A nightmare on SARS street: They’re using debt collectors to recover tax

a4Our two worst nightmares are owing SARS money and being pursued by debt collectors. These nightmares are fusing into one as SARS have contracted debt collectors to recover amounts due to SARS that are older than four years.

Why would SARS use debt collectors? 

Some commentators have expressed surprise that SARS would take such a step as they are amongst the best debt collectors around. They have legal remedies such as issuing effective emolument orders to employers to divert part of their employees’ salaries to SARS. In fact, they can go further and have more powers than any debt collecting agency.

Revenue authorities have not always been successful when outsourcing collections – a case in point is the United States where they have twice tried outsourcing and each time have withdrawn as costs exceeded the amount of revenue collected.

There is a significant degree of confidentiality required. Legislation restricts the information that can be divulged to third parties and legal specialists have questioned if it is lawful to disclose taxpayer information to debt collectors. The debt collection agencies have been sworn to secrecy and face potential criminal charges if they violate their oath.

Finally, SARS is paying a percentage of the recoveries to the collection agencies. It is not public knowledge what the percentage will be, but it is estimated that it will cost SARS about R1.5 billion to collect R15 billion of outstanding tax. This estimated 10% cost seems high when taking into account the above-mentioned factors.

The process

SARS has begun this process by appointing three debt collection agencies to collect the outstanding amount of R15 billion. The agencies are required to contact relevant taxpayers stating:

  • That their tax debt has been handed over to the agency,
  • The amount owed and any outstanding tax returns.

Thereafter, the agency will commence with the collection process.

If you are contacted, here’s what to do   

  • Speak to your accountants – they are well qualified to give professional advice.
  • Beware of scams! There are already many scams relating to SARS and this will definitely attract the scammers.  Make sure callers are genuine – for example, they should know your tax number and the amount you owe. You can easily verify this on your eFiling account, also check the collectors are genuine by phoning the SARS Contact Centre at 0800 00 7277 (0800 00 SARS). Most importantly, whatever you do check the account you are paying into is a genuine SARS account.

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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Business rescue: How well is it doing and how can we improve it?

a3Business Rescue (BR) is one of the cornerstones of the “new” Companies Act. It is generally agreed that the BR section of the Act is based on global best practice and is of a very high standard.

Virtually all business owners will go through difficult times at some stage in their career – knowing how BR works could be the saviour of your business.

What is Business Rescue?

When a business is facing difficulties, it can invoke business rescue which results in a business rescue practitioner putting into practice an agreed rescue plan (involving key stakeholders such as banks, creditors, shareholders, employees etc). During this process, the company is legally protected from creditors’ claims.

The final result is the business returns to normal trading (if the action plan is successful) or is liquidated if the plan is unsuccessful.

How is it doing?

Up to March 2016, 2,148 businesses had entered BR and 1,129 cases were still in process. Of 1,019 completed instances, 310 or just over 30% were proving to be successful.

Whilst this marks a step–up from the previous Companies Act’s Judicial Management process, it is a good time to take stock of BR.

3 steps to improving the rescue rate

  1. Almost all commentators want to see an improvement in the calibre of BR practitioners. Banks cite issues in this regard as a reason why they are not prepared to advance funds when businesses go into BR.

Potential solution:  Get the CIPC to raise standards for business rescue practitioners to be accredited as qualified.  The CIPC has begun to do this.

  1. Many of the businesses which went into BR should not have done so.

Potential Solution: Get the business rescue practitioner (or independent specialists) to do an in-depth analysis of the business before commencing BR. Apart from directors, involving other stakeholders will improve this process. If this analysis supports BR, then it should be given the green light.

In the statistics above, many of the companies were poor candidates for BR and should have been liquidated. Thus, this process will enhance the potential for a successful BR.

  1. Financiers who fund companies in liquidation should become preferred creditors in the event of liquidation. This will encourage banks to be more amenable to taking the risk of lending to BR entities.

Of course the best way to avoid BR is to be proactive. Always have forward-looking cash flows and continually scan the environment for potential risks.

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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Due diligence: It’s more than just compliance

a2We tend to think of due diligence as a boring bit of compliance when buying or selling a business. Often auditors come and hunch over files for a few days or weeks and then give you a report on their findings.

But in today’s fast-moving world due diligence can be a considerable asset to your business. Think of how quickly a social media comment can damage a business – having a process to prevent this, or, if it happens, a process to respond quickly, can prevent or at least limit harmful effects on your business.

What is due diligence?

It is really the process of taking due care that any major decision will add value to your business. Aligned to this is being prepared to react to any event such as the social media example above.

What you would do when undertaking due diligence varies with the task needed. For example if you are appointing a new director there would be:

  • Advertising for the position,
  • Interviews,
  • A short list,
  • Final interviews, and
  • Detailed checks including detailed referee questioning, criminal and credit checks, and social media screening (for any evidence of behaviour prejudicial to the organisation) and so on.

With buying a business there would be:

  • Detailed compliance tests – such as all laws obeyed, taxes paid, no major legal issues, all patents renewed and all contracts in order,
  • Detailed checks on current management,
  • Checks on controls and finances,
  • Human Resource policies are comprehensive and working well,
  • New product strategy, and
  • All business processes in order.

Use checklists

We live in a busy fast-moving world so set up checklists for the types of due diligence you use.

Remember that in the final analysis these checklists are only a guide. Management makes the final determination after reviewing checklists.

By doing a thorough job of due diligence, management gains important knowledge – this can be used to leverage things such as an improved deal.

The bottom line – due diligence is much more than just compliance, it’s a valuable management tool.

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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Be prepared as government takes aim at trusts

a1“Let me tell you how it will be

There’s one for you, nineteen for me

‘Cos I’m the taxman, yeah, I’m the taxman”

(The Beatles – ‘Taxman’)

For many years government has been hostile to trusts. In the latest draft Bill of 2016 taxation amendments, a provision has been inserted on trusts.

Be aware that this has not passed into law but it will have a fundamental impact on trusts if enacted as it stands. This early warning gives you more time to consult with your tax adviser.

The proposed changes: 

  1. An individual or a connected entity that makes an interest-free or low interest rate loan to a trust will be taxed from 1 March 2017 (if the provisions are passed unaltered). The tax will be the difference between the SARS interest rate of 8% (note this is subject to change) and the interest amount charged,
  1. If you are taxed under this provision, you have 3 years to recover the tax paid from the trust. If the tax is not recovered, the taxed amount is treated as a donation in your hands as taxpayer.

An example illustrates

Assume you make a R1 million tax-free loan to a trust.

In the next tax year you will be liable for tax on R80,000 (8% of R1 million). Let’s further assume that tax payable on this is R32,000 (40% of R80,000)

If 3 years then elapse and the R32,000 is not recovered from the trust, you will be taxed on a donation of R32,000 and will pay tax of R6,400 (20% donations tax on R32,000)

Note that the interest cannot be offset against your annual interest exemption of R23,800. Neither can the donations tax be part of your annual R100,000 donation tax exemption.

Be prepared!

For many years, one of the tenets of establishing a trust has been for the founder to finance it by an interest-free loan with no adverse tax consequences. If the new tax Bill is enacted as is, this will change.  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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The axe begins to fall for those named in the Panama Papers

A5We live in the age of leaks. The latest is the “Panama Papers” which details how wealthy people and companies have used off-shore accounts to protect and hide their assets from their country’s authorities.

1,700 South African names appear in the leaked Panama Papers. In a parliamentary briefing, a SARS official said that 79 Panama companies had been matched to SARS data and it had linked this to 81 South African residents.

Whilst opprobrium has instantly attached to those named, we should recognise that the truth is that the vast majority of transactions associated with the Panama Papers are, in the words of Barack Obama, almost certainly legal schemes.

Where does this leave individuals or companies who have been named?

A new Special Voluntary Disclosure Program (SVDP)) commences on 1 October this year. It is likely that South Africans who had set up unlawful structures in Panama were planning to enter the SVDP when it opened in October.

However, where SARS or the Reserve Bank has already notified taxpayers of a pending (or the commencement of) an audit or investigation, such taxpayers cannot use the SVDP.

It is apparent that SARS and the Reserve Bank plan to proceed against taxpayers before October, thus preventing these taxpayers from using the SVDP.

The onus is now on defaulting taxpayers to take advice now on approaching SARS and the Reserve Bank as quickly as possible – get to them before they get to you. There is still an existing VDP running and making full disclosure will prevent the risk of being exposed to criminal charges. There will also be a reduction of penalties faced by taxpayers.

Bear in mind also the international treaties entered into by more than 100 nations (commencing in September 2017) which will introduce an automatic sharing of information between the Revenue authorities of these countries.

The leaking of the Panama Papers only underscores that it is becoming increasingly difficult to hide assets by using offshore structures

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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A good news story: Farming is doing better than we think

A4One of the stories that underpins the current wave of pessimism around our economy is farming. We read stories about:

  • Farmers being murdered and driven off their land.
  • The government plans to ban all foreign ownership of land.
  • New ways are being sought to make it easier (and cheaper) for the expropriation of agrarian land.
  • In the late 1980s there were more than 65,000 white-owned farms. Today there are less than half of that.
  • The 2011 agricultural strike lead to a 50% rise in the minimum wage rate. This led to the belief there would be increased mechanisation in the farming industry which would result in widespread layoffs of unskilled labour.
  • The government acknowledges that the bulk of subsistence farmers settled on formerly white-owned farms have not been viable farmers.

These points are true but they don’t reflect the full story of what has in fact happened.

The positives

  • Farming output has risen by 40% since 1994
  • On the whole South Africa is an exporter of agricultural products (imagine where the currency would be if this wasn’t the case)
  • Employment in the commercial sector has risen by 250,000 since 2011- from 626,000 to 876,000 earlier this year. This is a 40% increase.
  • South African farmers have adapted to the shifts and demands of globalisation and have shown considerable resilience. For example, there has been a drop in the demand for beef but farmers have shifted into other areas such as horticulture
  • Farming income doubled between 2007 and 2012
  • Just under 1.7 million people make a living from subsistence farming. Add to this the 876,000 working in the commercial sector and you have a significant number of people earning a living on the land.
  • Agriculture has a significant multiplier impact on the economy. For every R1 generated economic output will grow by R1.81.

Farmers not only face adverse weather conditions but they get little support from the authorities (in contrast to Western Europe and the United States). Yet they have more than coped with this by growing productivity substantially. This productivity leap has enabled the government to begin the process of transformation (nearly 10% of commercial land has been acquired or just under 8 million hectares) without it seems any harmful economic consequences.

Farmers still confront many challenges – the proposed Expropriation Bill is one example. Yet we can be confident they will weather the storm and continue to be a vital cog in the economy.

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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Company directors: Beware of the risks with resolutions

A3“The devil’s in the detail” (wise old idiom)The “new” Companies Act (the Act) has some requirements which can easily be overlooked. They may seem to be minor and technical, but not complying with them could expose you to major risks.  In our increasingly litigious society, it is important to be thorough.

For example – resolutions must be sequentially numbered

In addition to being dated, resolutions are required to be sequentially numbered. Remember the law now (subject to the Memorandum of Incorporation) allows resolutions to be passed by electronic media which can make it more difficult to keep track of resolutions.

Ensure that your company has put in place such a numbering system. If you outsource your company secretarial function, check that your outsource partner has implemented this requirement.

The danger for directors

The Companies Act includes a general provision that: “Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention”.  You are accordingly exposed to substantial liability and should take cognisance of these and similar provisions, no matter how technical they may seem.

Record how directors vote at meetings or when passing resolutions

Another ancillary point is that it makes sense to record how each director voted on any matter, since directors risk liability for losses to the company arising from any breach of their fiduciary duties or required standards of conduct.

One of the defences available to directors when certain unlawful decisions are taken by the board of directors is to be able to show you voted against the matter. Thus, tabulating how each director voted can quickly establish who was against the decision made. Also remember, some years can pass before directors are sued.

Directors are tasked with overseeing and controlling of companies, so don’t overlook what seem to be small matters – they can come back to haunt you.

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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Brexit: What does it mean to you?

Recently, Great Britain voted in a referendum to leave the European Union (EU). This sent shock waves throughout the world. Where does Brexit leave South Africa which has strong ties to both Britain and the EU? The EU is by far our largest trading partner whilst Britain alone accounts for 4% of our exports and we currently run a R4 billion annual surplus with the United Kingdom.

A global phenomenon at play

To a large degree the vote was a rejection of the status quo and the affluent (London voted overwhelmingly to stay in the EU). This reflects a global backlash against globalisation and income disparities – even the United States is not immune as evidenced by the rise of Donald Trump.

Whilst we often think we are unique in the number of protests in South Africa, we are in line with global trends. China, for example, has over 50,000 protests a year.

New territory    

No nation has ever before exited the EU (it has 28 members), so what is going to happen is uncharted territory.

One option being mooted is that Britain will not actually leave the EU – the Westminster Parliament, for example, could vote to remain in Europe. However, new Prime Minister May has clearly ruled this out.

Brexit will be a negotiation between the EU and Britain which is clearly subject to how each party approaches and negotiates the breakup.

There are many scenarios out there, ranging from an amicable settlement whereby Britain remains part of the EU customs union to a complete separation. In between these poles are options where Britain has free access to certain sectors in the EU or has access to the EU market but will need to impose EU tariffs on other trade partners.

The fact that South African markets have largely recovered from the June 23rd vote indicates that financial markets, which tend to look 6 to 12 months ahead,  are now more comfortable that South Africa will be able to navigate a favourable solution when the outcome of the Brexit negotiations is known.

But – no one likes uncertainty

There is always the risk that Brexit will not be a smooth process which will make it difficult for South Africa to negotiate a favourable outcome with two extremely important but potentially antagonistic trading partners.

South Africa has one of the most liquid foreign exchange markets of developing nations and has already shown how volatile it is to events such as Brexit. This uncertainty is perhaps the biggest downside of Brexit.

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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Startups and small businesses: Consider crowdfunding

A novel and effective way of raising finance

It is well known that finance is extremely hard to raise for small and medium sizes entities (SMEs). Banks are very conservative and prefer to deal with the larger, more established businesses. The venture capital market is small in South Africa and many SMEs fail due to a lack of finance.

Globally, crowdfunding has taken off and has also been successful locally in the past few years.

What is crowdfunding?

It consists of an online platform that puts investors in touch with any kind of organisation that requires funding – it can for example be a startup business, a one-off project or perhaps an N.G.O. looking for funding.

The online platform tracks how the required funding is being met.

It is best illustrated by looking at a crowd funding portal or two – see examples like Startme http://www.startme.co.za/ and Jumpstarter http://jumpstarter.co.za/ – Google for more.

How do I make use of it?

Many of the funding requests fail and one of the most successful United States platforms has some excellent advice for using a crowdfunding platform:

  • You need to have expertise on the web and social media.
  • Plan and prepare. This is crucial. You need to have a great strategy for reaching investors. A video is a good tool for this. The video should come from you or a member of the team to communicate your passion and commitment.
  • Be transparent, honest and specific. The funding required should be detailed and not general. Thus, if you need R100,000 break this down into discrete amounts e.g. R20,000 for advertising, R20,000 for selling expenses etc.
  • Get your friends or colleagues to contribute – launching on a crowdfunding site with some funding already secured is a key success factor. US platforms advise that having 30% secured funding makes a considerable difference to the campaign.
  • Use influential people – well known bloggers, for example, can spread the message which can get momentum going
  • Always be proactive as being in frequent contact with potential investors will enhance your credibility. Make widespread use of social media platforms – they can be powerful e.g. the recent strike in Zimbabwe was inspired by a social media video.
  • Have set time limits for raising the funds. This creates a sense of urgency plus people have limited attention spans. Most sites recommend a one to two month fundraising cycle
  • Reward your investors. It doesn’t have to be large sums but if you are, say, making a documentary, give investors free copies. If it is for an N.G.O. send funders letters of thanks from the beneficiaries.
  • Have a good team in place as planning and executing the campaign are very time intensive
  • Always remember that some fund raising simply does not work. However many of the failed efforts have brought benefits as it has taught valuable lessons. In one instance, a business relaunched its campaign with fewer, more simple concepts and was then able to raise their required funding.

Tax issues  

There are many tax issues here – for example prepayments can fall into taxable income for the recipient. Speak to your accountant. This has the potential to derail a campaign.

Crowdfunding is up and running – it definitely works. Think about using 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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Your tax deadlines for July

A6The period for individuals to submit tax returns for the 2015/2016 period begins on 1 July. Important dates to remember for the 2015/2016 tax year are:

  • 23 September 2016 is the due date for manual and postal income submissions.
  • 25 November 2016 – eFiling if you are a non-provisional taxpayer.   If you plan to submit from a SARS’ office this is also the due date for filing (non-provisional).
  • 31 January 2017 – provisional taxpayers via eFiling.

If your IRP5 is wrong

Note that if you are an employee you will no longer be allowed to make any corrections to pre-populated IRP5 details. If you disagree with the information in your return you will have to approach your employer to correct it with SARS – your employer is by law obliged to do so.

Before you lodge a return at all, check that you are obliged to do so

Per SARS: “If you earn under R350,000 for a full year from one employer (that’s your total salary income before tax) and have no other sources of additional income (for example, interest or rental income) and no deductions that you want to claim (for example medical expenses, travel or retirement annuities), then you don’t need to submit a return” – but that’s just an overview and in any doubt ask your accountant for advice – the penalties for non-compliance are severe.

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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