Ampersand Vol8

3RD QUARTER 2007 VOLUME 8

NATURAL BORN THINKERS Each year Cameron & Prentice opens its doors to a handful of young graduates fresh from universities around the country. As career season gets underway at South Africa’s top universities, Antonie van der Hoek takes a look at the type of person he’s looking for to join the Cameron & Prentice team. At Cameron & Prentice, we don’t pretend to be one of the big audit firms. We are a proud, Cape Town-based, medium-sized firm. What you see is what you get – experience, integrity and commitment. It’s a philosophy we work by and expect our staff to embrace and take into every aspect of their work too. However, we understand that it takes a certain type of person to work to this and achieve it. People who are prepared to roll up their sleeves, immerse themselves in other people’s businesses, accept responsibility and accountability, learn from others, stand up and be counted, jump in the deep end, work in a team and have fun while they are doing it. But most

important of all is that they must be alert and astute. We are looking for natural born thinkers. Trainees are at Cameron & Prentice for a minimum of three years. And it takes a certain maturity to accept this three-year academic slog as well. While Cameron & Prentice provides the essential support for academic success of their trainees, they themselves have to dig deep to produce the goods. It’s not easy to work a full day and hit the books at night. But that’s what we expect. And we expect our trainees to do it well. They represent us – their thinking, their attitude, their experience, their commitment, their initiative. And for this, we support them and reward them.

WHAT’S IN PROVISIONAL TAX PAYMENTS SARS enforces penalties CLEANING UP THE ACT Companies Act gets a facelift CONGRATULATIONS Trainees pass Part 1 of the Board Exam SARS SNIFFS OUT UNDECLARED INCOME Submit your assets & liabilities statements SUPERMARKET WILLS Will your Will stand up for itself?

IN BRIEF

Property valuations

Current accounting standards require that fixed properties owned by companies should be valued on a regular basis. It is important that clients obtain regular third party valuations of their properties to ensure that audits are not delayed.

ED’S DESK I have to admit, for Cameron & Prentice, it has been an awesome winter. Despite the strikes, the hikes in fuel prices and interest rates and the odd cold front, the year continues to race ahead apace. Our merger with Warneke & Co. is fast proving to us to have been a great strategic move. Our new, expanded staff has found its feet quickly in the building, systems have been embraced and productivity and performance have been impressive. So too has the performance of a few of our staff members who have recently passed Part 1 of the much revered Board Exam – a very pertinent point as universities around the country gear up for a few months of the on-campus career development season. In this issue of Ampersand, SARS very much takes the spotlight. Dave Warneke looks at corporate law reform and the importance of ensuring that one’s statement of assets and liabilities reconciles. Chris Norris examines provisional tax payments and associated penalties. Peter Prentice shares a scary story about a Will, and Antonie van der Hoek gets to toast our latest Board Exam heroes. And although we may have a month or two of winter to go, and there is a good chance the interest rates and petrol price will go up again, hang in there. Our heads will be down, we’ll be perfecting our well oiled machine and ready for the last quarter of the year. Can you believe it! Until then. Ed



Annual returns for CCs

The effective date for the commencement of Annual Return submissions by CCs was 1 April 2007. CIPRO has however advised that it will not enforce the lodgement of and payment for Annual Returns for CCs with effect from 1 April 2007 but envisages that, after a mass marketing campaign to the public, annual returns for CCs will have to be lodged with effect from the latter part of 2007.

About to buy a property from a non-resident?

With effect from 1 September 2007, any person who buys fixed property, with a value of R2m or more from a non-resident seller, will have an obligation (either personally or via the conveyancer or estate agent) to withhold a certain portion of the purchase price payable from the Seller and to pay it over to SARS.

Scams under the guise of SARS refunds

Clients are advised to be extremely cautious if anyone claiming to be from SARS makes contact (either by fax, e-mail or personal visit) with the purpose of asking for a repayment of a refund made in error. We have recently experienced an increase in attempts to defraud our clients in this manner. Clients should contact us immediately if approached as above.

LET’S CELEBRATE! Congratulations to Lara Forsyth and Gary Isbister on passing Part 1 of the Board Exam. Antonie van der Hoek explains why celebration is in order. It’s a tough time for trainees, but two of Cameron & Prentice’s own have done us proud and convincingly passed Part 1 of the Board Exam. For the three years that trainees are with us at Cameron & Prentice, the Board Exam pretty much takes centre stage. It requires intense commitment from them. A full day’s work is often followed by long evenings and weekends poring over their books. While they pick up enormous on-the-job experience, Cameron & Prentice ensures and supports a strict academic procedure as well.

Exams are demanding, but the results are clear. We are proud of the effort and commitment these two trainees have shown towards their academic and professional futures. Now to Board Exam Part 2!

CORPORATE LAW REFORM REFRESHED The DTI has embarked on a process to completely overhaul and update the Companies Act. The process is being executed in two phases. Dave Warneke explains the process and progress.

The first (and less complicated) phase was recently completed on 11 April 2007, when the Corporate Laws Amendment Act was signed into law. This first phase addressed certain matters which were seen as urgent, which are discussed in more detail below. The second and more complicated phase is a complete overhaul of the Companies Act, to include the probable relaxation of the compulsory audit requirement for certain categories of “limited interest” companies. This phase has culminated in the issuing of a Bill (The Companies Bill) in February 2007, for public comment by 19 March 2007. A large number of submissions have been made regarding this Bill and to date a large number of matters have not been decided on. We will keep you updated on progress in this regard. Matters dealt with in the Corporate Laws Amendment Act are: relaxing the requirements for a company to be able to provide assistance for the purchase of its own shares, requiring a special rather than a general resolution for the disposal of the greater part of the assets of a company, giving legal backup to accounting standards, dealing with auditor independence issues and introducing definitions of “widely held” and “limited interest” companies. • A company is now permitted to provide financial assistance for the purchase of its own shares, provided that a special resolution is obtained and the Board of Directors is satisfied that certain solvency and liquidity criteria are met.

• A company is defined as “widely held”, inter alia, if its articles provide for the unrestricted transfer of its shares or if it is permitted by its articles to offer shares to the public. Companies that are not “widely held” are defined as “limited interest” companies. • As mentioned above, the definition of a “widely held” company includes a company where the articles provide for the unrestricted transfer of shares. By contrast, the articles of the newer private companies generally expressly provide for the pre-emptive right of the existing shareholders (thus meaning that, unless these companies fall into the definition of a “widely held” company for another reason they will be “limited interest” rather than “widely held”). However some older private companies did not include preemptive rights in their articles and so technically fall into the definition of a “widely held” company. Please contact us if you keep the articles of your company and you find that this is indeed the case. • “Widely held” companies are required to appoint an audit committee. • The same individual may not serve as the auditor of a “widely held” company for more than 5 consecutive years • The financial statements of “widely held” companies must comply with Financial Reporting Standards i.e. GAAP, whereas effectively “limited interest” companies must comply with these same standards for the time being, but the intention is to develop differential standards for these entities.

SARS CRACKS THE WHIP ON PROVISIONAL TAX PAYMENTS Provisional taxpayers are required to complete a provisional tax return (IRP6) every six months and submit payment where necessary based on their estimated taxable income for the year. Chris Norris provides the low-down on provisional tax payments and the penalties that go with it.

The first provisional tax return for a tax year must be submitted six months before the end of the tax year and the second return on the last day of the tax year. For taxpayers with a February year-end, the dates are 31 August and 28 February of each year. Where the first provisional tax payment is paid late, a 10% penalty will be charged by SARS. The second provisional payment must be estimated based on the last assessed income and the amount payable would be the net tax payable for the year, less any PAYE for the year and any first provisional tax payment made. The penalties for underpaying on the second payment or submitting the provisional return late can be severe. If a taxpayer wishes to make a second provisional payment based on an estimate lower than the basic amount then this is acceptable but

SARS will levy an underpayment penalty of 20% if this estimate is less than the basic amount and is less than 90% of actual taxable income (including any capital gains) for that year. Where the second provisional tax return is not submitted by the due date, a further penalty of 20% will be imposed by SARS. In addition, if the provisional tax payment is paid late, a further 10% penalty will be charged by SARS.

payment of R72 500 (based on the basic amount of R500 000) is made on time. However, the second provisional tax return and payment, which was based on a R400 000, is submitted and paid 30 days late. The total penalties (i.e 10% penalty for late payment, 20% for underestimate and 20% for late submission) amount to R33 350, which raises that taxpayer’s effective tax rate from 29% to 34.6%.

These penalties are in addition to interest charged on late payment of provisional tax.

Although SARS may reverse penalties charged, our experience is that it is becoming more difficult to get relief in this regard.

The substantial penalties payable are best illustrated by way of an example: A corporate taxpayer has a basic amount, as assessed for the latest year of assessment, of R500 000. It estimates its taxable income for the year to be R400 000 but, on assessment, the taxable income for that year amounts to R600 000. A first provisional tax

C&P sends out provisional tax notifications in advance and it is important that clients contact us on receiving the notification of provisional tax payable to ensure that correct estimates and payments are made, and that payments are made by due date, to ensure that penalties and interest charges do not arise.

POTENTIAL UNDECLARED INCOME UNDER THE SARS MICROSCOPE The reconciliation of personal statements of assets and liabilities is one of the key tools that SARS uses to identify potential undeclared income. Dave Warneke examines just what is involved in checking whether all income has been properly brought to account. For the 2007 tax year, certain individuals have to submit statements of assets and liabilities with their income tax returns. These individuals are: all shareholders in private companies, members of close corporations, individuals carrying on a trade on their own or in partnership with others and individuals who earned more than R100 000 in investment income.

Bearing in mind that the R300 000 of salary would have been subject to employees’ tax of approximately R72 000, this source of income would have left only R228 000 in after-tax income from which that taxpayer would still have had to pay all household expenses, instalments and insurance premiums. How then was the taxpayer’s net asset value able to increase by R500 000?

The concept is straightforward: if you take a taxpayer’s net asset value (and for the purpose of computing net asset value on an income tax return, assets are recorded at original cost as opposed to market values) as at 28 February of the current tax year, and compare it with the net asset value at 28 February of the previous tax year, the difference should be explainable by after tax declared income or capital gains.

There may of course be a legitimate explanation. For instance the taxpayer may have received funding from his or her spouse or an inheritance, exempt income or he or she may have made a non-taxable capital gain. The 2006 income tax return form required this type of income to be disclosed in a section headed “amounts that you consider non-taxable”. Interestingly, the new IT12C form for the 2007 tax year does not contain such a section. Therefore, unless SARS has information relating to this income

For example, if a taxpayer’s net asset value at the end of the 2007 tax year (28 February 2007) was R2 million, and at the end of the 2006 tax year (28 February 2006) was R1.5 million, and for the 2007 tax year the taxpayer only declared taxable income from a salary of R300 000 (and had no declared capital gains or non-taxable income), SARS would suspect an omission of income.

from other sources, it will not be able to take these amounts into account in its calculations. It will be interesting to see if this will lead to a lot more investigations or at least, direct enquiries by SARS of us or the taxpayer concerned. In any event, it is important to ensure that there is a proper explanation in place should it be called for. It should be noted that potential problems may also arise where the net assets do not balance in the other direction i.e. where there is an apparent untoward decrease in the net asset value from one year to the next. The potential problem here is that the decrease may have been caused by an omission of assets – implying that if the assets were to be brought to account in a subsequent year, they would give rise to an untoward increase in the net assets between that year and the previous year. We consider it vital to ensure that our clients’ statement of assets and liabilities reconciles when compared to their income and lifestyle. This is probably our most effective way of ensuring that income has properly been brought to account, thereby protecting the client from investigation. Complications often arise when dealing with capital gains in the reconciliation of the statement of assets and liabilities. For more information about this, visit our website www.campren.co.za.

BEWARE OF SUPERMARKET WILLS We are painfully aware that Wills are essential. Equally essential is acute understanding of how and if a Will is actually valid and able to be realised. Peter Prentice recounts a recent experience with an off-the-shelf Will that almost went horribly wrong. I recently had occasion to lodge a Will, as agent with the Master of the High Court on behalf of the executrix of a deceased estate. The Will was a typical pre-printed shelf Will, or as I prefer to call it a supermarket Will. It was neatly set out leaving large gaps for the testatrix to fill in her last wishes. Unfortunately she was getting on in years and was very short sighted. Her daughter, the

nominated executrix diligently completed the Will under her mother’s directions and they proceeded to the local police station to sign and have the Will witnessed in the presence of two local police officers.

if that person writes out the Will or any part of it. In this particular incident, although the Will was declared invalid the beneficiary received her inheritance, not in terms of the Will but according to the Law of Intestate Succession.

The mother, the daughter and the police officers were not aware of Section 4A of the Wills Act which may disqualify anyone from receiving any benefit from the Will

Be warned, don’t be tempted to use the pre-printed Will variety without being aware of the legalities surrounding its completion.

Q: When will 2007 income tax returns be issued by SARS?

Q: How long do accounting records and other documents need to be kept for?

A: SARS has indicated that 2007 income tax returns for individuals and Trusts will be issued by the end of August 2007 and income tax returns for companies and CCs by the end of September.

A: Generally, accounting records such as books of account and annual financial statements are required to be kept for a period of 15 years. Supporting invoices and bank statements etc should be kept for at least five years after the tax return for that year has been submitted to SARS. Statutory documents for companies and close corporations should be kept indefinitely.

Q: If SARS doesn’t need supporting documents with the return, do I still have to send them to C&P? A: It is correct that SARS will not require supporting documents such as IRP5’s, IT3’s, RA and medical certificates or log-books to be attached to income tax returns. However, SARS can request these documents at any time for a period of five years after the tax return has been submitted to SARS. Clients should thus send us all documents as in the past so that these can be retained and supplied to SARS if requested to do so.

(overheard)

SARS is going electronic. Personal tax returns can now be submitted online.

Q: By when will 2007 returns have to be submitted to SARS? A: SARS has indicated that tax returns for individuals and Trusts should be submitted to SARS by 31 October 2007. Companies and CCs will be able to apply for an extension up to 12 months after financial year end.