Ampersand Vol5

CAMERON & PRENTICE C H A R T E R E D

A C C O U N T A N T S

( S A )

3RD QUARTER 2006 VOLUME 5

NEWS, VIEWS

AT T I T U D E S O F A 2 1 S T C E N T U R Y F I R M

THE FRIENDS WE KEEP This year Cameron & Prentice celebrates ten years of pro bono work with the Friends Of Valkenberg Trust. Trustee, Antonie van der Hoek takes a look at the non-profit organisation and the rewarding relationship that has been built. It’s all too easy to get bogged down in the comfort of day-

volunteers, the hospital now operates a hair salon, clothing

to-day business. To not look beyond our front door and

shop, and is able to purchase key equipment that is so

acknowledge the communities that exist in our society, that

desperately required. The Trust is active in securing donations

are so desperate for help in one way or another. The Friends

from a range of companies to ensure the purchase of this

Of Valkenberg Trust is one such organisation that we at

key equipment.

Cameron & Prentice are proud to support and provide our accounting skills to, free of charge.

It is a rewarding relationship. It’s an opportunity for a firm like Cameron & Prentice to add value, to supply much

The Friends of Valkenberg Trust is an amazing organisation that works to support Valkenberg Hospital. Its objectives are aimed at assisting patients and their needs when the hospital is unable to. Thanks to the Trust and the many

needed accounting and other services to ensure the Trust operates in good governance. While Cameron & Prentice is active in supplying their services free of charge, other companies and professionals such as social workers, lawyers, doctors etc are doing the same in their respective capacities.

WHAT S IN TAKING RESPONSIBILITY Our way of giving back WHEN YOU RE GONE Cashing in your estate WHAT STUDENTS WANT We re all ears ZERO RATED OR 14% VAT under the spotlight CALLING A TRUCE Amnesty for Small Businesses

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ED S DESK

IN BRIEF: Reminder for Provisional Tax Top-ups Clients are reminded that provisional taxpayers whose taxable income exceeds R50 000 are advised to make top-up tax payments by 30 September (for February year’s of assessment) to minimize SARS interest charges. Please contact us for assistance if you are unsure of your tax position in this regard. New Transfer Duty Rates With effect from 1 March 2006, the threshold at which transfer duty becomes payable for individuals has been increased from R190 000 to R500 000. The rate on transfers between R500 000 and R1 million has been set at 5% with the value above R1 million attracting transfer duty of 8%. The flat rate for companies and trusts has been reduced from 10% to 8%. Small Assets Write-off

So the World Cup is over for another four years. The office seems quieter after the weeks of wall-to-wall soccer fever. Though, I’m sure, some are still trying to guess those words that eventually sent Zinedine to the bench on final night. Odds are, despite all the translation, you’ll make far more sense of the words that grace these pages. And to be honest, it’s more relevant and, in our books, more interesting. We are after all, mere accountants. However, in the true spirit of World Cup 2006 controversy, we’ve tried to add a little controversy to our own Ampersand pages. We’ve chosen to discuss a few subjects that will provoke clear opinion. Be it Trevor Manuel’s amnesty for small businesses or whistleblowing irregularities. VAT, however, is pretty black and white, and hardly controversial, but it does warrant a page of clear explanation. So grab that cup of coffee and bury yourself for the next 90 minutes in the news and views that affect your business. And by the way, there is a little extra time (if you need it).

The threshold for small assets that may be written off in full in the year acquired has been increased from R2 000 to R5 000 with effect from 1 March 2006. Subsistence Allowances With effect from 1 January 2006, where a subsistence allowance has been paid to an employee, but that employee has not by the end of the following month spent the envisaged nights away from his usual place of residence, then the payment is deemed to have been paid for services rendered and not as a subsistence allowance. This means that the payment must be treated as normal remuneration and PAYE must be withheld from the employee and paid to SARS.

GRADUATING TO A HIGHER PROFILE ON CAMPUS Now in our second year of greater graduate recruitment activity on campuses around the country, Antonie van der Hoek is serious about securing top students to become top employees at Cameron & Prentice. Recently at the UCT Careers Fair the demand for good accounting graduates in the workplace became acutely apparent. Most big name audit firms were very much out in force in recruiting mode. And yes, we were there too. What is interesting, however, is just how seriously graduates are approaching their years of learnership with a firm. What makes them gravitate towards one firm and not another. Sure, bursaries and international exposure always crop up as key benefits, but so too do the real issues of “what am I really going to walk away with once my learnership is over?”

Enjoy. Ed

Lara, Gary and Antonie at the UCT Careers Fair 2006

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“Graduates today are wanting a learnership that proves that they rolled up their sleeves and got their hands dirty,” says van der Hoek. “That they were empowered through responsibility

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and had a real chance to learn and master.” And that’s what is proving quite a hook for many graduates interested in doing their learnerships at Cameron & Prentice. “Many are looking for the opportunities to experience all aspects of the job in a smaller, not so corporate environment. They are essentially a greater calibre, more well rounded student than we have experienced previously. They are demanding proof of credible experience to be gained.” With winter as recruitment season, Antonie and his team of young Cameron & Prentice graduates can be found presenting and interviewing at top universities in the Eastern and Western Cape.

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FINAL AMNESTY FOR SMALL BUSINESS The Act providing details of the small business tax amnesty announced by Trevor Manuel in his budget speech earlier this year was promulgated recently. Chris Norris explains the amnesty and examines the implications. The rationale behind the amnesty is a further initiative to broaden the taxbase among small businesses, many of whom operate in the informal sector. Taxi operators have been specifically included since one of the requirements to participate in the taxi recapitalisation programme is that applicants need to produce a tax clearance certificate. Although some law-abiding taxpayers may feel aggrieved by the introduction of yet another tax amnesty, we at Cameron & Prentice wholeheartedly support Treasury’s and the Minister of Finance’s efforts to broaden the tax base which will ultimately spread the overall tax burden. The amnesty effectively applies to all taxpayers except listed companies and in order to apply the requirements are that: • The applicant must have carried on a business (i.e. salary and nonbusiness related investment income earned would not qualify);

The amnesty covers both unregistered taxpayers and taxpayers who are registered but whose income from, supplies made or employment taxes due in respect of their business activities have not been declared or have been understated during any year preceding the 2006 year of assessment. Taxpayers wishing to apply for amnesty must complete a 4 page application form and must ensure that the form is submitted to SARS before 31 May 2007. The application for amnesty must be accompanied by an income tax return for the 2006 tax year and a statement of all assets and liabilities as at the end of the 2006 year of assessment. Once amnesty approval has been granted, the applicant will be granted relief from the payment of:

This amnesty, which has once again been billed as a “final amnesty”, provides a unique opportunity for taxpayers who under declared their income in prior years, to regularise their tax affairs.

• PAYE underpaid during the qualifying period; • VAT underpaid in respect of any supply or importation of goods or services during the qualifying period;

• In the case of a company or CC, all the shares or members’ interest must have been held directly by individuals throughout the 2006 year of assessment;

• STC on any dividend or deemed dividend in any year preceding 2006;

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The amnesty does not apply to any amounts that have already been paid by the applicant, or are payable as a result of any return submitted to SARS, prior to the submission of the application.

• Income tax on undeclared income or years preceding the 2006 year;

• The turnover of the business for the 2006 tax year must not be more than R10 million;

• In the case of a trust, all the beneficiaries throughout the 2006 year must have been natural persons.

based on the applicant’s taxable income for 2006. The percentage payable ranges from 0% up to a taxable income of R35 000 to a maximum rate of 5% on taxable income exceeding R500 000. In order to ensure that approval for amnesty is not withdrawn, any levy payable must be paid within 12 months of approval.

• UIF in respect of remuneration during the qualifying period; and • Skills development levy during the qualifying period. On approval, an amnesty levy is payable

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VAT IS IT ALL ABOUT? Often a cause for confusion in the VAT system is the distinction between taxable supplies, whether at 14% or zero rated, and exempt supplies and the effect such supplies have on the claiming of input tax credits. Chris Norris explains that the distinction is crucial both from the point of view of the vendor making the supplies and the recipient of those supplies. Taxable supplies are treated in one of two ways, either standard rated supplies, where VAT is charged by the supplier at the current rate of 14%, or zero-rated supplies, where VAT is charged by the supplier at 0% (such as for example exporting goods or providing services to non-residents under certain circumstances). Supplies such as providing financial services, the letting of residential accommodation, educational services or bus transport, are specifically exempt from VAT and no VAT is thus charged by the supplier on such services. One of the fundamental principles of the VAT system is that a VAT vendor may only claim input tax credits to the extent that the goods or services concerned have been acquired for the purpose of making taxable supplies. Where an enterprise (other than NPO’s which have special rules) makes only exempt supplies, then that enterprise would not be entitled to register for VAT purposes and would not be entitled to claim any VAT input tax credits on expenditure incurred. All VAT paid thus becomes a cost in such an enterprise. Where an enterprise makes both taxable supplies and exempt supplies, then the VAT position becomes a little more complex. A full input tax credit is allowed only where the goods or services have been acquired by the vendor wholly for the purpose of making taxable supplies. Thus, where

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a vendor makes both taxable and exempt supplies, an apportionment of the input tax may need to be made and, if this is the case, part of the input VAT incurred will not be claimable by the vendor. Many businesses make exempt supplies without being aware that they are doing so. Providing staff loans or housing to employees are exempt supplies as is the investing in a bank account of excess funds.

Financial institutions and the landlord of a mixed use building (i.e with both a residential and commercial component) are some examples of vendors that make both taxable and exempt supplies. Some relief is provided for vendors in the form of a de minimus rule. Where the intended use of the goods or services acquired is at least 95% for making taxable supplies, then no initial apportionment needs to be made. This provision assists vendors whose level of exempt supplies is minimal (such as

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in the staff loans example). However, in situations where the de minimus rule does not apply (such as with a mixed use building), an apportionment must be made. The question is, how should the apportionment be calculated? Firstly, a “direct” apportionment must be done. In other words, all input tax credits that relate solely to the taxable activity must be identified and claimed. Similarly, all input tax credits that relate solely to the exempt activity must be identified and may not be claimed. Thereafter, all remaining input tax credits (e.g. in respect of general expenses) must be apportioned in the ratio of taxable turnover to total turnover. Where this method does not give a fair result, SARS can be approached to provide a ruling on an alternative method preferred by the vendor. As mentioned above, taxable supplies are treated as either standard rated or zero-rated supplies. The making of zero-rated supplies does not in itself affect the vendor’s ability to claim input tax credits on expenses incurred to make those supplies. Thus a vendor whose business is solely the exportation of goods that qualify for zero-rating will always be in a VAT refund position. Vendors that make both taxable and exempt supplies should therefore ensure that their systems are in place and that VAT is not overclaimed, as the penalties for such transgressions are harsh.

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BLOWING THE WHISTLE ON IRREGULARITIES With the new Auditing Profession Act (APA) now in place, Antonie van der Hoek examines Section 45 of the new Act. And explains, blow-by-blow, the ramifications of the changes ahead. It’s a complex and controversial subject, but Section 45 of the APA introduces the concept of a reportable irregularity which became effective on 1 April 2006. This concept requires the auditor of an entity to submit a written report, without delay, to the Independent Regulatory Board for Auditors (IRBA) when that auditor is satisfied or has reason to believe that a reportable irregularity is taking place or has taken place in respect of that entity. Management of the entity must be informed, in writing, within 3 days of the report being submitted to the IRBA. This is very different to the requirements under the old Act (PAAA) which granted management a 30 day period in which to rectify the irregularity after which the auditor could reassess the need to report it. This may put strain on the relationship between auditor and client as the auditor may be seen as a “whistleblower”.

“Reportable Irregularity” means any unlawful act or omission committed by any person responsible for the management of an entity which: • has caused or is likely to cause material financial loss to the entity or to any partner, member, shareholder, creditor or investor of the entity in respect of his, her or its dealings with that entity, or • is fraudulent or amounts to theft, or • represents a material breach of any fiduciary duty owed by such person to the entity or any partner, member, shareholder, creditor, or investor of the entity under any law applying to the entity or the conduct of management thereof.

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However, auditors face the prospect of criminal prosecution, with a fine or imprisonment not exceeding 10 years, or both, should they fail to report an irregularity to the IRBA. In a way, it is forcing directors and management to face up to the challenges of corporate governance and to implement the appropriate controls to prevent irregularities from happening. The IRBA have an obligation to report any irregularities brought to its attention to other appropriate regulatory bodies, including SARS. Section 45 would only apply where the registered auditor has been appointed as auditor to the entity. In other words, where the registered auditor is only performing a compliance function such as accounting officer to a CC or only performing consulting services then Section 45 would not be applicable.

Objectives of the new Act include: • Protecting the public in the Republic by regulating audits performed by registered auditors; • Providing for the establishment of an Independent Regulatory Board for Auditors (IRBA); • Improve the development and maintenance of internationally comparable ethical standards and auditing standards for auditors that promote investment and as a consequence employment in the Republic; • Setting out measures to advance the implementation of appropriate standards of competence and good ethics in the auditing profession; • Providing for procedures for disciplinary action in respect of improper conduct.

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THE IMPORTANCE OF LIQUIDITY IN YOUR ESTATE PLANNING So often not accounted for, Peter Prentice alerts to one of the biggest pit falls in estate planning — the importance of liquidity.

It is extremely important to consider the amount of cash your executor will require when winding up your estate. It is also important to give thought to the source of cash. Will your executors have to realise assets? What assets should they

realise? Are there proceeds from insurance policies? Your executors may require substantial amounts to cover estate liabilities, estate administration, capital gains tax, estate duty and executors remuneration. It is not always possible to predict a precise cash requirement but a little planning may prevent the sale of estate assets that would be preferable to leave in the hands of your beneficiaries.

just ask... Q: Can I pay my provisional tax in instalments? A: It is possible to pay provisional tax in instalments. However, SARS must be approached beforehand and an application form must be completed and submitted to SARS for approval. The application process is however fairly onerous in that it requires extensive personal information to be submitted to SARS before SARS will approve a payment plan. Interest will be charged by SARS on the instalments at the official rate, which currently approximates prime. If payments are made in instalments without approval then penalties and interest will be charged. Given that such penalties and interest are not deductible for tax purposes, and in view of the invasive nature of the SARS application form, it may be preferable to utilise overdraft facilities and other finance wherever possible.

Q: What are the current criteria for claiming home office expenditure against salary income? A: Until the 2006 tax year, the provisions of the income tax act did not allow a salaried employee to claim home office expenses as a deduction against salary income. Changes to the legislation were made with effect from 1 March 2005, which now assist taxpayers that are forced by their employers to maintain a home office, and who mainly use that office as their main business location. Clients should be aware that non-residential use of their primary residence has negative CGT implications.

Q: Must capital gains be taken into account in calculating provisional tax? A: All provisional taxpayers should take capital gains into account in their estimates when calculating their provisional tax payments. Since 25% of a capital gain is included in an individual’s taxable income, and 50% in the case of a company or CC, leaving capital gains out of the provisional tax calculation could result in unexpected penalties being levied on taxpayers who submit their second payments on an amount lower than their basic amount. We request that our clients keep us informed regarding any capital gains that they may have realised in order that their provisional tax estimates take capital gains into account.

Q: Can I give my staff an interest free loan without fringe benefit tax implications? A: Interest free loans that have no fringe benefit implications can be provided to staff members under the following circumstances: • Casual loans that do not exceed R3 000 at any time. This provision is intended to apply to short-term loans granted at irregular intervals and does not automatically apply to all loans that are less than R3 000; • A loan granted to an employee to enable that employee to further his own studies. Where a low interest or interest free loan is a taxable fringe benefit, the fringe benefit value must be calculated as the difference between interest at the official rate and the interest actually paid on the loan.

(overheard) Tax evaders now face criminal action!

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