Make Sure You Have a Shareholders’ Agreement

50b7c20d4567e47cae6f107f423e8b5eA well-known attorney recently said he is constantly surprised by the number of shareholder disputes that could be quickly resolved if there was a shareholder agreement.

The importance of shareholder agreements

Human nature is fickle and a few years after starting a company on a handshake, things can quickly unravel. That’s why shareholders should apply their minds upfront to defining the key characteristics in their relationship with fellow shareholders.

For example, if a shareholder wants to sell out after a dispute and wants a friend to acquire his shareholding, this can create many obstacles:

  • What if the other shareholders want to acquire the equity?
  • Who sets the price of the shares?
  • What happens to the current shareholder’s loan account?
  • The remaining shareholders may want a different shareholder.

The chances are, in this example, that the shareholders will have to turn to the courts to resolve the situation.

A shareholder agreement should contain…

The major points a shareholder agreement should contain are:

Firstly, the roles and responsibilities of the shareholders, such as do they actively participate in the business or appoint directors.

Secondly, if one of the shareholders does want to exit or if an offer is made for the company, there should be clear processes as to how to execute this:

  • How the shares are valued (normally by independent accountants).
  • Whether existing shareholders get first option to buy the shares and how to allocate the shareholding if more than one shareholder wants to buy the equity.
  • The time frames for all this to happen.

Thirdly, how to resolve shareholder disputes. Usually some arbitration and dispute resolution mechanisms are built in.

Fourthly, what mix of shareholder money and debt to use in the business?

There are obviously many aspects to the agreement, and the nature of the business and the relationships of the shareholders (e.g. do they know each other well?) will determine what else should be included in the agreement.

Don’t forget the Memorandum of Incorporation (MOI) and the Companies Act

In terms of the “new” Companies Act, the shareholders’ agreement cannot conflict with the Act or the MOI. If any clauses in the shareholders’ agreement are not consistent with the Act or the MOI, they are null and void.

For example, if the shareholders want to restrict directors in incurring company debt, the Companies Act requires that this be stipulated in the MOI. This could thus lead to an expensive error as failure to insert this clause in the MOI will effectively mean that directors can borrow at their own discretion.

Take good advice when drawing up your agreement.

Bottom line: Protect yourself and draw up a shareholders’ agreement – one day you will need it. When that day comes you will be very relieved to have taken the time in agreeing fundamental principles with your fellow shareholders.

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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You and Budget 2018: The New Tables

Financial chart with calculator and penFor ease of reference please find below –

  • The new tax tables for individuals and trusts (with notes).
  • The new tax tables for Small Business Corporations.
NEW INCOME TAX TABLES 2018/19 (INDIVIDUALS & SPECIAL TRUSTS)
Taxable Income Tax
 
R0 – R195,850 18% of taxable income
195,851 – 305,850 R35,253 + 26% of the amount above R195,850
305,851 – 423,300 R63,853 + 31% of the amount above R305,850
423,301 – 555,600 R100,263 + 36% of the amount above R423,300
555,601 – 708,310 R147,891 + 39% of the amount above R555,600
708,311 – 1,500,000 R207,448 + 41% of the amount above R708,310
1,500,001 and above R532,041 + 45% of the amount above R1,500,000
New rates apply from 1 March 2018. Trusts (other than special trusts) are taxed at 45%

 

NOTES 2018/19 CHANGES FROM LAST YEAR APPLICABLE DATES
       
VAT 15% Increases by 1% 1  April
Rebates
Persons under 65 R14,067 Increased by R432 1 March
Secondary (Persons over 65 and below 75) R21,780 Increased by R666 1 March
Tertiary (Persons 75 and older) R24,354 Increased by R747 1 March
Tax Thresholds
Persons under 65 R78,150 Increased by R2,400 1 March
Secondary (Persons over 65 and below 75) R121,000 Increased by R3,700 1 March
Tertiary (Persons 75 and older) R135,300 Increased by R4,150 1 March
Interest Exemption
Persons under 65 R23,800 No change N/A
Persons 65 and older R34,500 No change N/A
Dividends
 Dividends Tax 20% No change N/A
Medical Aid Tax Credits per beneficiary
First two beneficiaries R310 p.m. each Increased by R7 1 March
Third and more R209 p.m. each Increased by R5 1 March
Business Travel – Tax free
Up to 12,000 kilometres per annum R3.61 per km Increased by 6 cents per km. 1 March
Travel Allowance 
Travel allowance still taxable at 80% No change No change N/A
Logbook compulsory
Other Taxes
Capital Gains Tax – Individuals/Special Trusts* 18.00% No change N/A
Capital Gains Tax – Companies 22.4% No change N/A
Capital Gains Tax – Other Trusts 36.00% No change N/A
Fuel Levy Increases by 22 cents a litre 4 April
Cigarettes Increases by R1.22 per packet of 20 1 April
Wine (Unfortified) Increases by 23 cents a 750 ml bottle 1 April
Spirits Increases by R4.80 a 750 ml  bottle 1 April
Beer Increases by 15 cents a 340 ml bottle 1 April
Road Accident Fund Increases by 30 cents a litre 4 April
       
*= Represents the maximum effective  rate of Capital Gains Tax

 

SMALL BUSINESS CORPORATIONS – NEW TAX TABLE
Taxable Income New SBC Tax Rates Change vs Prior Year
   
R0 – R78,150 Nil Band raised by R2,400
R78,151 – 365,000 7% of taxable income over R78,150 Small tax decrease
R365,001 – R550,000 R20,080 + 21% over R365,000 Small tax decrease
Over R550,001 R58,930 + 28% over R550,000 Small tax decrease
   
Benefits to taxpayers are marginal
Rates apply 1 April 2018 to 31 March 2019

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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You and Budget 2018: It Could Have Been Worse!

money2018-1“What people really want is fairness. They want people paying their fair share of taxes” (Barack Obama)

In the Medium-Term Budget Speech (MTBS) last October, Finance Minister Gigaba laid out some frightening numbers – tax revenue was not rising as predicted and expenditure was inexorably increasing. The forecasted spending ceiling was breached and the message for Budget 2018 was clear – “Expect substantial tax hikes”.

In the end, there are indeed R36 billion’s worth of tax increases, but also the Government will put in place spending cuts of R85 billion over the next three years. The combination of tax increases and spending cuts is an important step towards restoring fiscal credibility.

The big story – VAT increasing to 15%

Many commentators called for an increase in VAT but were doubtful that Government would push through such an unpopular and regressive (regressive in the sense that it impacts more on the poor than the rich) measure so close to an election. Yet a 1% increase from 1 April headlined the Budget. This is the first VAT increase in more than 20 years.

The two other main contributors to tax revenue – company and individual tax – are already at high levels and further increases would likely prove to be counterproductive, again leaving Government short of its revenue target. Lower income groups will also benefit from an increase in thresholds for the bottom three personal income tax brackets.

Globally, the world is increasingly moving towards indirect taxation as it brings more certainty to the fiscus in that it is a relatively simple and robust collection process.

In the past few years, the affluent have been inundated with tax increases. VAT is paid by all consumers and so spreads the load of the tax burden. The concern remains that this regressive tax will impact adversely on vulnerable households despite the existing zero-rating of basic food items and despite the cushioning effect of an above-inflation increase of 7% in social grants. On the other hand some economists support it as increasing fairness in our tax system and as the tax least likely to damage the economy.

For business, the VAT rate change will however mean more costs as a result of extra administration in changing your systems and stationery. Start preparing now!

The major increases and how much tax they will raise 

MAJOR INCREASES AND REVENUE PROJECTED
Taxable Income SARS Revenue Projected
 
VAT rises from 14 to 15 % R22.9bn
“Bracket Creep” * R 6.8bn
Excise taxes** R2.6bn
Fuel Levy (52 cents a litre) R1.2bn
Ad Valorem Excise Duties*** R1.0bn
Sugar tax R1.0bn
Medical Tax Credit cap R0.7bn
Estate Duty on Estates over R30 million (25% tax)**** R0.15bn

 

* Personal Income Tax brackets are not adjusted for inflation so any increase in your salary (even just an inflation-linked increase) could push you into a higher tax bracket.

** Excise Tax on cigarettes is up 8.5%, whilst alcoholic products will see excise tax increase by between 6% and 10%.

*** Ad Valorem rates will increase on luxury goods from a range of 5% to 7% to a range of 7% to 9%.

**** The duty is levied on the dutiable value of an estate at a rate of 20% on the first R30 million and at a rate of 25% above R30 million. Donations tax increased by 5% in line with that.

What will Government prioritise on the expenditure side?

Over the next three years:

  • Basic education will receive R792 billion whilst tertiary education gets R324 billion (R57 billion for free education including R12 billion this year). This follows President Zuma’s concession to the Fees Must Fall campaign.
  • Health Care gets R667 billion.
  • Social grants R528 billion.
  • Basic services to low income households R205 billion.
  • R129 billion for public transport.
  • R126 billion for water infrastructure and services.

The key ratios and what they mean for us

Analysts, ratings agencies and investors look at economic ratios as part of the process in determining how a country is performing.

  • Together with an improved growth outlook, the proposals will reduce the consolidated budget deficit to GDP from 4.3% in 2017/18 to 3.5% in 2020/21 – as best practice is close to 3%, this is a good trend.
  • Net debt to GDP was forecast at over 60% by 2023 per the MTBS and is now expected to fall to 56.2%, also a positive indicator. Generally, this should be below 50% but this is now heading in the right direction.
  • Inflation is expected to be benign for the next three years and contained within the 3% to 6% mark.
  • GDP is estimated to increase by 1.5% this year, by 1,9% in 2019/20 and by 2.1% in 2020/21. As our population is growing at 1.35%, this means that real growth per capita is projected to rise in the medium term.

All of these ratios will hopefully give comfort to investors and ratings agencies. It remains to be seen how achievable they are but our new President seems to have substantial credibility.

Other important changes

  • The Carbon Tax will be effective from 1 January 2019. As this is expected to be complex and will require considerable set-up time, start preparing for it now.
  • Another point of interest is that government departments and parastatals are mandated to pay suppliers in 30 days – failure will result in management facing charges. That’s good news for suppliers struggling to keep their cash flows positive.
  • The Minister mooted several retirement reforms such as that pension and provident preservation funds will be allowed to make transfers to a retirement annuity fund (after the retirement date of an employee). This was excluded in the retirement reform proposals of 2017.

For a comprehensive guide to the 2018 Budget, there is an excellent summary by SAICA downloadable here.

What about Junk Status and investor confidence?

Moody’s is the only major ratings agency not to have fully downgraded South Africa to junk status. Government’s commitment to getting financial discipline back into the budgeting processes within government plus the bold decision to raise VAT will hopefully be welcome news to ratings agencies.

It should also be attractive to potential investors – something needed to grow the economy and jobs.

The bottom line

In tone, this is a Budget which builds on the rising hope the nation has experienced since our new President was sworn in. It confronts corruption head on (for example, the proposed reforms to procurement rules), tackles tax administration and declining tax morality and clearly seeks to contain expenditure, plus relaxing regulations where possible.

Above all, it was pragmatic and in increasing VAT seeks to spread the burden of tax increases. Not nearly as bad news a Budget as some feared it might be!

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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Stop the World I Want To Get Off

Email marketing“Join the slow e-mail movement! Read your mail just twice each day. Recapture your life’s time and relearn to dream.” (Dan Russell, IBM Researcher)

We live in times of immediate responses and instant gratification. A survey done on emails showed that people check their emails up to eighteen times per hour.

Apart from emails we are distracted by smartphones which send us endless messages from Facebook, Instagram, WhatsApp, Twitter and so on. Not forgetting you can keep pro-actively checking these media as well.

Picture John Twit who has to analyse and report on a new brand strategy which he has just received from the firm’s advertising agency. His boss wants the report in three hours so he can give feedback at a Board meeting.

John starts going through the report but continues to frequently check his emails. Many of them are urgent and require a swift response. As the three hour deadline looms, John gets increasingly stressed and finds it difficult to focus on the report. By the time he emails it to his boss, he is exhausted and mentally drained.

What’s happening to John?

The human brain is wired to focus on only one important task at a time. So when John tries to respond to urgent emails whilst working on his report, he struggles to focus on the brand report.

Also, every time he switches from emails back to his report, he has to reset his brain to focus on the report. John feels mounting frustration as the deadline for the report looms and he faces ongoing pressure from the emails coming through.

Research shows…

The New York Times did a study on 124 people. Half the people were allowed to only view their emails three times a day. The other half were allowed to check their emails with no limit placed on this process.

Within a week the people who looked at their emails three times a day showed markedly lower stress levels. Other research revealed that people communicated more with fellow staff members and remained more focused when they reduced the number of times they checked emails.

Productivity has been sluggish for more than a decade, so it is doubtful that the trend of responding instantly to emails has had a major economic effect. In fact you will probably find that many of the “urgent” emails have been resolved by the time they are opened several hours later.

So… 

Breaking habits is never easy to do but checking your emails only two or three times a day will be good for productivity and ultimately your mental health.

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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Taxpayers: Why YOU Should Participate in this Local Survey by SAICA

a2 Online_Survey__The cost of tax compliance has recently been in the spotlight as SARS’ revenues have fallen and pressure is mounting on taxpayers to spend even more time on tax compliance. Reducing these costs will have beneficial effects on the economy:

  • As costs of compliance fall SARS revenues should increase, lessening future tax hikes
  • Low tax compliance costs will encourage investment in South Africa
  • It will allow business to focus more on their business which in turn should stimulate job growth.

It would be extremely useful to see what South Africans (individuals, small and medium-sized businesses (SMEs) and larger corporates) think about tax compliance in terms of the time involved and costs.  SAICA has initiated a survey on this important topic.

There are three major cost components to tax compliance:

  1. Internal costs of your staff completing tax returns, making payments and responding to SARS queries;
  2. Costs of using tax professionals to assist with the above processes; and
  3. Other costs such as travel claims and using software to compile tax returns.

Quantifying these costs will enable SAICA to get a composite picture of time spent and tax compliance costs, and to use this data to analyse how to drive these costs down. With statistically valid data, SAICA can lobby government to take action to reduce compliance time and costs.

Of particular interest is that this survey will form a baseline against which future measures can be scientifically evaluated as to how effective they are.

Help reduce tax compliance time and costs

Why not let your voice be heard and participate in the survey? Read the “Participant Information Sheet” and find the link for the survey on SAICA’s website here.

On page 2 of the letter click on the relevant category:

  • Individual;
  • SME; or
  • Large corporate.

Make your voice heard and ensure that there is a statistically valid sample so that concrete measures can be taken to reduce tax compliance time and costs.

Please note that the closing date to complete the survey is March 30th.

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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Allowable Stock Deductions: Hopefully Less Tax, Less Admin

A3-ThinkstockPhotos-521139490-2121x1414George, the CEO of a company, was driving with his Finance Director, James, to a meeting. George had learned of a recent Tax Court case around stock values and was curious to know more.

“James what does this stock case mean?” George asked.

“Firstly, stock valuation has long been a bone of contention with SARS which has led to endless work, debate and argument with SARS. This tax case reconciles the company’s and SARS’ stock valuations and thus brings clarity and certainty” James replied.

“That’s a positive but how does it work, I’m curious” said George.

“It certainly is a positive” James answered. “Well, as you know the value of stock at year end comes off cost of sales and the lower your stock value the less tax you pay.

If your sales are, say, R200 and
Cost of sales before closing stock is R100
and your closing stock is R20 then
Cost of sales is (R100-R20) R80 and
You therefore add (R200-R80) R120 to your taxable income
But if closing stock was R10, then you would add R110 to your taxable income.

In reality this can have a large impact on the tax you pay. In the case we are talking about, the amount involved was more than R100 million.”

Stock valuation

“Ok so far. Now carry on” said George

“How you value stock is clearly very important. The Accounting profession values it as the lower of cost and net realisable value (NRV). So whichever is the lower of the two methods is accepted as the stock value.”

“Cost is easy to determine – whatever you pay for the stock. NRV is more complex and is made up of any extra costs to getting your stock in a saleable condition less the selling price.”

“I should point out” continued James “that SARS agrees on cost but the Income Tax Act does not mention NRV but speaks of a diminution in value. Tellingly SARS is given discretion as to what it considers ‘just and reasonable’ in deciding what a diminution in value means. ”

“Let’s look at an example in measuring NRV. Say you sell raincoats for R75 and they cost R50 each. However, your supplier delivered them late and you have to keep them in stock for six months until the next rainy season.”

“They will then need to be dry-cleaned at a cost of R10, the cost to get them to shops is R7 and you will now need to incentivise shop assistants to sell the raincoats at a cost of R12.”

“These costs (R10+R7+R12) are deducted from the selling price of R75 making NRV R46. As this is less than the cost of R50, this becomes your stock cost.”

What’s IFRS and why is it important?

“Great” said George “the cost has dropped by R4 a raincoat but why is everyone talking about ‘IFRS’?”

“International Financial Reporting Standards (IFRS) is a globally accepted methodology of compiling financial statements” continued James. “What is important here is IFRS adopts a systematic approach to determining NRV.”

“The Court was impressed with this approach which gave a credible methodology in reaching NRV. As mentioned SARS has discretion in accepting or rejecting NRV. The Court ruled that the IFRS approach is to be accepted by SARS.”

“So” said George “the days of endless debate and argument between business and SARS on stock valuation are over. Business will pay less tax and there will be much less administration time.”

“Exactly” said James. “But we do need to bear in mind that this judgment, as persuasive as it is, isn’t actually binding in other cases unless a higher court ratifies it. Also of course SARS could appeal.”

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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Submit Your Budget 2018 Tips!

A4 bigstock-167576966The Minister of Finance makes his Budget Speech on 21 February and would like to hear your tips for the Budget. To submit your suggestions go to “Budget Tips” on the National Treasury website.

Our 2018 Budget is one of the most important since 1994 and will almost certainly include substantial tax increases, so make sure you get your views in.

Remember the Minister does read your tips and usually mentions some of them in his 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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The Drought Affects Us All

Day Zero is closer than ever and may even occur sooner than expected as on the 21ST of April 2018. This will not only influence the Western Cape, but South Africa as a whole. With the 50-litres-per-day-for-the-next-150-days alarms going off, will the looming ‘Day Zero’ affect those beyond the Western Cape?

Water is a daily need – cooking, drinking, hygiene – and the need for it is far greater than what the city has left. Water meters are being monitored, swimming pools are being emptied, and monthly tariffs have increased to ensure that households use water within the set restrictions. The rest of the country will feel the water crisis pinch.

  • Drought creates a socio-economic effect. The deficit between water demand and water supply worsens, forcing businesses to cut down drastically during production. This contributes to the already existing socio-economic factor of unemployment with more businesses trimming overhead costs to allow them to remain profitable. Unemployment in the Western Cape will have a ripple effect on the rest of the country, with people relocating in search of jobs elsewhere.
  • Health risks increase as the greater population adjusts to the limited water use for sanitary purposes. One of the biggest perils is the sewerage system coming to a standstill.
  • Because Cape Town is the leading exporter of wine, fruit, vegetables and wheat, the prices of these commodities are bound to increase nationally in order for the agricultural sector to remain profitable despite lower quantities in production.
  • Cape Town is the country’s second economic hub. Because of the water crisis, Cape Town is a high risk for incoming capital. Abroad corporations who have built business relationships with the country are left to look elsewhere for those who will meet their production needs.
  • There is increased pressure on the national government to provide an infrastructure that ensures that water is “protected, used, developed, conserved, managed and controlled in a sustainable and equitable manner, for the benefit of all persons” (Water Act of 1998).

Tourists are urged to be as cautious as the city’s residents by choosing to stay in accommodation facilities that have water-saving measures in place, using cups when brushing teeth instead of letting the tap run, and taking shorter showers.

Dam levels are critically low, and when storage reaches 13.5%, Cape Town will turn off most taps, leaving only vital services with access to water. Below is a list of dam levels of each province as of 22 January 2018:

Province Dam levels in %
Western Cape 25.3 %
Gauteng 94.1 %
Eastern Cape 58.9 %
Free State 65.0 %
KwaZulu-Natal 50.6 %
Limpopo 65.3 %
Mpumalanga 76.9 %
Northern Cape 75.6 %
North West 67.0 %

Day Zero is expected to hit on 11 May 2018, and as over consumption continues excessively, the day draws closer and closer.

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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Sugar Tax: Is It Good For Us?

shutterstock_378367333_0“This feels like a victory for Britain’s children” (celebrity chef Jamie Oliver commenting on news that a sugary drinks levy will be introduced in the UK in 2018) 

Tax increases are on the way and Treasury has signalled that a sugar tax (more correctly, a “Health Promotion Levy”) will be levied from 1 April 2018. As with all new taxes, emotions have been running high.

Much of the debate centres on whether the tax is simply a revenue-generating exercise or whether it will bring medium to long term health benefits to South Africa.

Recent tax increases have come mainly from an increase in the personal income tax rate and the fuel levy. Spreading the tax net wider will help Treasury to raise additional revenue.

The tax will be levied at 2.1 cents per gram of sugar content that exceeds 4 grams per 100 ml.

The passing of the legislation follows exhaustive negotiations, and public hearings which included NEDLAC (National Economic Development and Labour Council).

How will prices rise and what does the sugar industry say? 

The proposed tax is estimated to add up to 11% to the cost of sweetened soft drinks such as Coca-Cola. This is in contrast to the initial proposal which was 20%, plus items such as 100% pure fruit juice have now been excluded.

The sugar industry, which opposed the levy, has been under pressure since the turn of the century and 20,000 jobs have been lost, with the industry saying now that another 3,129 jobs will be under immediate threat and 20,000 more in 5 to 7 years. There have also been predictions that companies like Coca-Cola will cut investment leading to further job cuts.

What does the health industry say? 

  • A sugar tax is one of the cornerstones of the Department of Health’s determination to reduce non-communicable diseases (NCDs) such as obesity, diabetes and heart disease.

The Department sees a clear link between NCDs and sugar consumption, although this supposed correlation is strongly disputed by opponents of the levy.

  • NCDs are the leading cause of death in low to middle income countries.
  • South Africa has the highest incidence of obesity in Africa.
  • We are among the top ten consumers of soft drinks in the world.
  • Diabetes alone killed 25,000 people in 2015, whilst diabetes, strokes, heart diseases and other obesity related conditions cause 55% of deaths in South Africa.
  • India, Portugal, Saudi Arabia and Thailand have introduced taxes to combat NCDs in 2017. More than 30 countries have sugar tax legislation in progress.
  • Key research in these countries is that there were minimal job losses (Mexico) and it reduced consumption of sugar drinks by 10%.

In conclusion…

Treasury forecasts an additional R1bn to R1.5bn in annual revenue from the levy.

Licensing and registration of manufacturers of sugary beverages will take place from February 2018.

On balance the consensus seems to be that a sugar-sweetened beverages tax will bring in revenue to the fiscus (potentially limiting income tax increases) and is likely to have health benefits. Parliament is aware of potential retrenchments and will be monitoring the impact of the tax on the sugar industry.

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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Bitcoin: Is A Bubble Driving Up The Price?

40CD75C700000578-4543488-image-a-20_1495758052657“A bubble is an economic cycle characterized by rapid escalation of asset prices followed by — a massive selloff.” (Investopedia definition) 

You come home from work one day and see your next door neighbour off-loading an expensive flat-screen T.V. He tells you he has become wealthy from his Bitcoin holdings. You gotta buy some he tells you the price is going crazy.

Rational thought is gone – you rush inside and Google Bitcoin. When you discover that Bitcoin is the most Googled word in the world, surpassing even the Kardashians, you are convinced you are on the road to riches.

Since November 2016 the value of a Bitcoin has risen from $800 to over $15,000 at time of writing. Bitcoin now trades on the Chicago Board Options Exchange and the Chicago Mercantile Exchange. These are futures markets and have contributed to the fast rising price of Bitcoin. As Bitcoin has come to get more market acceptance, so interest in this cryptocurrency has rapidly grown.  

One of the reasons why the value has grown so quickly is there can only be twenty one million Bitcoins in existence. As the price goes up, the investors  hold onto them, anticipating further price rises. This supply shortage further drives up the price.

At some stage a herd mentality takes over, fuelled by greed and the price goes through the roof. In this stampede no one stops to think – they have to jump in before the price rises even further.

With all bubbles, at some point the price defies belief. Once this happens the losses mount as fast as the price once rose until the asset becomes worthless.

But is it a bubble or not?

The hard fact is that no one knows for sure.  If it is a bubble and you invest now you could lose a fortune.  If it isn’t and you don’t invest, you could lose out on a potential fortune.

“Hindsight” of course “is 20/20” but by then it’s too late to do anything about it, so the best advice at this stage is this – be guided not by the herd mentality we talked about earlier but by your own research.  If you do invest, the only prudent thing to do is to use money you can afford to lose.

All we can say for sure is Bitcoin is starting to exhibit all the characteristics of a bubble and that at some stage there is the risk the price will collapse. So perhaps if you feel the urge to buy Bitcoins, resist the urge to Google “how to buy Bitcoins” and instead take a deep breath and go and watch the Kardashians!

If you are still not convinced, consider what happened to Sir Isaac Newton, an intellectual giant and one of the fathers of modern science. He initially bought into the South Sea Company and as prices rapidly rose, he sensed a bubble and sold out, making a very good profit. But prices continued to rise at a dizzying pace and he reinvested just in time to witness the collapse of the company. Newton was ruined by the South Sea Bubble.

The current situation with Bitcoin does not invalidate the concept of a digital currency which has the potential to do what banks do – be a credible third party between a buyer and seller and guarantee payment when the conditions of the contract are met. The big difference is that cryptocurrency uses blockchain technology and is much cheaper. It’s here to stay.

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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