Ampersand_vol12

4th QUARTER 2008 VOLUME 12

MIND YOUR OWN BUSINESS Buying a business could be the most important decision a person makes. Especially so if he/she is a first time buyer where the stakes are high, and if he/she is dipping into life savings. While the obvious financial aspects of buying a business are critical, Antonie van der Hoek examines the softer issues that are so often overlooked but are key to its future success. The skills of the buyer. Often the first time buyer is dazzled by the life long dream of owning his or her own business and the opportunity to make money. However, if the buyer’s skills don’t match those required by the type of business then the business may be doomed. For example, the idea of owning a coffee shop may seem wonderful. However, if you have no experience or knowledge of the catering/restaurant industry you are probably in trouble. You need to know and understand how to control costs to ensure that the business remains financially viable. Key industry information learnt from many years in a similar business is also desirable. Lifestyle of the buyer. It is important to consider your lifestyle when considering which business to buy. A person who cannot do without sleep should not be looking to buy a nightclub. A person who travels a lot will need to assess whether the business can afford to employ a manager, or whether the business can operate successfully with a manager. In the latter case certain financial and operational controls will need to be put into place to ensure that the new owner can keep his/her pulse on the business. Personality of the buyer. Some people do not enjoy dealing with others and thus should not buy a business where they may have to be on the frontline, dealing with the public. Others are very sociable and may be well suited to buying and running a pub, restaurant or other tourism-related businesses.

Personal circumstances of the buyer. Buyers who have young children may wish to avoid buying a business which involves a lot of after-hours commitment or a business which is located far from home. Monthly income required. It is financial suicide to buy a business which is unlikely to provide you with the minimum income you require. Entrepreneurial strengths. Not all are born to become entrepreneurs. Most aspire to become business owners without considering the risks and stresses involved and how they might cope with these. Entrepreneurs are generally risk takers and are driven, come success or failure. They are able to deal with stress in a constructive way. The buyer’s medium- to long-term objectives. Some may look to buy a business with the intention of reselling it after a period of time, e.g. someone who has taken early retirement and needs to earn a living until his policies mature. In this case it is important for the buyer to assess whether it is the kind of business which can easily be resold and whether he is able to add value to the business during the period he owns it. Some buyers buy a business with the intention of providing a child/children with a source of earnings. Once again the business needs to match that child’s level of ability and competency. Continued inside

WHAT’S IN SARS PULLS OUT ITS WHIP Penalties coming our way. PLAIN SAILING Go big on strategy. CONSOLIDATE YOUR DEBT Could it work for you? DEFINING NEW DIVIDENDS TAX Goodbye STC? A GENTLE REMINDER Update your will.

IN BRIEF Interest free loans – SARS vs Brummeria Renaissance (Pty) Ltd

ED’S DESK Please tell me there are other subjects in the world besides politics, the global economic collapse and Madonna’s divorce from Guy Ritchie. You certainly wouldn’t believe it, reading the same old headlines day after day. I think it’s time we talked about something else. Besides, it’s nearly the end of the year, the festive season has officially opened and the beach is beckoning. Fortunately on the pages of Ampersand, we promise not to mention any of the aforementioned subjects. Instead we’re sticking to what we know best – business and numbers. And this issue is packed full of it. Our Tax Partner, David Warneke, has been very active in the media lately and graces our pages again with a number of interesting pieces on the subject. He takes a close look at consolidating debt and emphasises the discipline required if one is to make a success of this strategy. He reveals the new penalties that SARS are introducing, and discusses the thinking behind the dividends tax. Think big picture. That’s what we’re discussing in A Word Of Advice. Strategy is key to your business’s success. And in times like these, it’s time to hang on tightly to your strategy to realize that bigger picture. That brings us pretty much to the end of 2008. Here’s to a safe and sound festive season. And for what it’s worth, my advice for having a wonderful break - stick your head in the sand and avoid the newspapers at all costs, don’t give the credit card too much of a work out. Walk on the beach or go up the mountain instead (that much, I know, is free). ED

SARS has issued a Draft Interpretation Note following on from the Brummeria Renaissance (Pty) Ltd case dealing with interest free loans. In the Brummeria case, the Court held that the right to use loan capital interest free has an ascertainable money value that should be included in gross income where the interest free loan is granted as a quid pro quo in exchange for goods or services. SARS concludes in the Note that although the decision in the Brummeria case is not authority for the general conclusion that the value of the right to an interest fee loan will always be included in the gross income of the borrower, the principles from the judgement should be applied with due regard to the facts and circumstances of each case involving the right to retain and use an interest free loan. So where the facts surrounding the granting of an interest free loan are aligned with those in the Brummeria case (i.e. where the interest free loan is granted as a quid pro quo in exchange for goods or services), an inclusion in gross income of the borrower will arise. Presumptive turnover tax The new turnover tax regime for micro businesses announced by the Minister of Finance in his Budget speech earlier this year will come into effect on 1 March 2009. Businesses with an annual turnover up to R1 million will qualify. Qualifying businesses will be allowed to opt out of the income tax and VAT systems and pay the presumptive turnover tax instead. The VAT registration threshold will also be increased to R1 million with effect from 1 March 2009. 2008 tax filing season – IT3s Our clients are reminded of the SARS requirement to issue IT3s in respect of remuneration or other fees paid to recipients that are not already included on their IRP5’s. Where such income is included in the recipient’s tax return submitted to SARS and no IT3 details can be provided on the return, a query from SARS is likely to arise that will delay the assessment process. Staff on the move Congratulations to Krishnen Kistnen who recently passed his board exam. And a final farewell to Lara Forsyth who is heading to Georgetown, Cayman Islands at the end of the year. We thank her for her dedication and commitment over the past four years, and wish her all the best for the future.

Continued from cover While these points are nothing more than basic common sense, it is amazing how often these simple points are brushed aside in the excitement of a new direction in life. As the recently appointed franchisee in the Western Cape of Renwick Business Brokers, we are able to assist you to purchase a business that is truly a match to your needs and expectations. We can help to establish you on a solid base so that your new venture will receive the strong business acumen and support it deserves. For more information on buying or selling a business, please contact David on 021 530 8444 or email [email protected]

DOES IT PAY TO CONSOLIDATE YOUR DEBT? If you’re battling to pay off that new 4x4, why not consolidate your debts? David Warneke takes a look at debt consolidation as an effective and beneficial financial strategy. Given the tough economic times we find ourselves in, it just might make perfect sense. Let’s look at it this way, say you are paying off your home loan at prime less 2 and your 4x4 at prime plus 2, by simply adding the car debt to your home loan can save a wad of cash over the term of the car loan. Or will it? Firstly, you need to consider whether there are any penalty clauses for early settlement of your car finance arrangement. These can significantly detract from the savings to be achieved. If there are not, or the penalties are not so severe, this can be an astute decision. If you have not yet bought the car, financing the purchase directly onto the bond avoids these charges and also the initiation fees charged by banks. However, there are a number of things to bear in mind. Let’s look at the numbers. If you owe R350 000 on a car at prime plus 2, your repayments will be R10 190 per month over 48 months (with prime at 15.5% per annum). In addition to the monthly repayments you will probably be in for a monthly administration or similar fee. If you settle this debt and add R350 000 to your bond at prime less 2 over 20 years, you will be paying only R4 225 per month, a saving of R5 964 per month. However, it is not a good idea to finance a short-term asset like a car over 20 years. Ideally, you want to match the term of the finance to the useful life of the asset. If you do not, you will eventually be left with a clapped out asset and many years of repayments still to make. If you are disciplined enough, you can pay more into your bond each month to effectively pay the debt off over 48 months instead of 20 years. Your monthly payment at prime less 2 over 48 months will be R9 476 per month, a substantial saving of around R713 per month compared with R10 190. Over 48 months you will have saved R34 237 by consolidating. Tax considerations also enter the picture. If you receive a travel allowance for the car and keep a logbook (which is a very good tax savings idea), you need to know what your finance charges are if you claim based on actual

expenses. The onus is on you, the taxpayer, to prove your expenses. You will therefore need to be able to show what portion of the interest on your bond is attributable to the car. If you are disciplined and pay off the debt over 48 months, you will NOT get a correct answer if you do this calculation based on the relative values of your bond and car debt when you first consolidated. For example if your bond is at R500 000 and your car debt is R350 000, then it will not be true that 350 000 / (500 000+ 350 000), or 41.18% of your interest will be attributable to the car, as this assumes that you are financing both assets over the same length of time. You would need to compute the interest attributable to the car portion another way, for example by using a financial calculator. The interest attributable to the car portion of the bond would also not be affected by private additions or repayments to your bond, for instance if you were to capitalize renovations to the bond or decrease the home loan portion of your bond by an inheritance received. As a tax strategy, it is always best to pay off non taxdeductible debt (for example the home loan portion of your bond) before tax deductible debt (for example the car portion, if you receive a travel allowance and are keeping a logbook). So if you receive a windfall, first apply it to non tax-deductible debt. Also bear in mind that with travel allowance reductions, finance costs on a car are limited to what they would be on a vehicle with a maximum cost of R360 000 (including VAT). So if your car cost you R400 000, you are limited for tax claim purposes, to what the finance costs would have been on a vehicle with a cost of R360 000. Debt consolidation is proving to be a popular way of improving cash flow. However, check the small print, do the maths and chat to us to ensure you make the right decision.

ABC’S OF THE NEW DIVIDENDS TAX The 2008 Revenue Laws Amendment Bill proposes a switch from Secondary Tax on Companies (STC) to a withholding tax on dividends. David Warneke examines some of the reasons behind the change to the dividends tax and the implications that the changes will bring. The reasons behind the replacement of STC with a tax on dividends are as follows. It is considered that SA companies are presently at a disadvantage compared to international companies, as STC is a tax on the SA company rather than on the shareholder. Secondly, since the STC is levied at company level, tax treaty limits on dividend withholding tax rates have no effect in the case of STC. The proposal is that the dividends tax will tie in with the definition of ‘dividend’ (as is presently the case). However the dividend definition will undergo simplifying changes. The new concept is that an amount will constitute a dividend for tax purposes to the extent that it is not paid out of ‘contributed tax capital’ (‘CTC’). CTC is the amount paid to a company for shares issued by that company i.e. share capital and share premium. However, the definition of CTC contains various limiting rules where more than a prescribed size of shareholding (20% at present) is issued in exchange for the introduction of an asset. Also, where shares are issued in exchange for shares issued by another company, the CTC is deemed to be R nil. Special rules will apply to unbundling and amalgamation transactions. Hence it will be important to maintain a CTC ‘register’ as the CTC may well differ from the share capital and share premium balance. CTC is also class specific where more than one class of shares is in issue. Hence a separate CTC register would need to be maintained in respect of each class of shares. CTC must be apportioned pro-rata to each individual share. One of the consequences of the above rules is that a share buy-back will be subject to tax, as is currently the case, where the amount paid to the shareholder, less the nominal value and share premium attributable to that share (which together would constitute the CTC) constitutes the amount of the dividend.

It is proposed that the new dividends tax will be at the rate of 10%. However, if the dividend is paid inter alia to a SA resident company as ‘beneficial owner’, then the dividend will not be subject to the tax. Where the share is uncertificated e.g. a share in a listed company, and is paid to a regulated intermediary, for example, a stockbroker, the intermediary will be responsible for withholding and paying over the tax. Where the company declaring the dividend is a private company, all shareholders claiming exemption from the withholdings tax (other than shareholders who are members of the same ‘group of companies’ as the company declaring the dividend) are required to furnish a written declaration of their exempt status to the company declaring the dividend. If they do not do so, the tax must be withheld. This will necessitate a considerable amount of record-keeping in the case of private companies. When the move to a dividends tax was first mooted at budget time, there was considerable representation by taxpayers regarding the fact that it was envisaged that STC credits would be forfeited under the new dividends tax. It is to be welcomed that the bill allows STC credits to be taken into account.

The credits will however be allocated to shareholders on a pro-rata basis, regardless of whether or not they will be subject to the dividends tax when the dividends received by them are on-declared. For example, say that company A (a private company) has two equal shareholders - another SA resident company B and a pension fund. Say that company A declares a dividend of R1 million and has STC credits of R400 000 brought forward. In terms of the Bill, R600 000 of the dividend will be potentially subject to the dividends tax. If the necessary declarations are held by Company A at the date of payment of the dividend, no dividends tax will be withheld. Half of the STC credit will be deemed to pass to Company B and half to the pension fund. When Company B declares a dividend, it can take the R200 000 STC credit into account in the same manner as Company A. The R200 000 of STC credits allocated to the pension fund will effectively be lost. A report will need to be issued to the shareholders prior to the time of the payment of the dividend, detailing the STC credits available to the shareholders. All STC credits will however disappear on the third anniversary date of the dividends tax becoming effective.

DRACONIAN PENALTY REGULATIONS A WORD OF ADVICE CLEAR STRATEGY MEANS TO BE INTRODUCED BY SARS PLAIN SAILING Section 75B of the Income Tax Act empowers the Commissioner to prescribe administrative penalties in respect of non-compliance with the Act. On 21 October 2008, SARS released the second draft of the regulations prescribing the penalties. It is clear from these draft regulations that SARS is determined to stamp out all incidents of non-compliance with the Act. David Warneke takes a closer look at the penalties and punishment SARS is throwing our way. On a cynical note, one wonders to what extent the imposition of penalties is seen as an important source of revenue for SARS. Penalties should not be imposed with the overriding aim of raising tax revenues. It is important that the taxpaying public perceive that the various sanctions imposed by the taxing authorities fit the misdemeanors against which they are directed.

We are of the opinion that this will not be the case in a number of instances envisaged by these penalty regulations. It should be borne in mind that these penalty regulations are not yet in force – what follows below is a summary of the draft regulations, which may change before they are gazetted.

WHEN THE PENALTIES WILL APPLY The penalties will apply for: failure to timeously register as a taxpayer, provisional taxpayer or employer; failure to timeously inform SARS of a change of address; failure to appoint a public officer, appoint a place for service or delivery of notices or keep the Commissioner constantly informed of changes thereto; failure to timeously submit a return or other information requested by SARS; failure to inform SARS of a change of address as an employer or of having ceased to be an employer; failure to timeously give an IRP5 or IT3 certificate to an employee; failure to timeously submit a provisional tax form; or any other procedural or administrative non-compliance with the Income Tax Act, apart from certain limited exceptions. The penalties for the above offences are all identical. They are based on the taxpayer’s taxable income for the year of assessment immediately prior to the year in which the offence is assessed to tax, calculated as follows: ITEM

ASSESSED LOSS OR TAXABLE INCOME FOR PRECEDING YEAR

PENALTY PER MONTH THE OFFENCE CONTINUES

1

Assessed

2

R0 - R250 000

3

R250 001 - R500 000

R500

4

R500 001 - R1 000 000

R1 000

5 6

R1 000 001 - R5 000 000

R2 000

R5 000 001 - R10 000 000

R4 000

7

R10 000 001 - R50 000 000

R8 000

8

Above R 50 000 000

R16 000

loss

R250 R250

For all the implications, examples and explanations of this new wave of penalties, please visit www.campren.co.za.

When times are tough (and we know that they are), it is imperative that your business stays on course and that it adheres tightly to its business strategy. Every business must have OBJECTIVES. These generally are: To meet certain financial targets (e.g. profit), and/or To meet certain operational targets (e.g. number of branches or outlets) For a business to realistically achieve these targets there needs to be a STRATEGY. This strategy explains HOW the business intends to go about achieving these targets and would normally be in the form of a five to ten year rolling forecast of the following: Income statements Balance sheets Capital expenditure budget Revenue volumes Cashflow HR budget/people count These budgets would be maintained for the current financial year which would feed into the long-term forecast. It is important to know that this plan is not static. Every month the rolling forecast is adjusted for actual performance to date. In addition, the future rolling forecast needs to be updated for known changes. This way the CEO of the company can see how the runout of the business plan is impacted by the changes to actual performance as well as changes to other factors such as interest rates, petrol price, exchange rates, etc. The idea is that if the CEO can see how the change in certain factors is likely to impact on the future, he can make appropriate business decisions. This can be likened to the job that the skipper of a boat has. His goal is to get his vessel safely into the harbour. However, the effect of the wind and sea currents keep moving his boat off course and he has to keep adjusting the direction of the boat so that he achieves his goal of safely docking in the harbour.

IS YOUR WILL RELEVANT AND UP-TO-DATE? Times change. As do people and your relationships with them. So too should your will. Peter Prentice gives a gentle but necessary reminder.

Regularly clients bring in their wills to be reviewed to ensure they are up-to-date and relevant. It amazes me as to how many of these wills fail to accurately reflect the testators’ last wishes. They can be totally outdated in terms of current legislation affecting estate planning, and in a number of instances fail to indicate beneficiaries whom the client wishes to be included. In some cases the will was totally invalid as it failed to comply with the provisions of the Wills Act No 7 of 1953. Your will should be reviewed annually or with any changes in family circumstances. So do yourself and your loved ones a favour. Dust off your will and read it. If you are left in doubt regarding its content or validity we will be happy to advise and assist you with changes.

Q: Are bursaries that I provide to my employees subject to tax? A: Bursaries granted to employees are exempt from tax under certain circumstances. In order for the bursary to be exempt from tax: • The employee must study at a recognised study or research institution; • The fees must be paid directly by the employer to the study institution and cannot be reimbursed to the employee; • There should be a formal bursary agreement in place which should include a clause in terms of which the employee agrees to reimburse the employer if he or she fails to complete his or her studies (unless death, ill-health or injury intervenes). Q: What are the tax rules relating to pool cars and private use by employees? A: An employee will not be taxed on the private use of a pool car only if the following conditions are met:

employees in general; • The private use of that car by the employee is infrequent or incidental to its business use; and • The car is not normally kept at or near the employee’s residence outside of business hours. However, this condition does not apply if the employee is required to use the car for business purposes outside normal working hours and the employee is not allowed to use the car for private purposes (except purely incidental use) other than to travel to and from work. Q: How are gift vouchers handled for VAT purposes? A: Gift vouchers with a monetary face value and issued by a vendor are ignored for VAT purposes at the time that the voucher is issued – this is effectively a money for money exchange. Output tax is only required to be accounted for by the vendor when the voucher is produced by the customer as a means of payment for goods or services supplied. The voucher effectively operates as a cash payment at that time.

• The car is available to be used, and is in fact used, by

The new Companies Bill, which comes into effect in June 2010, is on the President’s desk for signature.

(overheard)