Ampersand Vol7

1ST QUARTER 2007 VOLUME 7

ON THE MERGE OF GREATER THINGS As we kick start the new year, we welcome David Warneke and his staff to Cameron & Prentice. Antonie van der Hoek discusses this exciting merger with Warneke & Co. and explains the direction of our growing firm. Three years ago we embarked on a journey. One that signified new direction and commitment for the partners at Cameron & Prentice and challenging implications for our staff. It’s always a hard task to grow a business, particularly when there are so many stakeholders directly involved. Our move to Pinelands was indeed the tangible face of our transformation - the sign of our coming of age. Since then, we’ve actively worked to improve the image of our firm and our communication with our staff and our clients. Most importantly, however, has been our commitment to continue to raise the bar on the work that we produce. Because it is very much our mission to be the best medium-sized audit firm in Cape Town, we have turned our attention to our staff - the people who are the face and backbone of Cameron & Prentice. We seek and employ young and inspired professionals who are prepared to roll up their sleeves and rise to the

challenges they are faced with every day. But most importantly, they are people who are willing to learn and who understand our firm’s commitment to excellence. The growth of the past three years has highlighted the need for further specialisation and greater staff capacity. For this reason we have actively sought a like-minded Partner with an already established and respected team to join forces with Cameron & Prentice. Equipped with strong business values, a wealth of experience, entrepreneurial spirit, and a committed team, David Warneke has joined Cameron & Prentice as Partner. David graduated with an Honours degree in Financial Accounting, a Graduate Diploma in Taxation and Masters degree in Tax Law from UCT. In 1994 he opened his own practice, Warneke & Co. after completing his training contract. Continued on page 2

WHAT’S IN BUDGET 2007 Deductions, exemptions and dividend tax

VAT STATUS What’s yours?

UPDATE YOUR WILL It’s that time of year again!

IT’S ABOUT TRUST Realities of creating a trust

HOW FAIR DO YOU GO? Understanding fair value

ED’S DESK

IN BRIEF – BUDGET 2007 AMENDMENTS

Medical Aid Deduction Caps

The monthly medical aid deduction caps have been increased from R500 to R530 for the member and first dependant and from R300 to R320 for each additional dependant.

STC Renamed

With effect from 1 October 2007, STC will be renamed as a dividend tax and the rate will be reduced from 12.5% to 10%. It is proposed that from some point in 2008, dividends will become taxable in the hands of the recipients. The company paying the dividend will be responsible for paying a 10% withholding tax on behalf of the recipient shareholder. It is at this stage envisaged that the 10% withholding tax will be a final tax in respect of that dividend.

Annual CGT Exemption

The annual CGT exemption for individuals has been increased from R12 500 to R15 000. In just the blink of an eye, the calendar year starts, the financial year ends, Trevor Manuel waves his magic wand and we’re down to business for yet another twelve months. If only it was really like that. Truth is, we now have to sift through the fine print of the budget speech, apply the new rules and ensure everyone tows the line. And yes, that means you! It’s a big job, but one we thrive on and improve on year after year. However, we believe that to truly raise the bar, we need to work with our clients and help them understand aspects of our business, and in turn, understand their businesses that much better. It’s little wonder then, that this issue of Ampersand is packed with articles that essentially, lay down the law. It’s a raw issue that calls the shots. From budget amendments to VAT status, understanding fair value and the tricky issues of trusts, we think keeping you up to speed and in touch with our side of the business is just as important as signing off your books at the end of the financial year. So read on. And relax knowing that we’ve got your interests well and truly under control, supported by a bigger and better Cameron & Prentice team. Here’s to the year ahead. Ed



Donations Tax Exemption

The annual exemption for Donations Tax has been increased from R50 000 to R100 000. Where family trusts are concerned, clients should exercise caution since new anti-avoidance provisions in the Income Tax Act give SARS the power to disregard arrangements where funds are round tripped (e.g. where journal entries are used or where funds are paid to a trust merely to be repaid on loan account). The annual exclusion should only be utilised in respect of trusts where the donor intends to make a bona fide donation to the trust and a transfer of cash or other assets actually takes place.

From page 1 He also enjoys an active academic career. As a Senior Lecturer in Taxation at UCT, David is also co-author of a text on taxation that is prescribed at leading universities throughout the country. He believes his on-campus presence is a wonderful opportunity to know and understand the graduates and potential that is coming through. A respected tax professional and academic, David and his team - Charl Stoltz, Andre Poole, Dean Jacobs, Jacobie Wagter, Michelle Parodi, Samantha van Blerk and Salome Engelbrecht - will add enormous value to our existing clients and to the future of Cameron & Prentice.

David Warneke, new Partner at Cameron & Prentice

HOW WELL DO YOU KNOW YOUR VAT STATUS? Recent changes to the VAT Act allow SARS to issue binding “VAT Rulings” or “VAT class rulings”. The system will be very similar to the Advance Tax Ruling system introduced recently in the Income Tax Act. However, as Chris Norris explains, the introduction of this new system signifies for VAT vendors that the status of any rulings issued by SARS in the past may have changed. As far as general written rulings are concerned, only general rulings listed in the Rulings Register on the SARS website as well as those contained in SARS Practice and Interpretation Notes and in previous issues of Vatnews will continue to be binding – unless specifically withdrawn by SARS.

The period allowed by SARS for the reapplication process started on 1 January 2007 and lasts until no later than between 30 April 2007 to 30 June 2007 Non-general rulings issued to specific vendors will remain in force only with respect to supplies that occurred before 1 January 2007. Vendors who received rulings from SARS in the past and who wish to retain the certainty that a binding ruling provides, must reapply to SARS for confirmation that the ruling is still correct. The period allowed by SARS for the re-application process started on 1 January 2007 and lasts until no later than between 30 April 2007 to 30 June 2007, with the closing date for applications dependent on the type of decision and when it was previously issued. Any ruling submitted by a vendor

for confirmation before the expiry date will be regarded by SARS as a binding decision until SARS notifies the vendor of its status. If a vendor fails to lodge a request with SARS within the set out time frames, the previously issued ruling will be regarded as a non-binding opinion and will thus have no force or effect in any future dealings with SARS. Rulings covered by these new rules

would include rulings issued by SARS in connection with mixed use buildings (e.g. the percentage of VAT input tax claimable on residual expenses) and rulings in connection with the applicability of the zero-rate to exported services. Clients who are in possession of old rulings are thus advised to ensure that the necessary requests are made to SARS before the closing dates mentioned above.

ARE YOUR TRUST’S AFFAIRS IN ORDER? A number of recent decisions of the Supreme Court of Appeal serve as an important reminder that in order for parties to lay claim to the benefits afforded by a trust’s status as an independent entity, the trust must ipso facto be an independent entity. David Warneke takes a closer look at what it means to be a truly “independent entity” and the raw implications of creating a trust.

There are numerous advantages to creating trusts, including savings in estate duty and income tax, as well as legal protection for the planner’s major assets. In the most common situation the planner sells growth assets for their current values to a trust on loan account. In this way the value of the assets is “frozen” at their current levels and this prevents growth from occurring in the planner’s own hands. This in turn leads to savings in estate duty and capital gains tax for the planner. Furthermore, assets owned by the trust fall outside the personal estates of the trustees, thereby bringing about legal protection (sometimes referred to as a “firewall”) over these assets in the event of the sequestration of the planner. These advantages can be substantial and we advise that if you have not set up a family trust, that you should consider doing so. However in order to enjoy these

benefits, it is most important that the ownership of the assets purportedly held in the trust must actually vest in the trust. The trust must not merely be the alter ego of the founder, who treats the trust’s assets as his or her own. In Land and Agricultural Bank of South Africa v Parker and others 2005(2) SA 77 (SCA), Judge Edwin Cameron said: “It may be necessary to go further and extend well-established principles to trusts by holding in a suitable case that the trustees’ conduct invites the inference that the trust form was a mere cover for the conduct of the business ‘as before’, and that the assets allegedly vesting in trustees in fact belong to one or more of the trustees and so may be used in satisfaction of debts… Where trustees of a family trust, including the founder, act in breach of the duties imposed by the trust deed, and purport on their sole authority

to enter into contracts binding the trust, that may provide evidence that the trust form is a veneer that in justice should be pierced in the interests of creditors”. In Badenhorst v Badenhorst 2006(2) SA 255 (SCA), the issue was a divorce settlement and whether assets purportedly held in a trust set up during a marriage should be taken into account in determining the husband’s personal estate. In reaching his finding, Judge Combrinck stated that “very often the founder in business or family trusts appoints close relatives or friends who are either supine or do the bidding of their appointer. De facto the founder controls the trust. To determine whether a party has such control it is necessary to first have regard to the terms of the trust deed, and secondly to consider the evidence of how the affairs of the trust were conducted during the marriage”. After taking into account various facts relating to how the trust’s affairs had been conducted, the Judge found that Mr Badenhorst had enjoyed and exercised de facto control of the assets and had treated the trust as his alter ego. The assets were therefore taken into account in determining his personal estate.

In order to prevent this unfortunate state of affairs we recommend that: • The trust should be correctly set up as an entity truly independent of the founder; • At least one outsider trustee, other than the beneficiaries and their immediate families, should be appointed;

• The requirements of the Trust Property Control Act should be complied with, inter alia that the trust should maintain its own bank account; • The trust should record all of its major decisions in the form of proper minutes;

• The trust should be registered as a taxpayer, as required by SARS; and • Annual financial statements should be drawn up for the trust.

MIRROR MIRROR ON THE WALL, WHICH IS THE FAIREST VALUE OF THEM ALL ... Financial statements have typically been based on historical cost, being the value at which the original transaction took place. Antonie van der Hoek examines the recent move to include items at their fair value and provides the finer print to help you understand just what’s involved. International Accounting Standard (IAS) 16 Property Plant and Equipment (PPE), effective for 2006 financial years onwards, permits PPE to be accounted for on either the cost or fair value method. PPE are tangible assets such as freehold and leasehold land and buildings, plant and machinery and are held for use in the production or supply of goods or services or for administrative purposes and are expected to be utilized in more than one period. It is important for users of financial statements to understand how a business uses its PPE and how it values them, as the management of these assets is often critical to the future success of the business. Initial Recognition The cost of an item of PPE should be recognized if the cost can be measured reliably and if it is probable that the asset will generate future economic benefits for the entity. Legal ownership of an item of PPE is not a requirement for recognition by an entity. Subsequent Expenditure In circumstances where subsequent expenditure enhances the value

of the asset to the extent that additional economic benefits will flow to the entity, the additional expenditure should be recognized as part of the asset’s cost. Measurement After Initial Recognition Once an item of PPE has been recognized at cost the entity has a choice of how to account for it in subsequent periods: 1.The cost model - carried at cost less accumulated depreciated and accumulated impairment losses, or 2.Revaluation model - carried at fair value at the date of valuation less accumulated depreciation and accumulated impairment losses. In both cases the expected useful life of the asset should be reviewed annually and adjusted upwards or downwards where applicable. The detail of both models is extensive and often requires in depth explanation and understanding to appreciate fully. For more information contact Antonie directly on 021 530 8444.

The cost of an item of PPE is defined as: The amount of cash or cash equivalents paid and the fair value of other consideration given to acquire an asset at the time of its acquisition or construction and includes: • the purchase price, including all non refundable duties and taxes, but net of any trade discounts received; • costs ‘directly attributable’ to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and • the initial estimate of the cost of dismantling and removing the item and site restoration costs, where the entity has an obligation to return the site to its original condition.

Directly attributable costs include: • costs of employee benefits arising directly from the construction or acquisition of the item; • site preparation, initial delivery and handling costs, installation and assembly costs, costs incurred in testing that the asset is functioning properly and professional fees such as legal and architect’s fees.

DON’T FORGET TO UPDATE YOUR WILL It’s a chore that needs to be revisited on an annual basis, but your will is an important document and should be treated as such. Read it, refresh it and understand the implications the new budget may have on it. Peter Prentice highlights a few key issues that may affect your will post budget 2007. With the incredible increase in house prices experienced over the last few years many more deceased estates are being caught up in the estate duty net. This has not gone unnoticed by Trevor Manuel who has graciously increased the Section 4A abatement to R 3,5 million which effectively means that the dutiable

amount of your estate (i.e. assets less liabilities) must exceed R 3,5 million before estate duty kicks in.

Remember also to update your will for changes in your or your family’s financial or other circumstances.

For a married couple, it is therefore possible, with a little structuring, to increase the R3,5 million exempt from estate duty to R 7 million, a saving of R 700 000 to the heirs.

We suggest you set aside some time to re-read your will to decide if any amendments are necessary. And if required, we can advise and assist you with any changes to your will.

Q: How should I treat discounts received for VAT purposes?

Q: Can I register my guesthouse business for VAT purposes?

A: In terms of the provisions of the VAT Act, where a vendor knows that a tax invoice that he holds is incorrect by virtue of the fact that the consideration for the supply has subsequently been altered due to the offer of a discount, then the vendor is obliged to account for the excess VAT initially claimed either as output tax or as a reduction in input tax claimed. There is no requirement that a credit note must be received by the vendor prior to making the adjustment and effectively repaying the excess VAT. The onus is on the recipient vendor to make the adjustment regardless of the receipt of a credit note.

A: A guesthouse business can only be registered for VAT purposes where the taxable supplies made by that business will exceed R60 000 per annum. It must be remembered that, where a deemed input tax credit is claimed on the property used for guesthouse purposes, output tax will have to be charged when the property is sold. Output tax will also have to be paid over to SARS on the value of the property if the vendor subsequently decides not to continue with the guesthouse and uses the property for residential purposes. Clients should thus be aware of the potential pitfalls prior to registering a guesthouse business for VAT purposes.

Q: What are the current income tax thresholds?

Q: How many employees must I employ for my personal service entity to qualify as an SBC for tax purposes?

A: The annual income tax thresholds are currently set at R43 000 for taxpayers under the age of 65 and R69 000 for taxpayers aged 65 years and older. In addition, taxpayers under the age of 65 are able to earn tax-free local interest income of R18 000 per annum whilst taxpayers aged 65 and over can earn tax-free local interest income amounting to R26 000 per annum.

(overheard)

Many new faces to meet on www.campren.co.za

A: Current legislation requires that three or more people, unconnected to the owner of the company or close corporation, are employed in providing services to clients. This number was previously set at four employees.