The big mac index says the rand is way undervalued

Logista_Aug-03f“Our results indicate that the Big Mac Index is surprisingly accurate in tracking exchange rates over the long-term, which is consistent with previous PPP research findings” (ScienceDirect)

For decades the Economist has been publishing its Big Mac Index to give an estimation of how under- or over-valued a currency is. This is done by comparing the price of a MacDonalds Big Mac Burger in a country to the price of the burger in the USA.

Although this began as a lighthearted attempt to establish currency values, it has gained traction and credibility.

Purchasing Power Parity (PPP)

It is a tenet of economic theory that over time currencies will equate to the cost of goods and services in other countries. Thus, if a basket of goods and services costs, say,  $20 in the USA and costs R100 in South Africa, then the Rand to US dollar rate should equal R5 to 1 US$.

The Big Mac Index

The cost of a Big Mac is $5.74 in the U.S. whilst the cost in South Africa is R31 which translates into the PPP rate of US$1 = R5.40. As the actual rate at the time the index was measured was R14.18 to the dollar, so the Rand is 61.9% undervalued (14.18-5.5/14.18).

How do we compare worldwide?

The Economist looks at approximately 60 countries in compiling its index and we rank as the third most undervalued currency, ahead only of Malaysia and Russia.

Whilst some will dismiss the Big Mac index, it does underline that South Africa faces many headwinds with a potential downgrade to full junk status (Moodys is expected to announce its decision on South Africa’s debt in October after the Medium Term Budget), a stalled economy and uncertainty as to how to re-ignite economic growth. As economic growth is dependent on investment another key issue is how to make South Africa an attractive place to invest.

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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If artificial intelligence is not that intelligent, should we be worried about our jobs?

Logista_Aug-02“Real stupidity beats artificial intelligence every time” (Terry Pratchett)

Artificial Intelligence (AI) is being rolled out in many guises throughout business. One instance of this is voicemail with some amusing results. One person recalls getting a voicemail message which said “I’m a user music to reach an audience” and, another example, “ — working with the Russian” but “I got killed”.

As the person said it’s hard to feel your career will be threatened by AI when you come across examples such as these.

In another irritating situation, a colleague recently got a call from a cell phone company which asked “will you pay your arrears in three days. Press 1 if this is correct.” When the person tried to say “what arrears?”, he was told that this is not a valid response. The colleague then phoned the company only to find a robot answered the phone. At this stage you feel you are probably having an Orwellian nightmare.

Will AI get “intelligent”?

There can be little doubt it will rapidly advance and predictions as to where it will go vary widely – some say that by the end of the next decade, robots will be as smart as humans

Another school of thought maintains that as AI will not be able to learn creativity, real human emotion or have a human personality, so it will never replace humans.

AI relies on mountains of high quality data for it to be able to effectively run its algorithms. There is a relative dearth of this data at present.

Effectively, the sceptics say AI will always just be software and don’t be fooled by your robot declaring its love for you. It is software trying to mimic human behaviour.

It must also be remembered that there are many tasks that don’t need human intervention.

So, what happens to our jobs?

AI is one of the drivers of the fourth industrial revolution and it is instructive to look at the first three industrial revolutions to understand what we can learn.

The first one came in the late eighteenth century when man began mechanizing factories and agriculture. Urbanisation began to develop rapidly (from displaced farm workers) and there was social unrest as many jobs were lost and professions weakened. This led to substantial inequality of incomes as a few industrialists made fortunes, a middle class began to slowly emerge but the vast majority remained in poverty.

The second industrial revolution came a hundred years later and was led by inventions that made the ordinary person’s life much easier – electricity, the aeroplane, the washing machine, the vacuum cleaner and many more that created a surge in living standards. Universal franchise and recognition of unions also came into existence in the developed world. So significant were these changes, such as housewives spending 42 hours less a week on household chores, that they enabled women to enter the jobs market. In turn this rapidly grew the middle class and inequality decreased substantially. Clearly this second revolution grew employment and living standards.

Another important aspect is that the second industrial revolution was a work enabler whilst the first industrial revolution was a job replacer.

The third industrial revolution began in the 1980s with the rise of digitization and it has been similar in some areas to the first industrial revolution – the middle classes have regressed in the developed world whilst the top 1% has become wealthier. However, in developing countries, mainly Asia, hundreds of millions of jobs have been created as industrialization has rapidly rolled out there.

The fourth industrial revolution is expected to automate just under half of the jobs in the United States and thus be similar to the third revolution. How it will fare in places like China and India is difficult to predict. In South Africa business will benefit from the new technologies but the poorer communities will not have the skills to take advantage of opportunities offered by AI. Thus, inequality will continue and may get worse.

Overall, the last two hundred and fifty years has seen a massive upward change in the number of jobs created. The problem lies in the uneven timing of these changes – it took three generations in the nineteenth century for there to be real progress in growing jobs.

Whilst AI may sometimes seem comical at the moment, it is going to reduce and/or eliminate many jobs. But it will also create new employment opportunities. As a business owner, upskill your workers so they can be prepared for the changes that are already happening.

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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Don’t let a death or disablement destroy your business

Logista_Aug-01The greatest need in many small businesses is for cash flow. Picture this scenario:

Three people start a business and after a few years it is beginning to make profit – in a year it will go cash positive. One of the shareholders is killed (or disabled) in an accident, leaving the spouse and children desperate as neither the company nor remaining shareholders can afford to buy the dead shareholder’s equity.  The family put his or her shares up for sale. The other two shareholders now face the prospect of a new shareholder who may not agree with their strategies. The outlook for the business is suddenly very uncertain.

Buy/sell policies  

Had the shareholders put in place a buy/sell policy when they started the company, the death of the one shareholder would not have threatened the business. The policy on the death (or disability) of the shareholder results in the remaining shareholders acquiring the shares and proceeds of the policy going to the family of the dead shareholder.

In this way the shareholders keep control of the business and the family of the shareholder receive a pay out which will help remove the financial uncertainty they face.

Generally, buy/sell policies are governed in terms of a shareholders’ agreement.

If the shareholders have loans then make sure they are covered in the agreement – they will need to be dealt with anyway on the death or disability of the shareholder.

Also ensure the agreement is aligned with your Memorandum of Incorporation (MOI) as the MOI has preference over a shareholder agreement.

Key person insurance

If you have shareholders who are active in your company or you have a key manager(s) and the loss of any of these people could have a detrimental impact on the business, then the company can take out insurance on these key people. Proceeds from key person insurance flow into the company.

Suppose, for example, that you recruit a marketing executive who substantially grows your business. Should this executive be killed or disabled, it will lead to a material loss in sales. Taking out key person insurance will give your company the financial space to recruit and train a new marketing manager and will give you time to make up the lost sales

Many companies have failed by not providing for the loss of a shareholder or key manager.

Take expert advice when taking out either of these policies as there are legal, potential tax and or death duty exposures.

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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Youth Employment Tax Incentive Extended for Ten Years

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There is chronic unemployment in the country and it is especially felt by the youth where up to 50% cannot find a job. The Employment Tax Incentive (ETI) is designed to encourage companies to employ “youths” (between the ages of 18 to 29) for 1 to 2 years.

Incentives for employers to make use of the ETI are attractive. You can deduct from your monthly PAYE owing the amounts shown below in the third column. In addition, these deductible amounts are exempt from Income Tax i.e. you get a double benefit.

The monthly calculated ETI amount per qualifying employee is determined as follows:

Source: SARS

Source: SARS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There are conditions – the employer must be in good standing with SARS and employees (apart from being aged 18 to 29) must have valid ID documents (or be a legal refugee).

This is a good incentive and it helps to address one of South Africa’s intractable problems. Another advantage is you can over the two year period identify employees with potential who will fit into your business.

Speak to your accountant to ensure you claim this incentive correctly.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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How Many Days Did You Work For The Taxman In 2019?

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“Tax Freedom Day is calculated by dividing general government revenue by GDP at market prices, then multiplying the result by the number of days in a year, and finally adding a day” (Free Market Foundation)

In the current year it will take the average South African 137 days to pay off his taxes and only from the next day does the taxpayer then work for himself or herself – this day is known around the world as Tax Freedom Day (TFD). The 138th day of 2019 was 18 May.

So, what does this tell us?

The news is not good – in 1994 TFD was 101 days. Last year TFD was on 13 May, a slippage in one year of 5 days.

Looking at the Free Market Foundation’s formula, if GDP rose then TFD would drop. Broadly speaking, this tells us that not enough tax revenue is being channelled into investment as investment leads to a growth in GDP. This is hardly surprising when you consider that salaries are the largest component of government expenditure.

On the other side of the equation, we are being increasingly taxed. In the last few years VAT and income tax have risen whilst new taxes such as the Sugar Tax and now Carbon tax have been implemented.

The President has promised that he will reform the economy to make it more attractive to invest in South Africa – let’s hope he succeeds.

Where does South Africa stack up globally?  

We are in the middle of the scale – it depends on the structure of the country. Welfare states like Norway and Germany approach 200 days whilst countries like the USA and Australia are just over the 100 day mark.

The question we have to ask ourselves is whether South Africans enjoy sufficient economic benefits to compensate for being approximately 5 weeks behind the USA and Australia?

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 Options: Going the Informal Route v the Companies Act Route

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The business rescue provisions in the Companies Act are regarded as progressive and world class and there is evidence that it has worked well.

Yet a 2016 survey showed that more distressed businesses opted for an informal approach and appear to be more successful than those opting for the remedies of the Companies Act.

What’s the difference?

Business rescue in terms of the Companies Act is a process whereby the company informs stakeholders of its situation and a business rescue practitioner is appointed to try and salvage the company. A moratorium is placed on creditors which gives  the practitioner room to find a solution.

With an informal arrangement, the business enters into negotiations with some or all of its creditors.

The two significant differences between the two approaches are that –

  • With an informal approach there is no protection from creditors demanding to be paid – this is a substantial risk because if creditors decide they want to be paid, the company could collapse.
  • The other big difference is that the informal way offers confidentiality to the business – with business rescue the financial position of the company becomes common knowledge to all stakeholders and the general market place. The company thus suffers reputational damage from which it may never recover even if it reaches a favourable settlement – e.g. consumers of the company’s product may opt to use a rival’s product in case the company does go into bankruptcy.

Directors: Plan ahead to prevent falling foul of business rescue requirements

Once a company becomes aware that it has run into or is going to experience financial difficulties, the directors are required by the Companies Act to perform liquidity and solvency tests and if these show the business cannot meet its obligations for the next six months, then it is required to either declare insolvency or apply for business rescue. Should the directors decide not to proceed with business rescue or liquidation, they are obliged to provide stakeholders with reasons for their decision  in writing – hence the company’s stressed position is revealed to the public.

Therefore if you want to take the informal route you need to do this before the business becomes financially stressed as above.

You will also need to present creditors with a credible plan when you embark on this option. Clearly, monitoring of the cash position and planning a comprehensive strategy are critical to the success of the informal turnaround process.

Your personal liability risk  

Directors are personally liable for any losses as a result of their actions or inactions if it can be shown that they acted recklessly or negligently. So plan accordingly and carefully. Remember also that staff and stakeholders could be financially ruined if the business fails.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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How Tax Returns Will Be Easier This Year, and Should You File if You Earn Under R500,000?

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“Death and taxes may be inevitable but they shouldn’t be related” (J.C. Watts Jr)”

Tax season 2019 begins on 1 August (1 July for taxpayers who are registered for eFiling or have access to the MobiApp) and SARS has taken further steps to reduce the burden on both taxpayers and SARS’ administrative systems.

This year there are three initiatives:

  • Increase the threshold of submitting tax returns from R350,000 to R500,000,
  • Enhancements to the MobiApp and improvements to EasyFiling,
  • Moving out the dates for submission of returns.

Threshold increased to R500,000

Taxpayers with employment-only income now only have to file a tax return if their annual employment income exceeds R500,000 (previously R350,000). The provisos to this are taxpayers must have:

  • Only one employer during the tax year,
  • No other income such as rentals received or car allowance etc,
  • No other additional deductions to claim e.g. medical costs or retirement funding,
  • Not made a capital gain of R40,000 or more.

A problem SARS has had with this is that many of these taxpayers still submit returns – up to 25% of tax returns received do not need to be filed. In a further effort to prevent taxpayers submitting unnecessary returns, SARS will send each of these taxpayers a simulated outcome as if they had filed a return which will show no tax is due.

Should you file a return even if you don’t have to?

If you may be in line for a tax refund, then it pays to do a tax return. In addition, if you think you may need a Tax Clearance Certificate it is probably prudent to complete a tax return. This will save any potential delays as SARS may query why you did not file your income tax form.

Ask your accountant for advice specific to your situation.

Enhancements you need to know about

SARS has been making efforts to upgrade their IT systems to reduce the number of people who use SARS branches to complete tax returns. Thus far this has had limited success, so SARS is increasing its efforts this year.

  1. The MobiApp

This enables taxpayers to submit their returns using their smartphones. Security has been enhanced by:

  • A biometric authentication facility,
  • A one time pin has been added,
  • The use of security questions, and
  • You can easily reset your password and username.

One really good feauture is the scanning and uploading of documents.

Note: the MobiApp cannot be used for provisional payments.

  1. EFiling

The system is now more user friendly for making payments, submitting your return and uploading documentation. In addition, Notices issued by SARS will be more specific, e.g. the Notice will specify what documentation SARS require in the event of verification and audit.

Taxpayers may use the MobiApp or EFiling from 1 July but may only use branches for submitting their returns from 1 August.

(Adapted from a SARS table)

(Adapted from a SARS table)

What is of interest in the table above is that the deadline dates have been moved out for manual submissions (it was 21 September last year) and for non-provisional taxpayers (31 October in 2018) whilst there is no change for provisional taxpayers.

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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Small Business Owners: Don’t Overlook Your New Compliance Requirements!

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Small business has limited resources and optimising these resources is a balancing act. Part of this balancing act includes the role of compliance. These requirements have increased as new laws are rolled out along with other regulations, such as BEE and FICA, which also need to be considered.

One needs to carefully weigh up the consequences of not complying with laws or regulations. It is no excuse to say “I was not aware of that requirement” – the onus is on the business to take the time to understand what it needs to know.

The new accounting reporting standards and how they impact on you

If your business is subject to audit, be aware that new standards have become effective in 2019.

The most important of these is “Revenue from Contracts with Customers”. This could, depending on your business, fundamentally alter the way your company recognises revenue (such as, construction and telecommunication industries) and even if it does not, disclosure requirements in the notes to your Annual Financial Statements (AFS) may change. These notes will have knock-on effects, for example, to bonus schemes tied to sales which may need to be altered. This will affect how you disclose remuneration in the AFS and could in turn impact how much additional tax your staff need to pay. In turn, this will change your PAYE (Pay as You Earn) and will roll through to the EMP 201 and EMP 501 (monthly and annual earnings declarations to SARS).

This is only one of several new standards, so speak to your accountant to assess the effect on your business.

Banks and other financial institutions rely on your AFS to determine the health of your business. Not complying with these standards could result in an audit qualification, in turn resulting in a negative perception of your business by key stakeholders.

Disclosing directors’ and prescribed officers’ remuneration

The Companies and Intellectual Property Commission (CIPC) recently released a Notice warning that the Companies Act disclosure requirements of remuneration to directors and prescribed officers are not always being correctly complied with. The CIPC is referring to organisations’ AFS (remember that you are required to lodge your AFS with the CIPC).

The Notice warns businesses that this is a significant area of governance and transparency – failure to comply could trigger an investigation into your company. This is something any business can do without as the CIPC is empowered to instruct entities, subject to the Companies Act, to correct contraventions. Or it may apply to the Courts to issue an administrative penalty or refer the matter to the prosecuting authorities.

Extensive disclosures are required as set out in the Companies Act in terms of remuneration – so again, consult your accountant!

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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Worker Burnout: Too Much Work and Unclear Goals

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“‘Burnout’, n. ‘Physical or mental collapse caused by overwork or stress’” (Oxford Dictionaries)

Two issues have come to the fore in terms of staff experiencing burnout – bosses who work too many hours, and conflicts in terms of duties performed.

This can result in burnout and high healthcare costs (estimated at $120 billion annually in the USA, along with 120,000 deaths).

Bosses working excessive hours

Generally managers who work long hours encourage their staff to work similar hours. This encouragement springs from either employees following their manager’s example or exhortations by the manager to also work long periods.

Experts say that a balanced lifestyle between work and leisure is necessary to keep the workforce mentally sharp and they question the benefit of excessive work hours. As one has put it, “Darwin only worked four hours a day and he radically changed human thinking”.

It is important that you satisfy yourself that your executives are not pushing their staff into an unnecessary workload.

Work-work conflicts 

Surveys show that another area of unhappiness is that staff face conflicting duties when performing their work. It is natural that people want to be as proficient as possible in their jobs, but they often find this almost impossible to achieve.

As an example, take the roles a physician is expected to fulfil:

  • Diagnose and treat patients
  • Research in his/her chosen field
  • Mentor learner physicians
  • Travel to and attend conferences
  • Attend to all the administration required including staff appraisals, budgets, sit in on committee meetings – the list goes on.

Yet when one looks at how the physician is evaluated, it is usually on the most prestigious function, that is, the research undertaken.

Thus, the physician ends up in the position of failing to meet some requirements which leads to frustration.

It can also potentially lead to lower productivity as it may encourage staff, like the physician, to get political in pleasing their superiors.

What can you do about these conflicts?

Researchers have made some key recommendations to address these work-work conflicts, beginning with defining what outcomes the business requires. This will result in:

  1. Ensuring staff have an appropriate job description based on fulfilling the key aspects of their job requirements.
  1. Making sure there is clarity and transparency as to what is expected of staff, and what goals they are expected to reach.
  1. Aligning their salaries and bonuses to these defined outcomes.

Work-work conflicts can easily arise in the workplace, so take action to minimise these conflicts in 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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