Must You Pay Tax on Bitcoin Transactions?

A4Bitcoin has become increasingly used in South Africa and there are some good platforms for its use. Although it has proved volatile (it fell 30% in value recently), its long term value has risen over the past decade.

So is Bitcoin subject to taxation?  Yes it is. South Africa is following global trends and SARS has confirmed that the normal rules of taxation will apply and it will be subject to income tax or capital gains depending on the type of transaction.

Speak to your accountant if you need advice.

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 and Shareholders: There’s Hope If You Forget Companies Act Compliance Requirements

A3The “new” Companies Act is pitted with clauses requiring that special resolutions be passed. There are also instances where as directors you are required to take certain actions such as recusing yourself if there is a conflict of interest.

It is important to note that transactions can be set aside if the necessary steps are not taken. Should this happen, a costly and time-consuming exercise would follow.

Can “unanimous consent” rectify non-compliance?

Both our “old” Companies Act and English company law allowed the concept of “unanimous consent” to override statutory non-compliance with certain requirements, such as the requirement for a special resolution to be passed authorising the sale of all (or the greater part) of a company’s assets. Simply put, if all of the shareholders were aware of the implications of a transaction and consented to the transaction, then the “unanimous consent” principle may be available to hold up the transaction despite the required statutory steps not having been taken.

In South Africa following the introduction of the “new” Companies Act in 2011, there was uncertainty whether “unanimous consent” would be accepted here until the Supreme Court of Appeal (SCA) recently pronounced on the subject.

What the SCA said

A company sold the major part of its assets and the directors had a conflict of interest in the sale. Part of the case revolved around setting aside the transaction as no special resolution was passed for the sale of the assets and the directors had not disclosed their interests. The company was owned by a single shareholder – a trust effectively controlled by one person.

The SCA said that the reason for requiring that a special resolution be passed was to “ensure that the interests and views of all shareholders are taken into account”. When reviewing the circumstances of this case the SCA found that the person who controlled the sole shareholder was party to the transaction and thus no special resolution was needed as the shareholder was clearly aware of and had effectively approved the transaction.

It used a similar line of reasoning in resolving the conflict of interest question.

The court specifically accepted the principle of unanimous consent, stating “that principle, long recognised in English company law, from which our courts have received much guidance, was accepted as part of our law relating to companies, under both the 1926 and the 1973 Companies Acts. I can see nothing in the current Act to suggest that the principle no longer finds application”.

The implications are that if a business is owner-managed or the board of directors are a tightly knit group then – even if in error you don’t tie up all the Company law requirements – the “unanimous consent” principle might be available to you.

Be sure however to seek professional advice – every situation will be different.

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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Vet Your Suppliers! Good Stakeholder Relationships Will Boost Your Profits

A2Suppliers play a strategic role in your business because if they fail to deliver on time or with the required quality, they can cause delays in your organisation. These delays will inevitably have a knock-on effect to your customers.
How to ensure you get high quality suppliers

Best practice dictates that vetting procedures are in place that cover, at least:

  • A review of the supplier’s financials to establish that the business has the financial means to remain sustainable and to deliver to its customers.
  • The supplier has sound processes in place and the organisation is well managed.
  • How long has the entity been in business? The longer the better.
  • Get testimonials from the supplier’s current customers.
  • Check for fraud and/or conflicts of interest. This involves establishing that none of your staff have undisclosed relationships with the supplier, that the supplier has no criminal record or any suspicious activities.
  • See how the supplier responds to queries. You could call as “customer” of the supplier and see how they react to a problem.
  • Check their social media platforms to ensure they are consistent with their marketplace persona.
  • Culturally are they a good fit for your business? Do they have the same values as your organisation?
  • Have in place ongoing processes to detect if there are any changes in the supplier’s organisation which could trigger further investigation.

Getting the most out of suppliers

In the new King IV Report there is a section on optimising stakeholder relationships by an “inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interests of the organisation over time”.

This involves understanding what they want and ensuring there is a mutual relationship of trust which will last a long time and from which both parties will get the outcomes they want.

An honest, transparent relationship with your suppliers will bring good long term profit to your business.

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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Tax Season Opened On 1 July: Here’s What You Need to Know, and Do

A1“Giving money and power to government is like giving whiskey and car keys to teenage boys” (P.J. O’Rourke)

Once again tax season has opened for individuals, and whilst we can chuckle at jokes about the pain of paying taxes, they remain of course an integral part of life.

By now you should have already gathered all your supporting documentation. This is an important task as not getting your tax 100% correct can lead to queries and audits from SARS, which is clearly something to avoid.  Whilst you won’t have to submit this with your tax return, you need to keep it available, for five years, in case SARS asks for it. Once an audit is open or if you must prove the item you need to retain documents for longer.

However, if you are going to do your return at a SARS branch, then bring all your documentation and your I.D. with you.

Documentation you will need is

  • Your IRP5. If you changed jobs during the year, you will have at least one other IRP 5. If you get any retirement funding, the relevant institution will send you an IRP 3 (a).
  • IRP 3 (b) for any investment income received.
  • Medical certificates from your medical aid plus any medical expenses incurred not covered by medical aid.
  • A logbook if you receive a car allowance.
  • Any retirement funding certificates received.
  • Any other documentation that will affect your return e.g. if you had a capital gain or loss during the tax year.

Check that the tax certificates you receive are correct and if you find an error, go back to whoever sent you the documentation and get them to issue a corrected certificate. SARS populate your tax return with information received from third parties (IRP5, IRP 3 etc) and the only way to change the populated data on your tax return is to get the tax certificates re-issued. This can be a very cumbersome process.

 Do you have to submit a tax return?

If you earn R350,000 or less –

  • From a single employer,
  • You have no other tax deductions, such as a car allowance or retirement funding,
  • You earn less than R23,800 in interest from South Africa (if you are less than 65 years old) or R34,500 in interest (if you are 65 or over),
  • You are a non-resident with only exempt dividend income.

Then you are one of the lucky people who don’t need to complete a tax return.  There are a couple of exceptions here, so if in doubt speak to your accountant. If you submit a return where you were not required to, this may, due to the SARS systems, lead to an automatic imposition of penalties and this may in turn lead to unnecessary disputes with SARS.

Of  course if you are due a refund, then you should submit a tax return anyway.

Submission deadlines

Important dates to file your tax returns for the 2016/2017 tax year are as per the table below.

A1grid

Be honest when compiling your return. Check that everything is correct and accurate. Finally, be alert to the scammers out there who always seem to target SARS related transactions.

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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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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