS official rate. The 7th Schedule to the Income Tax Act further requires that this taxable benefit be taken into account when calculating the employee tax (PAYE) to be deducted from the employee’s salary.

In the event of interest being charged on loans to employees, the requirement to register as a credit provider in terms of the National Credit Act should be considered.

Charging interest

Where interest has been charged on loan accounts, the general principle is that the interest is taxable in the hands of the party receiving the interest (note that natural persons currently have an interest exemption of R23,800 if aged below 65 years and R34,500 if older). The interest is not always deductible by the party paying the interest.

In addition to the tax treatment of charging interest, there are other legal complexities to consider. Section 40(1) of the National Credit Act requires that a person must apply to be registered as a credit provider if the total principal debt owed to that credit provider under all outstanding credit agreements exceed the prescribed threshold which has been R nil since 11 May 2016. Failure to register as a credit provider could result in the credit agreement being declared void. There are exceptions to the application of the National Credit Act which should be considered.

When loans become irrecoverable

The legal and tax consequences of loans becoming irrecoverable as well as the requirements and implications of the prescription of debt are complex and could vary significantly from case to case. It is worth obtaining professional advice when considering writing off or waiving significant loans with related parties.

Donations tax and estate duty

Throughout this article we have referred to donations tax being levied at 20%. This only applies to the first R30 million after which it increases to 25%. The same applies for estate duty where applicable. Donations tax must be paid to SARS by the end of the month, following the month in which the donation was made. Deemed donations due to interest being charged at a rate lower than the SARS official rate of interest are deemed to have been made on the last day of the relevant year of assessment.


Loans between related parties often lead to legal and tax consequences not fully considered at the inception. It is well advised to properly consider all tax and legal aspects, and if necessary, obtain professional advice before entering into a loan agreement with a related party.

BY: HANNO LE ROUX – Audit and Accounting Manager at Meredith Harington

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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