Budget 2019: Your Tips for Tito

how-to-budeget-and-squeeze-the-most-out-of-your-money-calculate-incomeOn 20th February the Minister of Finance, Tito Mboweni, will make his budget speech.

Traditionally, the Minister asks the public what they would like to see in the budget and this year Treasury has specifically asked South Africans to send tweets to @TreasuryRSA with the hashtag #TipsForMinFin and #RSABudget2019, or to use the Budget Tips form on the www.treasury.gov.za website.

Also keep an eye on the Minister’s own Twitter feed – for last year’s MTBPS (Medium Term Budget Policy Statement) he asked for contributions under a “Tips for Tito on Twitter” label; perhaps he’ll do the same for the Budget Speech.

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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Does “The Company” Still Have A Role To Play?

collaboration partnerships_1100733734_resizeConcepts the West has taken for granted are now being openly questioned, such as, is liberalism bad, is capitalism flawed, and does the company deliver what it set out to do?

These are valid questions and we should re-evaluate these concepts, particularly the role of the company.

What the company does

Over the past few centuries, Western ideas have globally been the most successful and have resulted in Western dominance. One of the key facets of this success has been the company.

It has proved a unique way of achieving great prosperity as:

  • Limited liability has seen companies prepared to take risks which has been the key driver in innovation (without innovation economies will stagnate).
  • Companies are organisationally efficient and have fostered good leaders, built up working skills and implemented good practices.
  • Through the market, companies are the most efficient allocators of resources and can raise large amounts of capital to achieve their objectives
  • Companies have thrived in the competitive environment of a market economy.

Examples abound such as Bill Gates setting up Microsoft to be highly effective in using existing technology to improve company operations.

So what’s the problem?

The first is a fall off in competition which leads to poor decision making and can stifle innovation. Facebook, for example, in a little over fifteen years has become monolithic and has now been shown to sell people’s private information.

Secondly, companies have become focussed on making money to the detriment of what they actually do – e.g. delivering a banking service. In the long term this leads to lower performance.

Thirdly, companies need to be continually vigilant in maintaining strong governance and ethical values. The current malaise in South Africa has seen many once-respected large businesses being ruined by assisting with state capture or allowing corrupt executives to enrich themselves at great cost to the company.

In a nutshell, we need to fix the company and make markets competitive again.

Time for renewal and experimentation

Today’s questions have happened in the past. At the turn of the twentieth century, many of the large conglomerates were broken into smaller more manageable pieces to bring competition back into these industries. This was highly successful.

In South Africa, the Competition Commission has been effective in curbing anti-competitive behaviour.

The King Commission has led to improved governance practices and has laid down a strong template for companies to follow.

Many new businesses have experimented with new approaches in organisational structure – at Spotify, for example, managers serve and report to their teams.

Companies have led the way in business for a long time and already we are seeing new shoots appearing as part of their renewal. This along with experimentation will almost certainly unleash a new wave of growth.

Catch that wave of growth! Look at your business and see how it can be made more effective.      

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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POPIA is Now Imminent: Don’t Underestimate the Work Involved

k-s19-ake-1534-lWith the release of final Regulations for the Protection of Personal Information Act (“POPIA”, often referred to as “POPI”), the Act’s commencement has become imminent.

Once this happens, business will have a twelve month grace period to prepare, but don’t leave it to the last minute.

Be warned there is a mountain of work ahead! Fines of up to R10 million can be levied for failure to comply with POPIA.

Watch this space! We’ll update you once POPIA’s commencement date is gazetted.

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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Directors: The Potential Liabilities You Face When Issuing Shares

WhatsApp-Image-2018-10-22-at-14.19.01In the life cycle of your company there will be times when you need to recapitalise the business.

When would you need to issue shares?

A basic requirement of the Companies Act (the Act) is that the company remain a “going concern” (have enough funding to remain in business for the next 12 months). To satisfy this requirement, directors must regularly perform liquidity and solvency tests (liquidity tests if there will be sufficient cash to meet all obligations whilst solvency tests if assets in the business exceed liabilities). If these tests indicate funding will be needed, one avenue open to the company is to issue more shares.

Alternatively a company may issue new shares when it plans a major expansion.

What is required of directors?

In terms of the Act, directors are responsible for issuing shares and must issue them for an “adequate consideration” which is to be calculated by the directors prior to the issuing of the shares.

This section of the Act requires that directors apply their minds to determining what an “adequate consideration” is.  In this process, directors need to keep the best interests of the company in mind, cannot have a conflict of interest and must show the necessary “care, skill and diligence” when performing this task.

This can be a demanding process as for example, the market may dictate that shares be issued below market value or an “inadequate consideration”. In this scenario, the company might for example have issued shares in the recent past and shareholders may only be prepared to take up new shares at a discount. Directors need to be able to justify the course of action they take i.e. that the value/consideration is actually adequate in the particular circumstances.

If you as a director fail in this task…

Directors can be held personally liable if they do not issue shares for an “adequate consideration” and may have to compensate stakeholders for any damages suffered in this process.

Thus while the Companies Act grants widespread powers, it also makes directors personally liable for losses sustained as a result of their actions. It is critical that you document your decisions so that you can withstand any scrutiny of them.

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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AI and the Changing Face of Jobs: Good News If We React Now

1_6PthHuOWvDLbhLj7kjzpNQ“Artificial Intelligence is a tool, not a threat” (Rodney Brooks, Roboticist)

There has been fear that the rise of Artificial Intelligence (AI) and robots will considerably reduce the work force. New research concludes that there will be winners and losers as AI becomes entrenched in economies, but there will be far more winners. The World Economic Forum (WEF) predicts that actually 58 million new jobs will be created – 75 million jobs lost but 133 million created (see the table below for more).

The trick facing business is how to get onto the winning side, as those businesses that will be most affected by AI, and those who quickly get it right, will have a substantial profit enhancer because AI will, in the medium term, drive down business costs.

Adapt and Thrive! What you need to do

  • The first issue is to acquire more resources in terms of technology (AI will need far greater processing power, new AI machinery), up-skilling your labour force and employing new staff (see table below).
  • Secondly, consider approaching other players in your industry to put together a plan that will bring in a future stream of skilled employees. This task is too big for one business to undertake.
  • You will also need to instil into your staff that they will need to continually improve their skills.

What type of employee will you require?   

Recruiters in the developed world are now focusing on people with problem solving skills – on an ongoing basis AI will throw up technical and competitive challenges. Staff need to be able to quickly solve these problems.

As technical people will become more of a value driver in business, having “soft” skills, like good communications and being effective in teams, will also be sought after.

Below is a table from the Word Economic Forum showing jobs that will be needed in 2022, and those that will face being replaced.

Landscape_LogistaA new era is starting and the news is fairly positive – AI should create more jobs, reduce business costs, and greatly enhance productivity. Don’t be caught on the wrong side of this revolution!

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 Aware Of the Changes to VAT on Electronic Services

A5The Minister of Finance warned in his 2017 Budget speech that VAT on electronic services would be widened. Treasury has now published regulations that come into effect on 1 April 2019.

The major changes

The definition of “Electronic Services” has been considerably broadened to include virtually all services. There are few exclusions namely:

  • Intra group transactions if the local company is a wholly-owned subsidiary of a foreign entity
  • Telecommunication services
  • Educational services provided by an entity regulated in a foreign country.

This means that B2B (Business to Business) transactions are included in the definition. This differs from other countries who exclude B2B and only tax B2C (Business to Consumers) transactions.

Electronic Services include cloud computing, advertising services, software subscriptions (such as anti-virus software), access to databases, the use of software provided by a foreign holding company (unless the above exclusion applies), broadcasting, and price reservation services.

Another point to consider is that intermediaries providing a platform for offshore entities are included in the Electronic Services definition. Thus a platform which invoices and collects payment on behalf of a foreign entity is included. This is sensible as it will be administratively simpler not to unnecessarily involve foreign businesses.

The threshold for businesses to register for VAT is R1 million in annual turnover from Electronic Services.

Take time to consider how this will affect your business. Better to get it right now than to have to negotiate penalties later with SARS.

It is worth speaking to your Accountant now if you could be impacted by this.

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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Directors: Fighting Corruption via Your Social and Ethics Committee

A4“South Africa has lost R700 billion to corruption over the last 20 years” (Institute of Internal Auditors)

The Companies Act requires a company to set up a Social and Ethics Committee if it is:

  • A listed company
  • A state owned entity
  • A company with a public interest score of over 500 in two of the last five years.

Social and Ethics Committees have a broad mandate to reduce corruption, to ensure that B-BBEE and Employment Equity Act programs are compliant with legislation, to be a good corporate citizen uplifting society around them and to ensure all employees are treated fairly and equitably.

The Companies and Intellectual Property Commission (CIPC) is empowered to issue guidelines and practice notes on aspects of the Companies Act.

The new CIPC guideline

The purpose of this guideline is to get companies to actively fight corruption and to set up a Corporate Compliance Program along the lines of the OECD (Organisation for Economic Co-operation and Development) Recommendation on corruption.

This initiative of the CIPC is a response to State Capture and to corruption scandals in the private sector. Corruption is becoming endemic in our society and can only be turned back and stopped by a comprehensive program.

The compliance program

  1. The starting point is commitment from top management to instil into the culture of the company that corruption is unacceptable across the organisation. Senior management should ensure that the Compliance Program is communicated on an ongoing basis to all stakeholders.
  2. A risk-based approach should be used to identify all potential corruption risks and on a continual basis manage these risks throughout the company. A database of all information gathered should be continually fed back to staff and stakeholders, and shared with other organisations fighting corruption.

All activities in the company should be undertaken with the risk management process underpinning these processes.

  1. An ongoing due diligence program should verify who the company is dealing with.
  2. Policies and procedures should be implemented and these should be clear-cut and easy to understand.
  3. Compliance training is to be undertaken and all staff and key stakeholders included in the training.
  4. Whistle blowing is to be actively encouraged and separate channels should be set up for whistle blowers to communicate any wrongdoing they become aware of. Whistleblowers need to be protected against reprisals and victimisation.
  5. A high level of auditing and investigative capacity needs to be implemented. Corruption, as we know, needs to be continuously attacked until it is completely uprooted.

We are all losers when it comes to corruption, so even if your business isn’t required to form a Social and Ethics Committee, consider what steps you can take to fight it.

Finally, don’t just follow the law and think that is enough. Those implicated in State Capture or private sector malfeasance protest they have broken no laws. Equally important is to practise good governance by implementing transparent and ethical norms.

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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What Is a Valuation Worth? The Art of Valuing Assets and Businesses

A3Recently the artist Banksy put up for auction a work called “Girl with Balloon”. It was sold for GBP860,000. No sooner had it been sold than it began to shred (Banksy had put a shredder in the frame). Halfway through the shredder got stuck.

Paradoxically Girl with Red Balloon is now worth double the price it fetched.

So how do we determine value?

In the bond market and stock markets value is determined by millions of people interacting to buy bonds or stocks. Valuations thus change by the second. Analysts use a variety of methods to value, say, shares and send out notes to their clients recommending certain shares to be undervalued and thus worth acquiring. However, there is uncertainty in this.

When we decide to sell our business either our accountant or business broker will value the business. A variety of techniques are used such as discounted cash flow, net asset value, comparative analysis of business competitors etc to arrive at a value. Of course in practice your business may be sold for a higher or lower amount than the valuation.

Finally, Bitcoin got to just under $20,000 last year but is now struggling to maintain a value of $4,000. Its loss of nearly 80% of its value puts it in bubble territory, and as a pioneer in cryptocurrencies it is virtually impossible to value.

What does all this mean?  

It should also be pointed out that the work that analysts and business brokers do is worthwhile (after all they are repeatedly asked to perform valuations), but each one of us looks at assets in our own unique way and we see value differently from the next person, illustrating how difficult it is to determine value objectively.

Valuations are in reality merely trying to establish a point whereby sellers and buyer can start to negotiate.

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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Deemed Accruals Can Seriously Disrupt Your Cash Flow – A Tax Lesson for Property Developers

A2A recent Supreme Court of Appeal (SCA) judgment has confirmed a view that our courts have held for a long time – namely that when a property developer enters into an agreement with a buyer to transfer the property, even if the developer only actually gets paid in a subsequent tax year, the income is deemed to have accrued to the developer at that date. The developer must therefore include the full proceeds of the sale in its income tax return for the year the agreement was signed.

This has the effect of the property developer paying tax before receiving the proceeds of the sale, putting the developer out of pocket until transfer to the purchaser takes place.

A R1.9m tax assessment challenged

A property developer in Cape Town entered into sales agreements for 25 units. Each agreement called for a deposit of R5,000 with the balance to be paid on completion of the development. Purchasers could take possession once the full sale price had been secured or within 60 days of the sale. By the end of the first year 18 purchasers had taken possession and in all 25 cases the purchase price had been fully secured.

Transfer of the properties took place in the next tax year. The developer did not include the sale proceeds in his tax return for the year of concluding the agreements but showed the proceeds in the next tax year.

The Court upheld the decision by SARS to tax the developer in full in the first tax year. The assessment at just under R1.9m was based on taxable income of R6.8m.

Why the developer lost

Property developers assume a substantial risk when they undertake a development – they spend millions of Rand upfront and if they can’t sell the developed properties they make a considerable loss. They mitigate this risk by selling the properties upfront – usually before they commit to building. Clearly they will not get paid until the property is transferred, so they accept a deposit plus a guarantee (usually from the purchaser’s banker) for the balance of the selling price, or alternatively the buyer placing the funds in the conveyancer’s trust account.

Once the developer is assured of selling the properties it then proceeds with the development. On this basis, banks will advance the cost of the development to the developer.

However, in terms of the law the proceeds of the sale of the properties are deemed to have accrued to the developer and are taxed in the year the agreement is signed.

This principle has been upheld by our courts for generations and developers need to be aware of the cash flow implications.

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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Interest Rates in 2019 – Which Way Will They Go and Why?

A1“Prediction is very difficult, especially if it is about the future” (Nils Bohr – Nobel Laureate)

Normally the market and economic commentators react favourably to interest rate decisions of the Monetary Policy Committee (MPC). The Reserve Bank, which houses the MPC, is one of the most admired institutions in the country.

The MPC’s decision to raise interest rates in November however drew a sharp reaction, and polarised opinion into two camps, both with strong arguments –

What can the recent rate increase tell us? Firstly, what those against the increase said…

The economy was either in recession or close to it when the decision was announced. This is contrary to mainstream economic thought as raising interest rates tend to slow down economic growth.

Secondly, inflation at 5.1% is well within the 3-6% band that the MPC targets. If you look at Shoprite, our largest grocery chain, more than 11,500 items in their stores are trading at lower prices than this time last year. Aligned to this is that the fuel price decreased by more than R1.80 per litre in December. The petrol price spreads its tentacles widely throughout the economy and this decrease will reduce cost pressures.

Consumer confidence has been dropping in recent months and a rise in borrowing rates will not help this.

Finally, the currency has shown strong gains over the past few months and thus the Rand needs no bolstering from an increase in interest rates.

Secondly, what those for the increase said…

It helps those with high savings as they will receive more monthly income.

One key uncertainty is the oil price. It has fallen 30% but this can just as quickly reverse.

It was unknown to the general public at the time (although the MPC would probably have known about it) but the Purchase Price Index, which measures cost increases within business, jumped to 6.9%. This indicates that industry is experiencing cost pressures which will over the next few months find their way to the consumer.

The international outlook is volatile with President Trump attacking Chinese trade policies. This volatility often negatively affects developing nations (like ours) as investors tend to move their funds into secure investments such as US Treasury Bonds. Thus, increasing interest rates will help shore up the Rand.

In turn, making the Rand more stable will send a positive signal to Rating Agencies which can help stave off further downgrades. This also can help to encourage investment which is crucial to future economic growth.

If one looks at these two viewpoints, the risks pretty well balance each other out. Clearly, the MPC was cautious with this call and time will tell which side was correct.

So which way will interest rates move in 2019 and beyond?

Where are local and global interest rates going? The consensus has been that the USA will continue to gradually increase rates as its economy has been surging. However, recent comment from the Federal Reserve Board indicates they will pause upping interest rates in 2019. Presently our Monetary Policy Committee have planned to raise rates from 6.5% at present to 7.7% in 2019, but these may be put on hold if the USA keeps rates constant.

Just bear in mind also that it is notoriously difficult for even the best economists to predict future economic conditions with any degree of certainty, so perhaps the best advice is to be prepared for both scenarios.

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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