Why invest directly offshore?

shutterstock_512738473Many South Africans are justifiably concerned that their retirement capital will be insufficient to meet their post-retirement needs. This concern is exacerbated by the recent downgrade to junk status, which has detrimental long-term investment consequences.

But there is a bright light on the bleak domestic horizon – direct offshore investing.

South Africans have the opportunity to invest in a direct offshore share portfolio using their discretionary travel allowances.  Individuals are allowed to take R1 million out of the country annually. With tax clearance an additional R10 million is permitted.

Despite credit downgrades the rand has not yet depreciated significantly. South Africans can use the attractive current exchange rate to their advantage by taking at least part of their hard-earned capital offshore to hedge against local political and socio-economic uncertainty. This should, however, not be the sole reason for doing so. Investors can gain exposure to pioneering growth sectors otherwise unavailable to them, including cyber security, electric vehicles and virtual reality. In addition, share portfolios can include international stalwarts such as Apple, FedEx and Visa.

Let us debunk two widely held beliefs:

  • Investing offshore directly is only for very wealthy persons
  • Investing offshore directly is expensive

Sadly both statements hold true in most instances. Large banks more often than not cite intensive administration as the rationale behind imposing significant minimum investment amounts (up to $500,000) and excessive fees. Maximizing profit margins is the top priority. They are unwilling to help rather than unable to help. Fortunately, there are international banks such as Swissquote that open trading accounts for smaller amounts at reasonable cost.

The global investment arena is transforming rapidly. Are your investments structured to participate in these growth opportunities?

  • Frants Preis is an equities portfolio manager at VEGA Asset Management. VEGA Asset Management has a service level agreement with Swissquote Bank AG.

Compiled by: Frants Preis, CFA

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Aggrieved Minority Shareholders – You Have Plenty of Options

A3The Companies Act gives directors substantial leeway to run a company and gives them considerable powers to do this. So how does it protect minority shareholders who disagree with how the directors operate the business?

What remedies are available to you?

  • A shareholder may seek court relief when there is “an unconscionable abuse” of the company’s separate legal persona.
  • Shareholders may “demand” that the company purchase their shares at “fair value” in the event of a:
    • Change in the company’s Memorandum of Incorporation (MOI)
    • Disposal of a large part of the company’s assets
    • Merger with another business
    • Scheme of arrangement being entered into by the company.
  • A shareholder may ask the court to protect his/her/its rights in matters affecting the MOI, company rules and company debt.
  • A shareholder may apply to court to have one or more directors declared delinquent.
  • If shareholders are being treated in an “oppressive” or unfair manner which prejudices their rights, the courts are given wide discretion. Inter alia, they can appoint new directors, restrain behaviour, change the MOI, award compensation to the prejudiced shareholder, issue shares, set aside transactions or require a trial be held.

The Supreme Court of Appeal in 2013 found in favour of a minority shareholder under this section.

  • Shareholders may institute a derivative action by demanding the company take legal action against wrongdoers who have acted in a manner harmful to the company.

Whilst we are often told the Companies Act favours directors, there are numerous avenues sanctioned by the Companies Act to address grievances of minorities.

Ask your accountant for help in doubt.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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How Many Days A Year Do You Work For The Taxman?

A2In the last few years in particular we have been aware of tax increases. The Free Market Foundation measures how many days in a tax year it takes to pay our taxes (taking total taxes over total earnings – obviously in reality we pay taxes monthly, or twice-yearly for provisional taxpayers).

Compared to last tax year, it will take us two more days to pay tax – on 22 May  we will have settled our owing to SARS and only from the 23rd will we work for ourselves. That’s 142 days (4 months and 22 days) we’ve worked for the taxman.

”Tax Freedom” Day gets later every year …

Since 1994, the number of days taken to pay tax has risen by 29 days – if we stick with the current trends, it means that each successive generation will work one extra month to pay tax.

Is this good or bad? 

It depends how government is spending its money. If the money is going on infrastructural projects that will increase productivity, this will increase economic growth over the medium term. In South Africa’s case the major trend has been the increase in the number of civil servants employed. Since 2009 our debt to Gross Domestic Product (GDP) has doubled which has put the country under unnecessary pressure and is one of the factors that alarms rating agencies.

Where to now?

One of the issues that worried former Finance Minister Gordhan was the sudden decline in “tax buoyancy” which measures how revenue collections respond to changes in national income. For example, tax buoyancy would be positive if GDP rose by 1% and revenue collections increased by 2%. In the 2016/17 year SARS fell R30 billion short of its collection target for the first time since 2009.

Potentially this can mean that taxpayers are taxed to the hilt (remember 4% of the population pay the bulk of our tax) or perhaps more worryingly, what amounts to a tax revolt is beginning. The people who pay most of our tax have the resources to avoid tax (remember that whilst “tax evasion” is illegal, “tax avoidance” using tax laws legally is allowed) or to find work in another country.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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SMMEs and BBBEE Firms – Government Wants To Do Business With You

A5The government spends over R500 billion annually on goods and services. Promises have been made for several years that government would promote small and medium-sized businesses (SMEs). Government has also promised to help emerging Black business through its Broad Based Black Economic Empowerment (BBBEE) program.

Now it has taken steps to follow through on this. From 1 April, new preferential procurement regulations have come into effect that favour SMMEs and BBBEE firms. The aim of these regulations is to channel R150 billion in procurement spend to these entities.

New regulations from 1 April – how will they work?

State and parastatal tenders depend mainly on price. In terms of the new regulations the percentage of points awarded for a tender that depend on price is 80% for tenders of R50 million or less, and 90% for tenders over R50 million.

Tenders may now be subject to pre-qualifying criteria which may contain any one of the following:

  • A minimum BBBEE (Broad Based Black Economic Empowerment) status
  • An Exempt Micro Enterprise (EME) status – turnover of R10 million or less; or a Qualifying Small Enterprise (QSE) status – turnover of R50 million or less
  • If it is feasible to subcontract a tender of more than R30 million then the business that is awarded the tender must allocate 30% of the tender to
  • EMEs and/or QSEs
  • EMEs and/or QSEs with at least a 51% Black shareholding
  • A cooperative which is at least 51% Black owned
  • Any combination of the above.

In essence this excludes companies that do not have the above criteria.

Thus, the state has put in the conditions for a large slice of its procurement to go to SMMEs and BBBEE businesses. It is now up to government and parastatal entities to use these new regulations.

SMMEs and BBBEE organisations should now follow tenders closely to see if they are eligible for a slice of this R500 billion spend.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Frightening Fraud Statistics – Protect Your Business Now!

A4A global organisation which focuses on internal (i.e. management, owners and staff) fraud, recently released some sobering findings.

Understanding them is your first step in protecting your business from serious loss.

In Sub-Saharan Africa

  • Over 60% of frauds were committed by people with a degree (in view of the large number of fake degrees consider carefully checking qualifications when hiring).
  • 82% of perpetrators were male with an average age of 38.
  • 18% came from the accounting department, 17% from operations and 11% from purchasing.

In global terms

  1. 5% of revenues are lost due to fraud. This applies to large and small entities but clearly will have a greater impact on small entities.
  2. The best method of fraud detection is by tip-off (approximately 30% of cases), followed by management review (15%), internal audit (12%) and account reconciliation (just under 10%). If you don’t have a tip-off or whistle blower policy, now is the time to do it. Most of the other detection methods come from active management control.
  • Most frauds come from asset theft and the largest (by value) from financial mis-statement.
  1. 90% of background checks did not pick up any indication of malfeasance and 82% of fraudsters had not been punished by their organisations. Something also to consider – and check with previous employers – when recruiting.
  2. Fraud losses were detected much faster and the loss was 34% less in entities with strong controls.
  3. Those committing fraud typically showed some of these characteristics:
    1. “Wheeler dealer” personalities
    2. Financial problems
    3. Living beyond their means
    4. Control issues
    5. Strong relationship with a vendor
    6. Family difficulties such as divorce.

Don’t become a “fraud statistic” – analyse the risk factors listed above and take preventative action now!

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Junk Status Is Now a Reality – How Will It Affect Us?

A1Events have moved swiftly – on 31 March the Minister of Finance and the Deputy Minister were axed. Ratings agencies Fitch and S&P downgraded South African debt to junk status the next week.

Why the muted response?

In December last year when Mr. Nene was replaced as Finance Minister, it appeared we had fallen off a cliff – the Rand tumbled and interest rates spiked sharply. Since then there were four attempts to replace Mr. Gordhan and thus the market was not surprised by the events of 31 March.

Yet there have been consequences – interest sensitive stocks have dropped R190 billion, South African bonds have shed R100 billion in value, the Rand is 10% weaker versus the US dollar and the cost of financing South African debt has increased by R1 billion per year.

The events so far …           

Two of the major rating agencies – Fitch and S&P – have downgraded our foreign denominated debt to junk status. Fitch has also downgraded our Rand denominated debt. Usually for rating downgrades to trigger selling of country assets, two of the three agencies need to declare junk status. As our foreign denominated debt is only 10% of our debt, the response has not been as dramatic as many expected. If our local debt receives a downgrade from Moody’s (they are deciding how to react to March’s events) this will have a much greater impact, particularly as 35% of local debt is owned by foreign investors.

We have been in junk status before following a debt default in the mid 1980s and we came out of junk status in 1999.  See this chart of our grading history since 1994 –

A1

Source: Adapted from a Nedbank chart

Now what?

The new Finance Minister and his team need to rapidly re-establish credibility in the Treasury. The path of only paying what the nation can afford should remain in place and controls over State-owned entities (such as Eskom) should also be built on.

Mr. Gordhan had the confidence of offshore investors and both Fitch and S&P made it clear they feared that South Africa would not stick to current Treasury policies.

We can go one of two ways:

  • Move along the path feared by ratings agencies which will lead to further bailouts of State businesses and increased government spending, e.g. on the nuclear program. This way will lead to lower or no economic growth and a steady downward spiral which could end up in further downgrades and an IMF bailout.
  • Maintain the fiscal stance of the last twenty years which could prevent further downgrades and see the country in a year or two emerging from junk status.

The man in the street

There will be less disposable income as petrol price hikes, a declining currency, more interest rate rises and stagnant economic growth curb our ability to improve living standards.

What is concerning is that surveys show that 30% of even “well-off” South Africans (i.e. they live comfortably and can cover future unplanned expenses) would struggle with an unexpected bill of R20,000. More and more people live at the margin and will be at even greater risk from the downgrade.

We can also expect unemployment to rise and investment to drop (particularly as foreign investment will substantially reduce). Considering GDP per head has not grown since 2013, you have to question how long the social fabric can hold.

Fin24’s powerful Infographic “How Junk Status Will Affect You” below says it all –

A2

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Blockchain Technology is Coming – Could Your Business Use It?

A5_LBlockchain offers exciting possibilities of what new technology can achieve.

What is blockchain?

It is a transparent, secure and tamper-proof method of storing data. It can also be updated as new transactions are added. Bitcoin has become the most recognised user of blockchain.  For a fuller explanation of the concept watch “What is blockchain?” on YouTube.

Why is blockchain technology so powerful?

Think how many people in Africa send remittances back to their families in different countries or the complications of importing and paying for goods. In these types of transactions banks play an intermediary role as the various parties need certainty that the transactions will be completed on an arm’s length basis.

Blockchain takes out the necessity of having a third party intermediary as it allows the two parties to interact and deal directly with each other. This will make these transactions less administratively burdensome, much faster and cheaper. With the blockchain, you will be able to view all transactions and the cryptography used makes them accurate and valid.

Large banks are now racing against each other to be the first to make the blockchain work for their clients  – Standard Bank is testing the technology. Shipping companies are also designing blockchain technology and the venture capital market is awash with start-ups specialising in blockchain technology.

We often read of how behind Africa is in technology. But also think how parts of Africa have used technology to close this gap – the use of cell phones in East Africa to do online banking is an example. Embracing blockchain could help us to further “leap-frog” into becoming more globally competitive.

Think about whether there are any creative ways your business might be able to use it.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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It’s COIDA Time Again!

A4The Compensation for Occupational Injuries and Diseases Act (COIDA) is a statutory insurance policy for your employees and pays them compensation if they are killed, injured, disabled or contract an occupational disease or illness whilst at work.

Employers are required to submit an annual return which is due on 31 May this year.

The return can be done online and is relatively simple to do. Neither is it expensive.

Administration

There is quite a bit of administration to do if one of your workers is, say, injured. Make sure you have a designated person who can do this.

Employee definition is wide

 Temporary and casual workers are covered as are trainees.

Involve your staff

Your staff does not contribute to the fund but they stand to get benefits from it. Get them involved in helping make the workplace safer and less prone to disease. It will help foster team spirit and a sense of belonging in the organisation.

Finally, not complying with this Act means you cannot get a letter of good standing which means you will not be allowed to bid for tenders. Penalties can also be levied for non-compliance.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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How Flattery and Peer Pressure Can Really Help Your Business

A3_LImagine you get an email from a charity asking you to participate in an event 60 kilometres away on Saturday. The email details how much good it does for the environment and long before the end of the email, your eyes have glazed over. On Saturdays you love having a braai and watching rugby with friends. “Sorry” you reply “I’m going away for the weekend”.

However, if the email had said that as “a highly regarded person”, your participation in the event would bring much needed extra funding to the NGO, you would definitely be interested. You would probably say, you would love to attend but you have commitments this weekend and the trip to Paarl is too far and will eat into these commitments.

“That’s no problem” quickly comes back into your inbox “I will personally collect you and we can listen to the rugby on the car radio. Your colleague Bob made quite an impression last year and we thought you would be better.”

You really admire Bob and against your better judgment you accept the engagement.

Why did you say “Yes”?  

Firstly, flattery works. If you want to get someone to do something flatter them, particularly if they don’t want to do it. Think how powerful an asset this is in the workplace. One of the key arts of management is to get people to accomplish tasks they don’t want to do and to keep them cooperative.

Another potent weapon is “social proof” or peer pressure. You agreed to go to Paarl after it was pointed out how good Bob was last year. A few years ago, research was done on this and hotel guests were divided into two groups – one group was told that reusing towels in their hotel bathrooms would have a positive effect on the environment. The other group were told that most other hotel guests reused their towels. People reacted far more positively when told other guests reused their towels and they began to reuse theirs.

Most people think (and say) they aren’t swayed by other people’s behaviour but in fact they are, particularly when these people are from a similar social group.

So how can you use this in business? 

Getting endorsements from customers and sharing this with potential or existing customers is a good example of improving your sales and profit line. Another way is to invite businesses you are cultivating to meet customers who view you favourably. This interaction can sway prospective customers to become actual customers. Have a dinner where current customers sit next to people who you want to do business with.

Throw in a bit of flattery and look forward to increased sales!

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Are You Battling to Get a Tax Refund? Tax Ombud To Investigate SARS Systems

A2Two months ago we wrote about how the Tax Ombud was now more independent of SARS and it hasn’t taken the Ombud long to flex these powers.

Over half of complaints received by the Ombud relate to the long time taken to get refunds to taxpayers. This relates to both Income Tax and VAT.

The Ombud may launch investigations if systemic problems manifest themselves and the Ombud will probe whether the slowness of refund is a systemic issue. The Minister of Finance has given the Ombud permission to proceed with the investigation.

What SARS says

SARS has welcomed the investigation and is confident of its systems, commenting:

“Due to an increase in fraud, SARS has had to react by tightening up our Risk Rules.  Despite such actions SARS has only referred 11% of cases for detailed audit. Regarding Personal Income Tax payments of 98.2% is paid within (72 hours).”

The problem is that the large refunds are generally in the 11% and 1.8% statistics quoted by SARS, and as small businesses are cash flow dependent, holding these back can threaten their solvency.

So that’s all cold comfort to honest taxpayers made to wait for refunds genuinely due to them, and we can only hope that the Ombud’s intervention is successful in reducing the delays.

We should also remember that SARS will be R30 billion short in its revenue collections for the 2016/2017 year. The Minister of Finance has expressed concerns as the shortfall reverses the trend of SARS achieving or overachieving its collection targets since 2009.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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