Lean Times Ahead: 6 Steps to Help You through Them

A_1“We have seen better days” (Shakespeare)

When you read that nearly 75% of the middle class experience financial difficulty and a similar percentage are in debt, it is time to worry.

Add to this the economic difficulties the country is going to experience flowing from the ratings downgrades and it will not be just the poor who will suffer but many middle class South Africans will also find themselves in a crisis.

The “phony war”

In the Second World War, the winter of 1939-1940 saw no activity but in the spring Nazi Germany blitzkrieged Europe and all hell broke loose – the “phony war” was over. It seems inevitable that our own “junk status phony war” will soon be over.

Don’t be fooled by the fact that the country has successfully weathered the first month or two of the downgrades. Remember that only our US Dollar denominated debt has been downgraded and this amounts to ten percent of South African bonds. The rating agency, Moody’s, has yet to decide whether or not it will also downgrade us to junk status.  Even if we don’t get a downgrade from Moody’s now, it will probably come in the latter part of the year.

There are several rungs in the ladder below junk status. When this happens to a country its economic growth, currency, unemployment and investment show further declines. If South Africa takes no action to improve State Owned Enterprises and corruption, we will face such further downgrades.

6 steps to take and avoid   

Lock down for the lean times with these –

  1. Don’t take on more debt to supplement monthly living. This amounts to postponing a day of reckoning which more debt will only worsen.
  1. Budget carefully and understand your spending patterns. For example, analyse the times when you spend unnecessary money and consciously avoid these occasions. Make a plan to cut spend and be disciplined about it.
  1. Plan to live below your current means. This may sound daunting but will enable you to become frugal. Some simple planning around your habits and strengths (if, for example, you are good with your hands, maintain your own car and home) will help you achieve this.
  1. If you succeed in either breaking even or saving money, think how it will improve your morale – just think of not waking up at 3 a.m. with a knot in your stomach as you worry about money.
  1. Learn to distinguish between a want and a need. Once you have done this, reduce or cut out things you want.
  1. The most important thing is realising your situation will get worse unless you cut costs. Then you must have the willpower to implement living frugally.

Employers:  Help your staff through this

Why not share these ideas with your staff – not only can it help them navigate these choppy waters, but it will improve morale and productivity in your workforce

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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Non-Executive Directors: Income Tax and VAT Implications

A_2There has been uncertainty for some time as to whether employees’ tax (PAYE) should be deducted from payments made to Non-Executive Directors (NEDs) for the services they perform. There has also been debate around whether NEDs should charge VAT for their services.

The Minister of Finance undertook to clarify this in the February 2016 Budget Review.

Note that in this context “SARS considers an NED to be a director who is not involved in the daily management or operations of a company, but simply attends, provides objective judgment, and votes at board meetings.”

SARS’ ruling on PAYE

SARS has issued a Binding General Ruling (BGR) which is effective from 1 June 2017.

For an NED to be considered subject to PAYE, two conditions would need to be met:

  1. The “Premises test” whereby more than 50% of the services performed by the NED are at the company’s premises, and
  1. The “manner in which the duties must be performed” or hours worked are subject to “the control or supervision test”.

Both of these stipulations would need to apply. Because SARS accepts that NEDs work independently of the company and thus do not earn employee remuneration, the second condition is not met.

Therefore (for NEDs resident in South Africa), no PAYE needs to be deducted.

This also means that NEDs can deduct normal expenditure, allowances and losses from their NED income. This is in favour of NEDs as employees’ deductions are severely limited by the Income Tax Act.

Note this does not apply to non-resident NEDs and their fees are subject to PAYE.

SARS’ ruling on VAT

Another BGR has also been issued regarding VAT, also effective 1 June 2017.

Employees subject to PAYE are typically not considered to be carrying on an “enterprise activity” and cannot register for VAT. The only exception to this general rule is that non-resident NEDs are, as part of government’s new systems to tax money before it goes offshore, subject to both PAYE and VAT.

The VAT Act recognises “independent contractors” as carrying out an enterprise and thus being subject to registering for VAT if earning R1 million or more per annum.

Accordingly, the services provided by NEDs fall within the ambit of the VAT Act and qualifying NEDs (the main qualification is earning R1 million or more p.a.) will be required to charge the company VAT when submitting invoices.

As stated above, non-resident NEDs are also required to register for VAT to the extent that they carry on their NED activities within South Africa.

These rulings provide welcome clarity for companies and NEDs.

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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Lessons from the WannaCry Ransomware Attack

A_3The mid-May WannaCry “ransomware” virus affected more than 100 countries, including South Africa. It showed that these types of attacks can be spread incredibly quickly and that we can expect similar incidents in the future.  And experts warn that a new cyber-attack (“Adylkuzz”) is already underway.

What should we do to protect ourselves?

  • Old software like Windows XP is particularly vulnerable (the reason the National Health was shut down in the UK is that their MRI machines run on Windows XP). Windows 10 has to date been unaffected. Use an up-to-date operating system and software (particularly anti-virus software).
  • Off-site back-ups are now more important than ever – if you can quickly access your backed-up data you only suffer the inconvenience of recapturing the current day’s data. The WannaCry attack only asked for ransom money to unlock files but there are no guarantees you will ever see your data again no matter what you do and the virus is capable of permanently wiping out all of your data.

Directors and management: The significance of vigilance and care as new virus threats emerge

Computers have become integral to our daily activities. It is not surprising that, as the risks posed by Information Technology (IT) grow, it has become a growing focus of Boards and senior management.

In the King Governance Codes, a whole section is dedicated to managing IT. The Companies Act gives directors and senior managers wide powers to run the business but it also makes them accountable. They need to show due care and be informed when managing the company. Civil liabilities can result should these duties not be adequately performed. IT management is important to a business and care and effort need to be exercised.

Computer criminals are getting more brazen and sophisticated, so be prepared.

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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SARS Streamlines its Alternative Dispute Resolution System via eFiling

A_4Often in the dispute process, vital documents cannot be accessed. For example, a request to SARS to explain an assessment (Request for Reasons) is lodged but it gets either lost or stuck in the SARS system. By the time it is located and SARS has responded to the taxpayer, the SARS system will have timed out an objection. Thus, if an objection is then received, SARS will disallow it. Similarly SARS may email a taxpayer who may be slow to respond due to circumstances such as, he/she is travelling abroad.

The 3 new eFiling upgrades

Now however welcome enhancements have been made to the eFiling system from 17 May 2017 –

  1. The first upgrade is an automated Request for Reasons which will automatically give you thirty business days to lodge an objection once SARS has responded to the Request for Reasons.

This facility can be used for income tax (personal and corporate) and for VAT.

  1. The second change is to allow VAT taxpayers to request a suspension of payment via eFiling, pending the resolution of the dispute process. Current law uses the “pay now, argue later” rule unless taxpayers can defer the payment.

This is similar in principle to the Request for Reasons and has also been welcomed by taxpayers and tax practitioners.

  1. Finally, SARS has introduced on eFiling the facility to apply for late submission of a dispute – you ask for a Request for Reasons, Notice to Appeal or Notice of Objection after the period to complete these steps has lapsed. You will have to submit reasons for the lateness of your actions. SARS will then consider the reasons for the late application before considering Reason for Request etc. Tax experts have questioned how this will work as clearly the substance of your objection is crucial in deciding whether or not to allow you to enter into a dispute with SARS.

These are sensible improvements and should reduce communication failures.  SARS eFiling is a central point of reference for both you as taxpayer and SARS, and having one channel of information will assist both parties.

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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Which is Better for Your Business? Lots of Rules or a Few Good Principles?

A_5Most of us are weighed down by compliance. Think of FICA, more onerous tax compliance, BBBEE, Employment Equity – the list is endless, more rules to deal with increasing complexity.

How does business manage its operations with all these external regulations?

The importance of strong leadership

Leadership plays a crucial part in any organisation and successful, sustainable businesses all have strong leaders. The example that leaders set filters down the business and becomes an integral part of the organisation’s culture.

To counter the increasing complexity of our times, many owners and senior managers use a decentralised structure to manage the business. In doing this, it is important to have the right people as managers. They need to be principled, self-motivated and prepared to be accountable.

In this type of structure, the owner or CEO sets out key principles for his/her managers to govern their sections. A key component of these principles is enforcing controls and acting when they either suspect or become aware of a breach in the company’s policies and/or controls. It is critical they follow the breach to its logical conclusion: either there is no breakdown, or commensurate action is taken against offenders.

Warren Buffett, for example, writes to his senior managers every two years stressing the organisation’s key principles and the importance of investigating any failures of controls or systems in the company. He also stresses these principles in meetings so that they become embedded in the organisation’s culture.

If breakdowns are not acted upon, an error invariably escalates until it is dealt with, by which stage it can have serious implications for the business.

Whistle-blowers – protect them

It is amazing how many people make use of hotlines or other whistle-blowing facilities.  It is relatively simple to set one up but even though the vast majority of items reported are insignificant, following up on potential frauds or other offences sends a powerful signal to the company. Staff understand their misdeeds are likely to be reported and investigated.

Whistle-blowers need to be guaranteed they will be fully protected and, if they wish, remain anonymous.

You can never discover all the breakdowns in a company but good leadership can detect most of them without loading your business with more rules, policies and bureaucracy.

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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The money market trap

A_6To the general public money market unit trust funds are safe and secure; a conservative, yet sensible investment that protects capital. This is a half-truth, as safety and security come at a cost. The cost? Inflation.

The money market is where the government, banks and companies raise capital through short-term loans from investors. Money market unit trust funds are similar to fixed deposit accounts offered by banks. Its main advantage over fixed deposit accounts is liquidity. Cash can be withdrawn at any time without penalties and there are no lock-in periods. This is primarily why returns offered on fixed deposits exceed money market returns.

Money market returns often fail to outperform inflation over the long term. This is the money market trap. It means that although the investment amount constantly increases, it will buy less and less over time. In this respect, money market unit trust funds can be risky and inappropriate to achieve long-term investment goals such as retirement or children’s education. The true risk is having inadequate growth assets to meet such long-term capital requirements.

Money market funds are, however, very useful as short-term safe-havens. It is ideal for short-term capital obligations and emergencies. In addition, individuals qualify for an interest income tax exemption of R23,800 per year or R34,500 for individuals older than 65 years. For example, a money market investment of R297,500 yielding 8% per annum would be tax-exempt, as the interest earned would equal R23,800.

As a rule of thumb it is not optimal to have more than one years’ living expenses and capital commitments invested in money market funds. If this is not the case, investors should consider rebalancing their portfolios.

By Frants Preis, CFA

Frants Preis is an equities portfolio manager at VEGA Asset Management

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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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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