Nwanda Internal News
(April 2017)

DAYS

Awesome Rewards were awarded to the following staff this month:
Rafeeah Razak – for a job well done
Sean Bushe – for a job well done
Matthias Krafft – for excellent quality of work done
Liza Hlatshwayo – for a job well done assisting the tax department

New staff members:
A warm welcome to Ashen Gunasee who has joined as an Audit Manager in Roy Macpherson’s team.

Ashen Gunasee

Melishia Engelbrecht recently joined Mauritz Jankowitz’ team as an Audit Supervisor. We hope that she is fitting in nicely with the firm.Staff photo

Farewell to staff member:
We bid farewell to Laycoln Trenton, we wish her the best in her future endeavours.

Good luck for the exams:
Our trainees will be going on study leave to write the May/June exams. We wish them the best of luck.
Exam

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Women have the right sentiment for investing

Some recent studies seem to suggest that woman have the right skills and attitude to be great in taking on matters regarding their financial planning and investments. However, other studies seem to suggest that they lack the requisite confidence to do so. The evidence seems to suggest that woman should take the lead within their families in this department

According to a report released recently by SigFig, a US based company assisting direct investors with their portfolios, female investors enjoyed returns of 12% higher than their male counterparts over the year the report covers. Assuming this performance trend continued over a thirty-year period, a woman with R100 000 (we’ll use rands, even though the report uses dollars) invested would earn R58 000 more than a man. Men were also revealed to be 25% more likely to lose money in the market than women. Why is that?

It would seem that men ‘churn’ (sell off and buy something else) their portfolios 50% more often than women. Churning is particularly detrimental to investment returns. For example, in 2014 frequent traders (or investors with an annual investment portfolio turnover of 100% and above) experienced average net returns of only 0.1% compared to the 4.7% enjoyed by other investors.

Overconfidence and cautiousness?

A likely reason behind the lower returns earned by men and their tendency to churn their portfolios is overconfidence. According to the study, men are typically one and a half times more confident than women that they will better the market in 2015.

All things considered, the proverbial playing field evens out later on in life. This is evident in how a typical 25-year-old woman invests in a similar way to a typical 35-year-old man, while a 55-year-old man invests in a similar way to your average 65-year-old woman.

Despite being more successful investors than men on aggregate, women tend to be less empowered when it comes to their finances. A Fidelity Investments Money Fit Woman Study indicates that 8 in 10 women refrain from discussing finances with people they are close to. Interestingly, while 82% of women feel confident when it comes to managing a monthly budget, this is not the case when it comes to long-term financial planning. So whereas women are confident they can balance a checkbook or manage the family budget without help, they are less confident regarding planning for their financial needs during retirement or selecting the right financial investments.

Indeed, a lack of confidence is a leading cause of financial illiteracy among women, despite it being a top concern of theirs. For example, while 77% of women cited feeling comfortable talking to a doctor on their own about medical issues, just 47% said they would talk with a financial professional on their own. However, 70% of women currently not working with a financial professional would be motivated to do so in the future.

Money and marriage?

All too often, one spouse will take care of the finances. And all too often, it is men who take the proverbial wheel in steering the course of their family’s financial future. According to Fidelity’s study, just 41% of partners make joint retirement investment decisions and only 17% of the respondents were “completely confident” that their spouse was able to take responsibility for the family’s retirement finances.

Couples should really decide together on their family’s needs and goals in both the short and long term. Together they need to agree on and take ownership of their financial plan if, ultimately, it is to work for them both. Eventually, when you are forced to live with the consequences of all the small financial decisions you made earlier on in life, this can lead to regret.

Women need to take advantage of their inherently more astute investment instincts and ensure that they are fully informed regarding their financial affairs, so as to take control of their tomorrow. It is only when you know what your tomorrow holds that you can truly welcome it.

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

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Will SARS allow you to deduct your company/close corporation’s assessed loss?

Under normal circumstances SARS will allow a taxpayer to carry forward the previous tax year’s assessed loss and set it off against the current tax year’s taxable income. However, there are certain circumstances under which SARS will not allow a taxpayer to carry forward the previous year’s assessed loss and the assessed loss will be lost for set off against future taxable income as well.

If the following two requirements are not met, SARS may not allow a business to carry forward its assessed loss to the current tax year:

Requirement 1: Carrying on a trade during the current year of assessment (the “trade” requirement)

The onus rests on the company/close corporation to prove to SARS that it was indeed trading during the current tax year. In deciding whether the taxpayer carried on a trade, SARS will take into account, amongst others, the following factors as they apply to the taxpayer’s specific business:

  1. The amount and type of expenses incurred during the tax year
  2. The extent of the business activities
  3. The nature of its general business activities
  4. Whether the business activities were actively pursued
  5. The number of transactions entered into during the tax year

The following aspects are not necessarily enough to prove that a trade has been carried on:

  1. An intention to trade in the future
  2. Activities to prepare for future trading
  3. Holding meetings
  4. Preparing financial statements

Requirement 2: Earning income from trading (the “income from trade” requirement)

A company/close corporation may indeed have traded (and incurred expenses) during a tax year, but the related income will only be realised in the following or a later tax year due to the type of industry in which the business operates. Once again, the onus rests on the business to prove to SARS that it was actually trading in the current tax year despite the fact that no income was earned.

SARS acknowledges that it is possible that a business may have carried on a trade without earning an income in the same tax year. Take a property rental company for instance. The company could have been actively advertising and marketing available rental properties without finding any suitable tenants. This would result in a loss for the tax year as expenses was incurred but no income earned in the same period. In this case it is clear that a trade was carried on and SARS should allow the set off of an assessed loss in the current tax year. However, SARS will only consider allowing the set off of the assessed loss if:

  • It was incidental that no income was earned during the current tax year despite the fact that the business was actively trading; or
  • No income was earned during the current tax year as a result of the business cycle or nature of the trade in which the business operates.

As can be seen from the above discussion, the deduction of assessed losses is a grey area. The onus rests on the business to prove to the satisfaction of SARS that it meets the “trade” and “income from trade” requirements as set out above. SARS will assess each individual business based on its unique facts and circumstances, taking into account the abovementioned factors to determine if the business will be allowed to carry forward its assessed loss.

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.

Reference list:
Source 1

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Tax terms used in the media:
Do you know what they mean?

Reading material on the topic of tax does not make for light, relaxing reading. A reader can easily feel lost if he/she does not keep up to date with the meaning of the new terms and phrases which are introduced constantly by National Treasury. This article aims to explain the meaning of a few tax terms/phrases that readers might come across in tax-related reading material.

Tax term 1: “Admin penalty”

“Admin penalty” is the shortened version of “Administrative Non-Compliance Penalty”. An admin penalty must be paid by a taxpayer to SARS if the taxpayer does not comply with their responsibilities set out under South African Tax Law. Currently admin penalties are only levied by SARS when a natural person taxpayer fails to submit his/her tax return for two years (or fails to comply with certain reporting requirements in terms of an agreement entered into between South Africa and the USA and which is only applicable to US tax residents or SA tax residents holding US assets)..

SARS will charge an admin penalty every month that a tax return remains outstanding. The first thing a taxpayer must do in this case is to submit the outstanding tax return(s) so that SARS will stop charging the admin penalty.

Tax term 2: “Verification” versus “Audit”

Both these processes aim to ensure that each taxpayer pay their fair share of taxes.

The verification process starts when SARS informs a taxpayer in writing that his/her tax return was selected for verification and requests the submission of supporting documents and/or a correction of the tax return. If the taxpayer does not respond to this letter within 21 business days, SARS will send a second letter.

The audit process will start if the taxpayer does not respond to the second letter either. A SARS auditor will call the taxpayer and request that the taxpayer submit the relevant documents after at least 5 business days.

If the taxpayer does not respond to the auditor’s request, SARS will assess the tax return based on the information in their possession.

Tax term 3: “Deferred arrangement”

If a taxpayer is unable to pay his/her tax debt to SARS, SARS may allow the taxpayer to pay the tax debt later or to pay if off in instalments. SARS will charge the taxpayer interest on the outstanding balance of the tax debt.

The taxpayer must apply for a deferred arrangement and SARS may approve or decline the application.

If a taxpayer does not keep to the deferred arrangement as agreed with SARS, the arrangement is automatically cancelled and the outstanding tax is due as per normal terms.

Tax term 4: “Small business corporation” (SBC)

A taxpayer who qualifies as a SBC may qualify for reduced income tax rates, as well as accelerated wear and tear allowances.

The following are some of the requirements that must be met in order to qualify as a SBC:

The taxpayer must be a close corporation, private company or a co-operative.

  • All the shareholders or members must be natural persons.
  • None of the shareholders/members may hold any shares or membership, or have any interest in the equity of any other close corporation, private company or co-operative.

The above terms/phrases are only a few of the many that are used in the media. Staying up to date with tax lingo requires a concerted effort from the reader’s side as new terms are introduced and current terms changed or improved by law constantly.

If you would like more detailed information on the meaning of the above or any other tax terms, please contact your tax practitioner.

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 ommissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

Reference List:
Source 1

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Nwanda Internal News
(March 2017)

DAYS

Awesome Rewards:
Renier Smit – Hard work and dedication during a stressful audit
Ntshepeng Tshotetsi – Hard work and dedication during a stressful audit
Kavitha Bhawanideen – passing APC board exam
Proffessor Mafela – passing APC board exam
Kim Sing – passing Advanced Labour Law

Congratulations:
Esmeralda Lottering for passing CTA level 2 exams
Proffessor Mafela and Kavitha Bhawanideen for passing the SAICA APC exam
Kim Sing for passing the Advanced Labour Law exam

New staff member:
A warm welcome to Melishia Engelbrecht – Audit Supervisor started on 1 March

Farewell to staff members:
We bid farewell to –
Erleen Coetzee
Aasimah Khan
Venice Jordaan
Dean du Toit
Divan Dixon

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VAT and common law theft

A recent decision has created some interest in whether the taxpayers failing to pay over the correct amounts of VAT can be charged – in addition to other statutory crimes prescribed by the VAT Act, 89 of 1991 – with the common law crime of theft.

In Director of Public Prosecutions, Western Cape v Parker[1] the Director of Public Prosecutions (“DPP”) appealed a decision by the Western Cape High Court that Parker, in his capacity as sole representative of a close corporation, had not committed common law theft in relation to the misappropriation of VAT due and payable by the close corporation to SARS. (Parker had been convicted of common law theft earlier in the Bellville Regional Court and sentenced to five years’ imprisonment, which conviction he appealed to the High Court.)

The Supreme Court of Appeal dismissed the appeal by the DPP as related to the charge of common law theft levied against Parker as related to the misappropriation of VAT amounts, due and payable to SARS. Essentially to succeed, the DPP had to show that the monies not paid over to SARS were in law monies received and held effectively by VAT vendors as agents or in trust on behalf of SARS, i.e. that SARS had established ownership over such funds even before it having being paid over. The court directed that no relationship could be established whereby VAT amounts due were received and held by VAT vendors prior to payment thereof over to SARS. In other words, the DPP could not show that Parker had misappropriated property which belonged to another – an essential element of common law theft that had to be present to secure a conviction.

VAT remains a tax in the proper sense of the word: monies received from customers were that of the taxpayer. Only once monies were paid over to SARS did it become SARS’ property. Even when the VAT in question became payable, such obligation did not per se create a right of ownership over the funds for SARS. Admittedly SARS has a legal claim against the taxpayer for an amount of tax, but it cannot be said to have established right of ownership over any specific funds held by the taxpayer.

It should be noted that Parker only appealed his conviction of common law theft. He was also convicted in the Regional Court of those crimes provided for in the VAT Act (section 28(1)(b) read with section 58(d)) which he did not appeal. His sentence in this regard was maintained, being either a fine of R10,000 of two years’ imprisonment, suspended for four years.

[1] [2015] 1 All SA 525 (SCA)

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 free loans with companies

The latest annual nation budget presented in Parliament proposed the dividends tax rate to be increased with almost immediate effect from 15% to 20%. The increased rate brings into renewed focus what anti-avoidance measures exist in the Income Tax Act[1] that seeks to ensure that the dividends tax is not avoided.

Most commonly, the dividends tax is levied on dividends paid by a company to individuals or trusts that are shareholders of that company. To the extent that the shareholder is a South African tax resident company, no dividends tax is levied on payments to such shareholders.[2] In other words, non-corporate shareholders (such as trusts or individuals) may want to structure their affairs in such a manner so as to avoid the dividends tax being levied, yet still have access to the cash and profit reserves contained in the company for their own use.

Getting access to these funds by way of a dividend declaration will give rise to such dividends being taxed (now) at 20%. An alternative scenario would be for the shareholder to rather borrow the cash from the company on interest free loan account. In this manner factually no dividend would be declared (and which would suffer dividends tax), no interest accrues to the company on the loan account created (and which would have been taxable in the company) and most importantly, the shareholder is able to access the cash of the company commercially. Moreover, since the shareholder is in a controlling position in relation to the company, it can ensure that the company will in future never call upon the loan to be repaid.

Treasury has for long been aware of the use of interest free loans to shareholders (or “connected persons”)[3] as a means first to avoid the erstwhile STC, and now the dividends tax. There exists anti-avoidance legislation; in place exactly to ensure that shareholders do not extract a company’s resources in the guise of something else (such as an interest free loan account) without incurring some tax cost as a result.

Section 64E(4) of the Income Tax Act provides that any loan provided by a company to a non-company tax resident that is:

  1. a connected person in relation to that company; or
  2. a connected person of the above person

“… will be deemed to have paid a dividend if that debt arises by virtue of any share held in that company by a person contemplated in subparagraph (i).” (own emphasis)

The amount of such a deemed dividend (that will be subject to dividends tax) is considered to be effectively equal to the amount of interest that would have been charged at prime less 2.5%, less so much of interest that has been actually charged on the loan account.

It is important to also appreciate that the interest free loan capital is not subject to tax, but which would also have amounted to a once-off tax only. By taxing the interest component not charged, the very real possibility exists for the deemed dividend to arise annually, and for as long as the loan remains in place on an interest free basis.

[1] 58 of 1962
[2] Section 64F(1)(a)
[3] Defined in section 1 of the Income Tax Act

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’ remuneration: VAT and PAYE

Two significant rulings by SARS, both relating to non-executive directors’ remuneration, were published by SARS during February 2017. The rulings, Binding General Rulings 40 and 41, concerned the VAT and PAYE treatment respectively to be afforded to remuneration paid to non-executive directors. The significance of rulings generally is that it creates a binding effect upon SARS to interpret and apply tax laws in accordance therewith. It therefore goes a long way in creating certainty for the public in how to approach certain matters and to be sure that their treatment accords with the SARS interpretation of the law too – in this case as relates the tax treatment of non-executive directors’ remuneration.

The rulings both start from the premise that the term “non-executive director” is not defined in the Income Tax or VAT Acts. However, the rulings borrow from the King III Report in determining that the role of a non-executive director would typically include:

  • providing objective judgment, independent of management of a company;
  • must not be involved in the management of the company; and
  • is independent of management on issues such as, amongst others, strategy, performance, resources, diversity, etc.

There is therefore a clear distinction from the active, more operations driven role that an executive director would take on.

As a result of the independent nature of their roles, non-executive directors are in terms of the rulings not considered to be “employees” for PAYE purposes. Therefore, amounts paid to them as remuneration will no longer be subject to PAYE being required to be withheld by the companies paying for these directors’ services. Moreover, the limitation on deductions of expenditure for income tax purposes that apply to “ordinary” employees will not apply to amounts received in consideration of services rendered by non-executive directors. The motivation for this determination is that non-executive directors are not employees in the sense that they are subject to the supervision and control of the company whom they serve, and the services are not required to be rendered at the premises of the company. Non-executive directors therefore carry on their roles as such independently of the companies by whom they are so engaged.

From a VAT perspective, and on the same basis as the above, such an independent trade conducted would however require non-executive directors to register for VAT going forward though, since they are conducting an enterprise separately and independently of the company paying for that services, and which services will therefore not amount to “employment”. The position is unlikely to affect the net financial effect of either the company paying for the services of the non-executive director or the director itself though: the director will increase its fees by 14% to account for the VAT effect, whereas the company (likely already VAT registered) will be able to claim the increase back as an input tax credit from SARS. From a compliance perspective though this is extremely burdensome, especially in the context where SARS is already extremely reluctant to register taxpayers for VAT.

Both rulings are applicable with effect from 1 June 2017. From a VAT perspective especially this is to be noted as VAT registrations would need to have been applied for and approved with effect from 1 June 2017 already. The VAT application process will have to be initiated therefore by implicated individuals as a matter of urgency, as this can take several weeks to complete.

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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Nwanda Internal News
(February 2017)

DAYS

Awesome Rewards:
Proffessor Mafela – for passing the SAICA APC Exam
Kavitha Bhawanideen – for passing the SAICA APC Exam
Francis Venter – cleaning of deep storage and taking care of M-files scanning
Chante-Liz Coetzer – overall improved performance

Farewell to staff member:
We bid farewell to Annelize van Zyl our Office Manager, we wish her success in her future endeavours.

It’s a girl:
Congratulations to Sikhanyile Noholoza on the birth of her baby girl on the 5th of February 2017.

Growing the Nwanda Partnership :
On 1 February 2017 Nwanda admitted Peter Steyn as a Partner and Christopher Botha as a Candidate Partner.  Peter joins us with his staff compliment of 3.

Welcome one and all to the Nwanda Team!

Welcome to our Nwanda additions:
Trainee accountants

Front: Gideon Manika  Left to right middle: Dean Elson, Jennifer Neill, Shene Miller, Ghilaine Kikoba, Shaista Ebrahim, Lebohang Lemaona, Miguel Jorge, Left to right back: Mohammed Moolla, Ernestus Botha, Talita,, Roux, Matthias Krafft, Amy Anderson.

Front: Gideon Manika
Left to right middle: Dean Elson, Jennifer Neill, Shene Miller, Ghilaine Kikoba, Shaista Ebrahim, Lebohang Lemaona, Miguel Jorge,
Left to right back: Mohammed Moolla, Ernestus Botha, Talita Roux, Matthias Krafft, Amy Anderson.

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Penalties on Underpayment of Provisional Tax

Under paragraph 20(1) of the Fourth Schedule to the Income Tax Act 58 of 1962, amended (“the Act”), if the actual taxable income of a provisional taxpayer, as finally determined under the Act, exceeds R1 000 000 and the estimate made in the return for the payment of provisional tax, that is the so-called second provisional tax payment, is less than 80% of the amount of the actual taxable income, the Commissioner is obliged to levy a penalty, which is regarded as a percentage based penalty imposed under chapter 15 of the Tax Administration Act 28 of 2011 (“TAA”).

The penalty, in the case of a company, amounts to 20% of the difference between the amount of normal tax calculated using the corporate tax rate of 28% in respect of the taxable income amounting to 80% of the actual taxable income and the amount of provisional tax in respect of that year of assessment  paid by the end of the year of assessment.

Paragraph 20(2) of the Fourth Schedule to the Act confers a discretion on the Commissioner to remit the penalty or a part thereof where he is satisfied that the estimate of taxable income was seriously calculated with due regard to the factors as having a bearing thereon and was not deliberately or negligently understated.

The Port Elizabeth Tax Court was recently required to adjudicate a matter relating to the imposition of a penalty on the underpayment of provisional tax in Case No. IT14027, as yet unreported, where judgment was delivered on 7 December 2016.

The Tax Court had to consider whether the company could lawfully amend its grounds of objection even though the matter was already on appeal ©iStock.com/ “Alert Judge
-by junial

ABC (Pty) Ltd was a provisional taxpayer which delivered its return for payment of provisional tax for the 2010 year of assessment on 30 June 2011. In its return of provisional tax it estimated the taxable income for the year of assessment and made payment in accordance with its estimate. Sometime later it appeared that the actual income received exceeded the estimate made by the company substantially. As a result the South African Revenue Service (“SARS”) imposed an underestimation penalty in terms of paragraph 20 of the Fourth Schedule to the Act.

The company lodged an objection which was rejected by SARS and resulted in an appeal which was decided in its favour by the Tax Board. SARS subsequently appealed the decision of the Tax Board to the Tax Court for a hearing de novo and subsequently filed a statement of grounds of assessment and opposing the appeal.

In reply, ABC (Pty) Ltd filed its statement of grounds of appeal according to the Tax Court rules. In its grounds of appeal the company abandoned all of the grounds raised in its original objection and in its notice of appeal and sought to rely only on the procedural ground raised for the first time by the chairperson of the Tax Board upon which he had found in favour of the company.

SARS subsequently filed a notice of exception arguing that the company could not rely on a new ground of objection not previously contained in its grounds of objection.

The company originally estimated its income for the 2011 year of assessment in an amount of R431 638,00 and made payment of provisional tax amounting to R64 905,54. Later, on 30 September 2011 the company made a further payment of R1 377 466,22. Subsequently, the company filed its income tax return reflecting a taxable income for the year of assessment amounting to R5 050 076,00.

By virtue of the large difference between the tax actually due per the final taxable income and the provisional tax paid, SARS imposed the underestimation penalty under the provisions of the Act. SARS considered the objection lodged by the company on the basis that the company did not seriously calculate its tax income as required.

The TAA had not yet come into force by the time that the company’s objection had been disallowed and its notice of appeal lodged. The Tax Board decided that the Commissioner was correct in rejecting the company’s objection and that the appeal should be dismissed on its merits.

However, the chairperson of the Tax Board mero motu raised a procedural issue under the TAA which had since come into force and decided in favour of the company. The chairperson of the Tax Board reached the view that the manner in which SARS had dealt with the imposition of the penalty was in conflict with chapter 15 of the TAA, especially sections 214 and 215 thereof.

The Tax Court had to consider whether the company could lawfully amend its grounds of objection even though the matter was already on appeal. Tax Court Rules do not provide for an amendment to the taxpayers’ grounds of objection and the Court therefor referred to the rules of the High Court.

The Tax Court considered the various provisions of the TAA and made the decision that SARS’s exception to the company’s application should be upheld and that the application for the amendment of the company’s grounds of objection should be dismissed. The Court therefore dismissed the company’s appeal and confirmed the penalty imposed on the understatement of provisional tax.

Based on the judgment it is concluded that taxpayers need to exercise extreme caution in calculating taxable income for purposes of provisional tax, failing which they will become liable to the 20% underpayment penalty.

Furthermore, when a taxpayer disputes the imposition of a penalty, or in fact any assessment, it is important that the grounds of objection are properly formulated as it is not possible to subsequently amend the grounds of objection.

Source:
Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, February 2017.

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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