Ampersand Vol13

1st QUARTER 2009 VOLUME 13

CAMERON & PRENTICE MERGER WITH GG WEST: BUSINESS AS USUAL, ONLY BET TER Effective from 1 March 2009, Cameron & Prentice merged with G.G. West & Company. Antonie van der Hoek outlines what this exciting step means to our clients. Over the past few years Cameron & Prentice has established strong systems that are now operating like a well-oiled machine. And the merger with G.G. West & Company means that we will now be able to work with greater productivity, improved turn around times, be better able to keep up with the ever-changing legislation and take on larger audits. Cameron & Prentice, located in Pinelands, was established in 1971 as a small firm with a handful of clients and a promise to keep things personable. This ethos is very similar to the way G.G. West & Company has conducted business over the last 57 years, and which will continue under the Cameron & Prentice brand. The combined team of G.G. West & Company and Cameron & Prentice will be a blend of experience and youth where the partners will work very closely together and actively practise the concept of knowledge sharing.

In particular we look forward to the input from Boryana Mintcheva and Shaun Fisher, partners at G.G. West & Company. Both are young and dynamic and excited about the merger. Boryana Mintcheva studied Micro Electronics Engineering at university in Bulgaria before she came to South Africa in 1992. She joined G.G. West & Company in 1996 and went on to qualify as a Chartered Accountant and obtain an MBA from UCT’s Graduate School of Business, in 2005. Shaun Fisher joined the firm in May 2005 and became a partner in March 2006. Shaun qualified as a Chartered Accountant in 2004 and has a Postgraduate Diploma in Income Tax Law from UCT. He has recently completed a BCom Honours in Taxation also from the University of Cape Town. Both firms are equally optimistic at the prospects of beginning a new era. We wish to emphasize that there will be minimal disruption to the clients of both predecessor firms and we look forward to seeing you at our premises at 4 Glen Roy, Pinelands.

WHAT’S IN BUDGET BRIEFS Getting down to detail NEW DIVIDENDS TAX Soon to replace Secondary Tax on Companies ARE YOU A STRONG LEADER? What it takes to be great MAKE A BUSINESS PLAN And make it good MINIMIZE ESTATE DUTY New law will pleasantly surprise

IN BRIEF - Budget 2009 Special Primary rebate increased

ED’S DESK Budgets and financial year end – this time of year is hot in every sense of the word. Come 1 March and we all settle in to yet another financial year. And hopefully, the temperatures will cool off as well. On 1 March however, we merged with G.G. West & Company in what we believe is a very good match. Both firms hold impressive track records and both have an ethos of personalized service. We can’t wait. In this issue David Warneke and Shaun Fisher wrestle with the changes that the new Dividends Tax will bring about. It makes for complex reading and the team at Cameron & Prentice is on standby to assist you with any queries you may have regarding this important topic. Peter Prentice demonstrates how the Revenue Laws Amendment Act, 2008 has created another opportunity to minimize estate duty. We also take a look at how a poorly written business plan often results in businesses not getting the funding that they, in many instances, deserve. With the tough economic times that businesses are experiencing at present, good leadership is vital. We include an article that we believe lists the most important qualities that characterize a good leader. Until next we meet…

Ed

The primary rebate has been increased from R8 280 to R9 756 a year for all individuals. The secondary rebate for individuals over 65 has been increased from R5 040 to R5 400 a year. This means that the tax-free income threshold for individuals under 65 years of age has increased from R46 000 to R54 200 and the tax-free income threshold for individuals over 65 years of age has increased from R74 000 to R84 200. Tax-deductible contributions The monthly monetary caps for tax-deductible contributions to medical schemes have been increased with effect from 1 March 2009 from R570 to R625 for each of the first 2 beneficiaries and from R345 to R380 for each additional beneficiary. Tax-free interest ceiling increased The tax-free interest income ceilings have been increased from R19 000 to R21 000 for individuals below the age of 65 and from R27 500 to R30 000 for individuals over the age of 65. The taxfree ceiling for foreign dividend and interest income has been increased from R3 200 to R3 500. Rollover relief SARS has proposed the introduction of “rollover” relief in respect of “entities with inactive real estate” such as vacant land and residential property. We envisage that this relief may be similar to the relief available on the introduction of CGT that allowed the tax-free transfer of properties out of companies, CCs and Trusts. As this proposal has not yet been enacted, we do not at this stage know what the detail of the proposal will involve. We will again advise in this regard in a future issue of Ampersand.

IN A DITHER OVER DIVIDENDS TAX In terms of the Revenue Laws Amendment Act, the new Dividends Tax could result in an increased tax cost where an employee share trust holds shares in its parent company. Shaun Fisher highlights the conundrum.

From time to time, employee share trusts hold shares in their ‘parent’ company. These are shares that have not been allotted to a qualifying employee in terms of the share scheme for which the trust was set up. For example, the shares may have been issued to the trust in anticipation of take-up by employees who will qualify shortly thereafter, or the shares may have been repurchased from an ex-employee. At present, if the parent company declares a dividend, Secondary Tax on Companies (STC) is payable thereon by the company at the flat rate of 10%. Where the dividend is in respect of the shares held by the employee share trust, there is no STC exemption. However, STC is calculated on the ‘net amount’ of any dividends declared by the company. The net amount is the excess of the dividend declared over the dividends accrued to the company during its dividend cycle. If, as is normal, the company is one of the beneficiaries of the trust and the trust distributes the dividend back to the company, the company will get an STC credit in respect of the dividend accruing to it. This credit will be taken into account in the next dividend cycle of the company resulting in a benefit to the company when it next declares a dividend. In terms of the Revenue Laws Amendment Act, the situation will be different when the new Dividends Tax comes into effect. The Dividends Tax will not apply where the ‘beneficial owner’ of the dividend is a SA resident company. If the trust is the ‘beneficial owner’ of the dividend the tax will apply but if the parent company is the ‘beneficial owner’, the Dividends Tax will not apply.

It is considered that the company will be the beneficial owner of the dividend if the trust deed makes it clear that the dividends from such shares HAVE TO be on-distributed IN TOTO to the parent company i.e. the trustees should be given no discretion whatsoever as to how to utilize the dividends. This is equivalent to the company having a ‘vested right’ to the dividend.

Where the trust remains the beneficial owner of the dividend, the company will be out of pocket as the new Dividends Tax contains no ‘input credit’ mechanism. In effecting such changes to trust deeds, the implications of the new general anti-avoidance provisions should be borne in mind.

STC CREDIT SHOCK WITH NEW DIVIDENDS TAX The recently promulgated Revenue Laws Amendment Act introduces a new Dividends Tax to replace Secondary Tax on Companies (‘STC’) from a future date still to be determined. David Warneke takes a closer look at an unintended result of the wording of the legislation. The Explanatory Memorandum gives the following example: Facts: Company X has two shareholders (SA Company and Individual) that each hold 50% of its shares. Company X has R400 of STC credits (i.e. has received R400 of dividends previously subject to STC). Company X distributes R600 to its shareholders by way of a dividend.

The major difference between the Dividends Tax and STC is that, whereas STC is a tax on the company declaring the dividend, the Dividends Tax is a tax on the shareholder that will be withheld, and paid over to the Revenue Service, by the company. Both are at the rate of 10%. The basics of the new Dividends Tax have been outlined in the previous edition of Ampersand (Edition 12 – 4th Quarter of 2008). This article discusses an apparent unintended result that will arise due to the wording of the Act, where companies with STC credits declare dividends to South African resident companies. Under these circumstances it appears as if the STC credits will be of no use to either company: the declarer of the dividend or the recipient thereof. Where companies have received more dividends than they have declared i.e. where they have STC credits, the current wording of the Act does not appear to allow for the STC credits to ‘work themselves up through a chain of South African resident companies’ as stated in the Explanatory Memorandum to the Revenue Laws Amendment Bill.

Result: Of the R600 dividend, the dividend tax does not apply to the first R400 by virtue of the existing STC credits. Of the remaining R200, R100 is allocated to each shareholder (meaning that the R100 paid to SA Company is exempt and the other R100 paid to Individual is taxed at 10%). The R400 of STC credits is similarly split, with the SA Company receiving R200 of STC credits and Individual receiving R200 of STC credits (which will be permanently eliminated). However, it does not seem as if the Act, as presently worded, will effect this result. The mechanism by which the R400 of STC credits is meant to be passed up to the shareholders is contained in section 64I. In terms of section 64I(1)(b) the company declaring the dividend has to notify the shareholder of the amount by which the dividend reduces its (the declarer’s) STC credits. This amount is correspondingly defined by section 64I(2)(b) to be an STC credit in the hands of the recipient company. On the other hand, the proposed section 64F exempts dividends from the Dividends Tax, inter alia where the beneficial owner is “a company which is a resident”.

The basic problem with section 64I is that it does not require the payment of an exempt dividend to use up a company’s STC credits. So in the example above, since the dividend paid to SA Company is exempt from the Dividends Tax, there would be no need for Company X to call on its STC credits in order to apply the STC credits against the dividend. Company X would therefore not be able to issue the notification regarding the reduction of its STC credits and SA Company would therefore not have STC credits (as defined), to use against the dividend received from Company X. Section 64I(3) deals with the reduction in STC credits, and states that “…the amount by which the STC credit of a company is reduced is deemed to be equal to an amount which bears to the dividend paid by that company to the person contemplated … the same ratio as the amount by which the STC credit of that company is reduced as a result of the payment of that dividend to all shareholders bears to the total dividend paid to all shareholders.” This apparent deemed reduction in the declarer’s STC credits in fact does no more than offer a formula for the apportionment of a reduction in STC credits between shareholders. It hinges on “the amount by which the STC credit of that company is reduced” without requiring that the STC credits be reduced. The implication is that STC credits will be of no use whatever where a dividend is paid to a SA resident company as beneficial owner. Hopefully we will see an amendment to Part VIII before the Dividends Tax comes into effect.

WHAT MAKES FOR AN EFFECTIVE LEADER?

A WORD OF ADVICE even the best laid plans…

In these tough economic times it is more vital than ever that a business enjoys strong leadership. The following are the most important qualities according to Sandra Larson (the past executive director of MAP for Nonprofits):

Generally business plans are drafted for the purpose of seeking financing. That means that the document must a) get the reader’s attention quickly, b) keep their interest, and c) convey critical information in a manner that is easy to understand.

Passion. A good leader must be passionate about his or her company’s business. This enthusiasm is contagious and inspiring to others.

Vision. Ideas about change and how the future could be different is essential to ensuring the sustainability of any organisation.

Intellectual Drive and Knowledge. A good leader has to be a reader and a learner. In turn, this helps, with the formulation of the vision. Confidence and Humility Combined. Without confidence, action will not occur to transform the vision into reality. However, a good leader must recognise that others may come up with better ideas than his or her own - and embrace those ideas wholeheartedly. A Good Communicator. Good communication is essential in order to convince others to come on board and share the company’s vision.

Many requests for financing are rejected simply because the business plan is poorly written, incomplete or unrealistic. It is critical to pay close attention to detail and include all information that the reader will need in order to make an educated decision. There are a number of common mistakes made when writing a business plan, including: the failure to fully express the business concept, the omission of important pieces of information, and a tendency to be unrealistic in their financial and market share assumptions and projections.

A Holder of Values. A good leader must have values that, in his or her opinion are life giving to society. However they must also have respect for others and their views.

Creativity. A creative leader helps with the formulation of the vision of the company and includes the ability to come up with novel solutions to problems.

Even businesses that have strong potential will fall by the roadside if their business proposal plan is poorly written.

Other pitfalls include:

Of secondary importance is: Planning Skills. A good leader is organised. This means that they are aware of what is happening within the company, the environment at large and how this affects their logistics. Interpersonal Skills. People need to clearly understand what it is that they are required to do, be praised for their work and feel as though they are part of a motivated team. General Business Skills. A good leader is also a jack-of-alltrades. He or she needs to have skills in financial management, human resources, information management, sales, marketing and more. From ‘What Makes for an Effective Leader?’ Copyright Sandra Larson.

Poor grammar and spelling A failure to provide supporting documents as needed A lack of clarity Longwinded or unclear explanations Arrogance that is evident in the document Insufficient evidence to support the notion that the business can be successful A lack of enthusiasm for the concept and the business. It is important that the business plan is not seen as just words on paper. It must represent what the business will do to be successful. It will become obvious very quickly if there is a clear understanding and vision of how the business will be managed, how products or services will be produced and marketed, how the business will make money and if there is a sound strategic direction for the business. The business plan document must be well organized and instill confidence in the reader that the business has a good chance of being successful. Contact us at Cameron & Prentice on 021 530 8444 if you would like to discuss our business plan services further.

REST IN PEACE The Revenue Laws Amendment Act, 2008 has created another opportunity to minimize estate duty. Peter Prentice explains further.

A newly created paragraph (i) of Section 3(2) of the Estate Duty Act No 45 of 1955 applies to the estates of persons dying on or after the 1st of January 2009. This, in layman’s terms, means that your pension fund, provident fund and retirement annuity funds escape the estate duty net and are excluded from your estate for the purpose of calculating estate duty. Added to the fact that most life assurance companies have scrapped the age limitation for entry into RA funds, you are now able to invest a lump sum into a RA fund which will be immune from estate duty.

Q: What are the VAT implications of acquiring a motor car? A: Where a registered VAT vendor (who is not a car dealer or car hire business) acquires a motor car as defined in the VAT Act (essentially a passenger vehicle), no input tax credit may be claimed on the acquisition amount. This rule applies to all means of acquisition, including purchase, lease, instalment sale and car hire. Neither the vendor’s intention on acquiring the motor car or the actual use thereof are relevant – the VAT incurred on acquisition of a motor car (except by the car dealer or car hire business) is simply not claimable as an input tax credit.

Q: I’ve heard that VAT needs to be paid on fringe benefits. Is this correct? A: Where an employer grants fringe benefits to an employee, a deemed supply for VAT purposes takes place. This means that the supply of the fringe benefit, except in limited circumstances, is subject to VAT and VAT must be paid to SARS in the normal manner. The value of the supply for VAT purposes is generally the

(overheard) The 2009 tax filing season has already kicked off. EMP501 PAYE reconciliations are due 30 May.

Something to sleep on or keep you awake at night? Do the sums, you will be pleasantly surprised. P.S. 2009 budget windfall! It’s time to look at your will again. Trevor Manuel indicated in his budget speech that the portion of the Section 4A abatement, currently R3.5 million, not utilised on the death of the first dying spouse may be utilised on the death of the second dying spouse. This may translate to a saving of R700 000 in estate duty. It might sound a bit complicated but nothing compared to unravelling this provision for Jacob Zuma and his many wives.

same as the value of the fringe benefit for income tax purposes. Examples of such VATable fringe benefits would include company cars, assets given to employees for a consideration below market value, free or cheap services provided to employees and the right to use assets either free of charge or for a nominal consideration.

Q: What are the new fringe benefit tax rules relating to employer provided phones and computers at employees’ homes? A: With effect from 1 March 2008 (i.e. for the 2009 tax year), the right granted by an employer to its employee to use a telephone or computer equipment at the employee’s home (mainly for the purpose of the employer’s business), is no longer a taxable fringe benefit. Any communication service provided to an employee, such as access to the internet or e-mail, is also no longer a taxable fringe benefit as long as the service is used mainly for the purpose of the employer’s business.

ANDY S SAR

SARS HAS REALLY TURNED UP THE HEAT ON LATE SUBMISSIONS.