SARS changes to employer statement of account

The South African Revenue Service (“SARS”) has recently made changes with regards to the management of payroll taxes in order for employers to more effectively manage their own accounts by way of a number of functions and tools.

SARS states that the aim of these changes is to allow employers to ensure that all their necessary payroll filings are correctly reflected, payments have been correctly allocated and that all charges to their accounts such as adjustments, interest and penalties have been correctly calculated and recorded.

The most recent changes include changes to the statement of account (“SOA”) which were introduced on 26 April 2019. These changes followed complaints by employers of errors on these accounts.

The purpose of the SOA is to reflect the balance and detailed transactions for a tax year with regards to Pay-As-You-Earn (“PAYE”), the Skills Development Levy, the Unemployment Insurance Fund and the Employer Tax Incentive (“ETI”) in order to allow for employers to complete their Employer Reconciliation Declaration bi-annually.

In order to make the SOA more clear and comprehensible, SARS made changes to the manner in which financial information is being displayed. In this regard, enhanced descriptions were included for liability and non-liability transactions. Also, all liability transactions are now grouped together and sorted in transaction date order. The exemption to this is any non-financial transactions with a date earlier than the first day of the period under consideration.

In order to identify payments and to better reconcile them with the employer’s bank statements, the SOA now also makes provision for receipt numbers for payments and journals.

Furthermore, ETI transactions (which have no impact on the PAYE account) are now grouped together and reflected at the bottom of the SOA.

In addition to the above, employers previously had to request SARS to make payment reallocations and corrections on their behalf. The monthly employer declaration (“EMP201”) and payment reference number (“PRN”) system was introduced to allow employers to amend their declarations and payments themselves. This tool also allows employers to identify and follow-up on incorrect or missing transactions using the consolidated employer SOA and query function as well as to correct unallocated payments.

Employers also have access to their financial accounts online to view and query transactions processed against their accounts in real-time. SARS also allows for a case management system where employers will be able to log queries, they are unable to resolve themselves and to monitor and track SARS’ progress with regards to the query logged.

With the annual employer reconciliations submission deadline now at 31 May 2019, employers are encouraged to use all these amended functions and tools to submit accurate information and to manage their payroll taxes more effectively in the future.

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 residency implications for South Africans living abroad

By Daniel Banes

Currently, a South African tax resident is exempt from paying tax in South Africa on any money earned as an employee overseas if you are out the country for 183 full days in a 12-month period (of which at least 60 of those days must be consecutive).However, a proposed amendment set to come into force March 1 2020 will affect certain South Africans who have moved or are working overseas.  The government has proposed amending the legislation to the effect that money earned up to R1m per tax year will be exempt; any amount earned overseas over the R1m will be subject to possible taxation in SA.If you are living or working overseas you should consider how this may affect your circumstances so as not to be caught out by this amendment.

Tax residency

Let’s start with tax residency.  The general rule is that anyone who considers SA their home is a South African tax resident. So, if you were born in SA and live in SA   you will be a South African tax resident.

However, if you leave SA with the intension of moving permanently to another country, chances are that you are no longer tax resident in SA.  This process is called breaking tax residency and is primarily determined by your state of mind.  The South African Revenue Service (Sars) has, however, provided indicators to assist in determining whether you are tax resident or not.  Some of these are as follows:

  1. An intention to ordinarily reside in SA (most important consideration);
  2. Your most fixed and settled place of residence;
  3. Where you stay most often and your habits;
  4. Your place of business and personal interests; and
  5. Employment and economic factors.

In other words, if you leave SA with the intention of moving permanently to another country and subsequently settle in that country, it is likely that you have broken tax residency with SA.

If you have broken tax residency with SA, you don’t need to worry about the amendment to the tax legislation.

It must be kept in mind that when you break your tax residency there is a deemed capital gains event (meaning that if you do not sell assets, you are still liable for capital gains tax) on some assets held.

Proving you have broken tax residency

It is now important to determine how you can prove to Sars that you have broken tax residency so that the proposed amendments do not affect you.

Whether you are a tax resident in SA primarily depends on your state of mind, which can be difficult to prove.  This is where Sars’ factors become important.

If you’re able to show Sars that your new home and economic and personal ties (among others) are in the new country, you should be able to prove you have broken tax residency.

You can also submit a tax return to Sars indicating you have broken residency – this is an option on the first page of your tax return.  In addition, there are documents signed between countries called

double taxation agreements (DTA).  These give taxing rights to the signatory countries to the document.  for example, SA has signed a DTA with the UK.  If you’re a resident of the UK in terms of the provisions in the DTA, you can’t be a tax resident in SA.

Formal/financial emigration

The concept of formal/financial emigration is separate to breaking tax residency.  it is an exchange control concept and is dealt wit by the South African Reserve Bank.

You may wish to formally emigrate, but don’t have to.  This involves an application to the bank and will result in all your South African funds being transferred into an ‘emigrants capital account’.  Only the bank that has opened the account can deal with the funds.

However, if you’ve left the country it is not necessary for you to formally emigrate.  It has no effect on your tax residency, although it can also be used as an indicator to Sars that you’ve broken tax residency.

There are a couple of instances where you must formally emigrate:

  1. If you have a retirement annuity in SA that you wish to liquidate (unless you’re already 55 in which case you don’t need to formally emigrate); and
  2. If you have more than R10m you wish to take out of SA.

Your citizenship is not affected by formal emigration and you get to keep your South African passport.

Effect on South African assets

Breaking tax residency has no effect on your assets (besides from the deemed capital gains event):  However, if you’re earning income from these assets you must declare it to Sars and may be subject to taxation depending on the amount earned and type of income.

When you formally emigrate all your SA assets will be transferred into an emigrant’s capital account with your bank.  For example, if you have cash in bank accounts, these accounts must be closed, and the money transferred to the emigrant’s capital account.

If you have a retirement annuity that is liquidated, the money must be paid into this account.  You must get approval from your bank when dealing with these assets once they are in the emigrant’s capital account.

You are still entitled to keep any immoveable property that you own in SA, but the title deed must probably be marked that the property is now owned by a non-resident. If this property is subsequently sold, the proceeds must be paid into the account.  On a final note, if you are a South African citizen working abroad temporarily and don’t break tax residency, any tax that is paid in the country where you are working should be set off against any tax that is owed in SA on this foreign income.

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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Depreciation vs wear & tear

Deterioration, obsolescence and wear and tear are among the reasons why assets decrease in value. By realising a deduction on depreciation for tax purposes, your company can recover the costs of certain moveable assets that are used in the production of income.

Generally, businesses won’t be able to make use of assets like heavy machinery or computer equipment, for example, for an indefinite period. As assets work together to generate an income for your business, over time these assets will have to be replaced with newer, more efficient ones. This article briefly looks at the basic concepts of depreciation for accounting purposes and wear and tear allowances for taxation purposes.

Depreciation – Accounting

Depreciation is essentially the decline in the value of an asset over time due to the wear and tear that occurs as a result of the normal use of that asset. For accounting purposes, a company’s assets should be depreciated on a systematic basis over the assets’ useful life. In addition, the depreciation method used should reflect the way in which assets’ economic benefits are utilised by the company and should also be reviewed regularly. The different methods of depreciation include: the straight-line method, reducing balance method as well as the production unit method.

For accounting purposes, depreciation is charged as an expense in a company’s income statement and is not deductible for tax.

Wear & Tear – Taxation

Wear and tear refers to the method in which the South African Revenue Services (SARS) allows companies to write off an asset for taxation purposes over a predetermined period. This wear and tear allowance permits companies to deduct, over a period of time, the amount that was paid for the movable goods that are used in the production of income. This deduction will result in a reduction of your company’s tax liability.

The period over which wear and tear can be claimed depends on the type of asset, as each asset will have a different write-off period. SARS has a prescribed schedule (Annexure A of Interpretation Note 47) for all assets, as well as predetermined rates at which companies can claim ‘depreciation’ for taxation purposes.

Any assets purchased for less than R7 000 may be deducted in full in the year in which the asset is purchased.

Recovering Wear & Tear Allowances

When an asset is sold, the wear and tear allowances claimed need to be recouped for that asset. The wear and tear claimed for the periods that the asset was in use is then added back to the taxpayer’s taxable income in the year in which the asset was sold.

Should you have any queries resulting from this article, please feel free to contact Leonard Burger at leonard@asl.co.za.

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 scams

Education and awareness around identity theft, phishing and other frauds have become part of life globally. If nothing else, scamsters are innovative and keep trying new avenues of defrauding businesses and individuals. In South Africa, this is no exception, and there has been a rise in the number of scams where persons pretend to be from the South African Revenue Service (SARS), to defraud honest taxpayers. This is a particularly useful method, since reactions to correspondence from revenue authorities are often quick and drives taxpayers into immediate action. Since June 2018, SARS has identified 15 new scams (in addition to a myriad of old scams still doing the rounds). Members of the public are randomly emailed with false “spoofed” emails made to look as if these emails were sent from SARS, but are actually fraudulent emails aimed at enticing unsuspecting taxpayers to part with personal information such as bank account details.Some of the more pertinent scams recently have been:

  • Payments required for “residential tax clearance certificates”. This is particularly relevant, with all the media reports around the so-called “expat tax” due to come into operation in March 2020;
  • Receiving a “tax invoice” from SARS with a link that should be clicked on;
  • Notifications of a refund, requiring taxpayers to complete bank account and credit card details;
  • Letters of demand with threats of court summonses; and
  • Requests for verification of assessments, with links to malware.

SARS provides the following guidelines when dealing with correspondence that purports to be from them:

  • Do not open or respond to emails from unknown sources;
  • Beware of emails that ask for personal, tax, banking and eFiling details (login credentials, passwords, pins, credit/debit card information, );
  • SARS will never request your banking details in any communication that you receive via post, email, or SMS. However, for telephonic engagement and authentication purposes, SARS will verify your information. Importantly, SARS will not send you any hyperlinks to other websites – even those of banks;
  • Beware of false SMSs;
  • SARS does not send *.htm or *.html attachments; and
  • SARS will never ask for your credit card details.

SARS has also made a facility available where scams or phishing can be reported. Taxpayers can either email phishing@sars.gov.za or call the Fraud and Anti-Corruption Hotline on 0800 00 2870.

It is advisable that taxpayers are always aware of the status of their tax affairs and are in constant contact with their tax consultants, to ensure that they are not caught unaware by any of the scams.

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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Valuation of preference shares

In income tax, the question of valuation of shares often causes a great deal of uncertainty, especially where shares are not traded on a recognised exchange. Although the Eighth Schedule to the Income Tax Act[1] in paragraph 31 gives some guidance on the market value of certain assets, the ‘catch-all’ method is the price that could have been obtained upon the sale of an asset between a willing buyer and a willing seller dealing at arm’s length in the open market.

The rules of capital gains tax determine that a person is deemed, on the date of their death, to dispose of all their assets (except for a limited number of exclusions) for an amount equal to the market value of those assets. Market value, and how it should be determined, is therefore a very important consideration.

Recently, the Supreme Court of Appeal in CSARS v The Executors of Estate Late Sidney Ellerine 2018 ZASCA 39 recently provided some more guidance on the valuation of preference shares in such a case, by considering the rights attached to those preference shares. The South African Revenue Service (SARS) argued that at the time of the deceased’s death, he was entitled to convert preference shares that he held in a company to ordinary shares and that the shares should be valued on that basis. This was a crucial consideration since it made the difference between the shares being valued at R563 million compared to its nominal value of R112 000.

After the Tax Court initially found that the deceased was not entitled to convert the preference shares to ordinary shares, the Supreme Court of Appeal considered certain amendments made to the company’s Memorandum of Incorporation (as it then was) as well as two special resolutions. Factually, based on these documents, the court found that the deceased was indeed entitled to convert the preference shares to ordinary shares on the date of his death. The shares, therefore, had to be valued at R563 million instead of R112 000.

There are two key lessons from this judgement. Firstly, the precedent that has been set that where a person has the right to convert preferences shares to ordinary shares, the preference shares should be valued on that basis.

Secondly, the true intention of parties should be reflected in the wording and construction of all documents. The legal team for the respondent in the Ellerine-case argued strongly that a purposive and contextual approach should be adopted in considering the Memorandum of Incorporation and special resolutions. The court was, however, not persuaded and indicated that while intention is important, the basic interpretation should be made with reference to what is recorded. Taxpayers are encouraged to seek professional advice prior to executing agreements to ensure that their true intention and the purpose for which they execute documents are clear from the wording used.

As can be seen from the Ellerine-case, failure to do so could be very costly.

  • [1] No 58 of 1962

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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Deductibility of interest for non-trading individuals

SARS Practice Note 31.2 (PN31.2) provides for a person to be able to deduct interest paid, even where that person is not a moneylender or doesn’t carry on any other trade, where that interest expense is incurred in the production of other interest earned to the extent that it does not exceed the interest income. Strictly, in terms of prevailing income tax legislation, this practice (which favours taxpayers) is not supported by the Income Tax Act, 58 of 1962.

Reliance on this practice by a taxpayer was recently considered in the Western Cape High Court.[1] Due to the unique structure of the taxpayer’s employment contract as a partner at a law firm, a portion of his profit share was withheld as an obligatory interest-bearing loan to the employer, to fund ongoing working capital requirements (‘director’s loan’). While periodic distributions of interest that accrued on the director’s loan was paid to him and treated as taxable income, he was not allowed to claim repayment of the capital for as long as he was in employment. At the same time, the taxpayer would incur interest on a bank loan used to purchase an immovable property (‘bank loan’).

The court had to consider whether there is a sufficiently close link between the interest incurred by the taxpayer on the bank loan, and the interest earned by him on the outstanding balance of the director’s loan. In other words, whether the bank interest can be said to have been incurred in the production of the interest income on the director’s loan.

The taxpayer contended that it did since he would have used the proceeds of the director’s loan to repay the bank loan had it not been for the strict repayment terms, and in the process reducing the capital and interest incurred on the bank loan. He considered the portion of the bank loan equal to the director’s loan as a loan payable on which an interest deduction should be allowed. This was supported by evidence of deposits into the bank loan from distributions of profit share which could also be matched.

The court found that even assuming the funds standing in credit of the director’s loan are ‘capital’ or ‘surplus’ funds as required by PN31.2, any distributions he receives thereon are entirely in the discretion of his employer. As a result, he was not solely reliant on the distributions to maintain the bank loan and the fact that he made deposits into the bank loan from profit distributions does not distract from this fact. To have access to the bank loan, he had to maintain it from sources other than distributions on the director’s loan. Accordingly, the purpose of the bank loan was to provide him with a facility, and not to maintain the director’s loan. It cannot be said that interest paid on the bank loan brought about interest earned on the director’s loan. He would have received interest on the director’s loan, irrespective of the existence of the bank loan. Accordingly, the court disallowed the taxpayer’s appeal for deduction of the interest incurred.

An important takeaway from the judgment is the distinction the court made between the two scenarios dealt with in PN31. Firstly, PN31.1 deals with a scenario where an interest expense was incurred in the carrying on of a trade, while PN31.2 deals with a scenario where a taxpayer does not carry on a trade. The requirements of the two paragraphs should be considered separately and not treated as a single principle. It is therefore important for taxpayers that want to claim interest deductions and rely on PN31 to consider both scenarios, especially if they are not in the business of lending money.

[1] L Taxpayer vs The Commissioner for the South African Revenue Service (Case A124/2017, on appeal from the Tax Court).

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 to intensify action against tax offenders

Despite the fact that SARS has upheld their philosophy of education, service, and thereafter enforcement, they have noticed an increase in taxpayers not submitting their tax returns by the stipulated deadlines, and not settling their outstanding debt with SARS. This is not limited to the current tax year but includes substantial non-compliance across previous tax years.

It is for this reason that from October 2017 SARS will intensify criminal proceedings against tax offenders. Failure to submit the return(s) within the said period could result in:

  • Administrative penalties being imposed on a monthly basis per outstanding return.
  • Criminal prosecution resulting in imprisonment or a fine for each day that such default continues.

Types of tax

SARS has reminded all taxpayers that, according to the Tax Administration Act No. 28 of 2011, it is a criminal offence not to submit a tax return for any of the tax types they are registered. These tax types are:

  • Personal Income Tax (PIT)
  • Corporate Income Tax (CIT)
  • Pay as You Earn (PAYE)
  • Value Added Tax (VAT)

It is also important to note that should any return result in a tax debt it must be paid before the relevant due date to avoid any interest for late payment and legal action. To avoid any penalties, interest, prosecutions as well as imprisonment, taxpayers are urged to rectify their compliance by submitting any outstanding returns as soon as possible. Please contact your tax advisor for assistance.

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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SARS now outsourcing Debt Collection

In an attempt to recover outstanding debt worth over R15-billion, the South African Revenue Service (SARS) has outsourced confidential taxpayer information from its debt book to selected service providers. (See notification letter). The outsourcing project, which was implemented on 1 June 2016, appointed the following service providers: CSS Credit Solutions, NDS Credit Management and Trifecta Capital.

The unpaid taxes include Pay As You Earn (PAYE) and Unemployment Insurance Fund (UIF) and Skills Development Levy (SDL) contributions which have remained outstanding for longer than four years by private companies and individuals.

We strongly urge you to contact our office for assistance should SARS or any of their appointed debt collectors contact you regarding an old debt.

Contact us here now

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Transactions required to be reported to SARS in terms of the Tax Administration Act

Certain transactions are required to be reported to the South African Revenue Service (‘SARS’) as and when entered into (section 37 of the Tax Administration Act, 28 of 2011 (‘the Admin Act’)).  These are referred to as ‘reportable arrangements’, and qualify as such when an ‘arrangement’ (defined as including any transaction, agreement, scheme or understanding) either meets one of the criteria set out in section 35(1)(a) to (e), or if specifically listed in a public notice issued by the Commissioner for SARS.  This article is concerned only with the former.

Failure to report a ‘reportable arrangement’ will result in a monthly penalty being levied against non-compliant taxpayers ranging from between R50,000 to R300,000 per month (section 212), for up to 12 months.  The purpose for requiring taxpayers to report certain transactions is obvious:  to allow SARS to monitor transactions on an ongoing basis which it considers to exhibit potential traits of tax avoidance.

Section 35(1) determines that arrangements which exhibit any one of the below criteria qualify as a reportable arrangement.  These are arrangements which:

(a) contain provisions in terms of which the calculation of interest, finance costs, fees or any other charges is wholly or partly dependent on the tax treatment of that arrangement;

(b) have any of the characteristics contemplated in section 80C(2)(b) of the Income Tax Act, 58 of 1962, or substantially similar characteristics (which include round trip financing, involving an accommodating or tax indifferent party in the arrangement or if the arrangement contains elements which offset or cancel each other);

(c) give rise to an amount that is or will be disclosed by any participant as:

  1. )  a deduction for purposes of the Income Tax Act but not as an expense for accounting purposes; or

(ii) revenue for accounting purposes, but not as gross income for purposes of the Income Tax Act;

(d) do not result in a reasonable expectation of an accounting pre-tax profit for any participant; or

(e) result in a reasonable expectation of an accounting pre-tax profit for any participant, but which is less than the value of the tax benefit to that participant if both are discounted to present value at the end of the first year of assessment when the tax benefit is created.

Irrespective of the above, even if an arrangement would qualify as a reportable arrangement in terms of the above, section 36 of the Admin Act lists various criteria which, if met, would render an arrangement an ‘excluded arrangement’ whereby such transactions need not be reported to SARS.  Moreover, in terms of the public notice issued by the Commissioner on 16 March 2015 in Government Gazette no. 38569 as Notice 212, a transaction would not be reportable in terms of the above criteria only if the tax benefit arising from the arrangement for all persons involved would not exceed R5 million.

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.

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