Fringe benefits and retirement funds

Binding Class Rulings (BCR) are issued in response to applications by a specific class of taxpayers (usually persons that will have the same tax consequences apply to them from a transaction) and clarifies how the Commissioner for SARS would interpret and apply the provisions of the tax laws relating to a specific proposed transaction.

BCR 068 determines the very technical consequences of transferring surplus retirement fund assets between funds and allocating assets from employer surplus accounts to retirement fund member accounts of members. Employers that are part of retirement funds should take note of the ruling and consult where necessary.

The ruling considers sections 1(1) (specific definitions in the “gross income” definition), 11F and paragraph 2(l) of the Seventh Schedule of the Income Tax Act (dealing with taxable fringe benefits).

The Parties to the ruling

  • The Applicants are resident companies who are participating employers to the Co-applicants.
  • Co-applicant 1 is a defined benefit pension fund.
  • Co-applicant 2 is a defined contribution pension fund.
  • Co-applicant 3 is a defined contribution provident fund.
  • The class members are all qualifying members of the co-applicants, former employees or dependents of deceased employees.

Transactions which the members of the class propose to enter into

Since the class members are entitled to, and the applicants are liable to fund their post-retirement medical aid benefits, the applicants, with agreement by the class, wish to eliminate this liability towards members by:

  • Allocating assets in the employer surplus account of co-applicant 1, to the retirement accounts of the class members of co-applicant 1.
  • Transferring a portion of the assets of the employer surplus account of 1 to those of co-applicants 2 and 3.
  • Allocating assets in the employer surplus account of co-applicants 2 and 3 to class member retirement accounts of these co-applicants.

Essentially, the applicants aimed to move surplus assets between the different funds without incurring tax costs, to the benefit of employees.

The Ruling

Contributions by the applicant to the co-applicant will constitute a fringe benefit and will be deducted by the class members in determining their taxable incomes. This would have been the case in any event and is not a contentious finding.

However, when the application transfer assets from the employer surplus accounts of co-applicant 1, to co-applicant 2 and 3, and lump sum allocations from the co-applicants to the member’s respective retirement accounts, no tax costs will arise, and specifically:

  • Not constitute a taxable fringe benefit for the class members.
  • Constitute an amount received by or accrued to class members subject to tax.
  • Be deductible by class members when determining taxable income.

Class members will still be taxed on payments to them by co-applicants which constitute gross income, income or taxable income, irrespective of whether these are payments as a result of regular contributions, or surplus amounts allocated to class members.

This ruling is a very pragmatic approach to the re-distribution of surplus assets within retirement funds.

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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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Managing your startup capital

Becoming an entrepreneur is not as easy as waking up with an idea and having money thrown at you to turn it into a reality. Most successful entrepreneurs share the same sentiments – it takes many rejections and disappointments, and plenty of restarts. There are two things this article will explore; how to get startup capital, and how to manage it.

  1. How to get the startup capital
    Your drive to become an entrepreneur should not be derived from wanting to have exactly what another entrepreneur has achieved. By virtue of your business idea being different, an opportunity to succeed already exists. Think carefully and seriously about your creative ideas to assess which ones present the most viable options. When you know what will work, approach investors.

    Investors are willing to consider investing startup capital to get your idea into the already competitive market and growing your customer base as quickly as possible. They want to see that their investment is going into the practical ways of making things happen.

  2. How to manage it
    Now that the capital for your business is available to you, your return on your idea’s marketing budget should now be approximated. Think realistically when it comes to overheads, advertising and personnel as these areas should not be where all your capital goes. The two important things that ensure that you appear more credible are the idea development and the launch thereof.
  • Ensure that you are able to track your expenditure so that your capital does not collapse.
  • Let your startup capital be for business purposes and don’t let personal problems dip into it
  • Learn to use a cloud accounting system to avoid possible accounting errors, and to balance your books

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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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Capital gains tax on death

Section 9HA of the Income Tax Act deals with deemed disposals by a deceased person. This section of the Act often causes some confusion, especially where there are heirs or legatees other than the surviving spouse. In terms of the provision, a deceased person is treated as having disposed of his or her assets at the date of death, for an amount received or accrued equal to the market value of those assets as at the date of death.

This deeming provision does not apply to the following circumstances:

  • Assets of, or for the benefit of the deceased’s surviving spouse.
  • An interest in a resident pension, pension preservation, provident, provident preservation or retirement annuity fund; or a fund, arrangement or instrument outside of South Africa, which provides similar benefits to that in South Africa.
  • In respect of some long-term insurance policies of the deceased.

The position is, however, different if the surviving spouse of the deceased acquires the assets. In this instance, the deceased is deemed to have disposed of the assets at base cost on the date of the deceased’s death. The surviving spouse essentially steps into the deceased’s position.

In the situation where assets are acquired by heirs or legatee’s, assets acquired are treated as though they were disposed of on the day immediately before the deceased’s death, at the market value of those assets. In this instance, any capital gains are to be included in the deceased’s final tax return covering taxes up to date of death.

The consequence is that, if an heir or legatee acquires assets in this manner, the base cost for them is the market value of the assets on the date of death of the deceased.

The practicalities of death are that there are essentially three different taxpayers involved:

  • The deceased person is to file a return covering taxes up until the date of death.
  • Thereafter, the deceased estate is regarded as a “person” for purposes of tax and is required to file a tax return for income earned after death, for each year that the estate is active.
  • Then finally, any heir or legatee is the ultimate beneficial owner of the assets and acquires the assets, and these then form part of such heir or legatee’s estate from the date of distribution to said person.

Executors of estates should, therefore, exercise caution when dealing with the capital gains tax consequences of a person’s death, as the type of heir or legatee could determine the treatment.

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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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What is relevant in a record of review?

In a judgment delivered on 17 February 2020, the Gauteng High Court dealt with a matter regarding a “record of review”, and its relevance relating to a review application brought by the Applicant in the matter, Medtronic International (“Medtronic”), on the refusal by the South African Revenue Service’s (“SARS”) refusal to reduce certain interests and penalties imposed on its Value-Added Tax (“VAT”) statement of account.

Medtronic was the victim of large-scale fraud to the value of approximately R460 million and as a result, fell behind with its tax obligations (the payment of VAT in particular). To correct the situation, it approached SARS through a Voluntary Disclosure Programme (“VDP”) application and entered into an agreement with SARS. Generally, the VDP programme does not allow for the reduction in interest due to non-payment of taxes. Medtronic, therefore, applied for the remission of interest in terms of section 39 of the Value-Added Tax Act, No 89 of 1991 (“the VAT Act”). SARS refused this application on the basis that the VDP agreement entered into between the parties was already in effect and, presumably, did not deal with interest.

Medtronic proceeded with review proceedings to overturn that decision, based on various points of law (including the principle of legality). Consequent to the launching of the review application, SARS delivered the record of proceedings (as it is required to do) to enable Medtronic to formulate its review arguments. After considering the record, Medtronic concluded that it does not comply with the requirements of a “record of review”. This was based upon the fact that various documents, such as the main application, internal memoranda, directives, policy documents, records of deliberations, and minutes of meetings, on which SARS based its decision, were not included. SARS claimed legal professional privilege on various documents relating to advice from legal advisors and claimed it was confidential information. Medtronic proceeded with a further legal notice, requiring SARS to dispatch the necessary documents. SARS failed to respond to this notice, as it contended it has complied with the necessary rules and that there was no further need for compliance.

The question arising from this dispute is: What is relevant in the “record of review”?

The court held that where a party requires evidence as to the interpretation of statutory provisions for those responsible for administering the provision, the courts may invoke the so-called Bosch-principle to tip the scales in the favour of those responsible for the administration of the legislation. The principle entails that evidence of a prior and consistent interpretation of a statutory provision by those responsible for the administration of legislation is admissible. In this instance, SARS had decided not to invoke this principle. The court considered the additional records requested by Medtronic and it sided with SARS in that the Bosch-principle was not applicable. Furthermore, the documentation sought would not further the interpretation of the statutory provision on which Medtronic intends to rely in a manner opposed to that which SARS has done. The court considered the documents that SARS had not provided as part of the “record of review” to be irrelevant. Ultimately, the court’s premise was that relevance is not dependent upon the pleaded issues in the initial review application. Relevance remains to be determined by the decision sought to be reviewed.

The take-away from the judgment is that an applicant will not always have full access to all SARS’s internal records as part of a review application. It is, therefore, important to ensure that when review proceedings are lodged, applicants appreciate what constitutes a proper “record of review”.

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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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SARS eases burden on taxpayers, but there’s a catch

The tax season is swiftly approaching. For many people, it’s a time of the year that they dread. When it comes down to it, tax can become complicated mess that involves a lot of maths and calculations that just doesn’t come naturally to most. For those of us who don’t have PhDs in accounting or mathematics, crunching the numbers and factoring in a variety of different income sources can be tough.

In 2020, the tax season looks quite a bit different from previous years where taxpayers could start filing electronically in July. One of the main reasons for the delayed tax season is the emergence of COVID-19 and the desire to keep as many people as possible from having to submit a tax-return in person, which means that SARS has taken measures to increase electronic means of filing tax-returns. This year, the tax filing season starts on the 1st of September and ends on the 31st of October (for those filing manually in-branch) or the 16th of November (for those using e-filing).

Because of the often-complicated nature of tax, there are a few measures that SARS takes to ease the burden on tax-payers, although some of these measures are not necessarily accurate or act in the best interest of the taxpayer.

This year, for instance, SARS is sending out a large number of auto-assessments, where they assess your tax-data for you and give you the simple option of accepting their assessment or going ahead and filing your tax-return as usual. Notifications of auto-assessments will be sent via SMS, and individuals can then use eFiling or SARS MobiApp to view, edit, or accept the proposed assessment.

For these auto-assessments, SARS only base their evaluation on the data that they have received. This means that if there are outstanding tax certificates or third-party data related to your taxable income, you need to make sure to get all your documents in order as incorrectly reported or undeclared income could make you liable to penalties and interest on outstanding tax amounts. If this is the case you will need to submit your tax-return as per usual.

Conversely, if the assessment does not take into account outstanding documents or other factors that preclude some of your income from being taxable, you should not accept the auto-assessment as you will be losing out. The bottom line here is that before you accept SARS’s auto-assessment you need to make sure the assessment reflects any and all of the aspects that have an impact on your taxable income.

Another measure comes in the form of Pay-As-You-Earn (PAYE), which is the monthly amount that your employer pays as a tax deduction on your behalf, based on your income-tax bracket. It’s nice because it means that you as an individual are covered for the most common tax that comes from earning a salary. The not-so-nice thing about PAYE is that it is a crude calculation and does not factor in the parts of your income that are not taxable, or the different parts of your income that are subject to different tax-levels.

For this reason, some young employed people, earning from only one stream of monthly income are exempt from submitting a tax return, but are losing out in actuality. Most of the time this option will not work in their best interest as they will be freely giving tax on non-taxable income to SARS.

For other taxpaying individuals, they will need to take into account a variety of income streams (including taxable interest, rental income, capital gains, medical aid schemes, retirement annuities, allowances, tax-deductible donations, to name but a few). If you are subject to many of these tax-variables, doing your own tax-return becomes a hassle.

While you could go ahead and piece together the puzzle of your annual individual tax-return on your own, it is advisable to make use of a registered tax practitioner. A tax practitioner will be able to do the complex calculations on your behalf so that you come out of the tax season with your sanity intact. This means you’ll likely have more money in your pocket than if you had blindly accepted an auto-assessment or neglected certain aspects of your tax-calculations.

Reference

https://www.sars.gov.za/TaxTypes/PIT/Tax-Season/Pages/default.aspx

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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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Deemed Disposals and Tax Residency

Section 9H of the Income Tax Act deals with matters relating to the cessation of residency in South Africa.

This section essentially states that where a person that is a resident ceases to be a resident during any year of assessment, that person must be treated as having disposed of his assets on the date immediately prior to ceasing his residency, and re-acquiring the same assets on a date immediately thereafter. This is referred to as a “deemed disposal”. Similarly, the year of assessment will be deemed to have ended immediately prior to the cessation and to have started on the next day.

Such a “deemed disposal” does not relate to the immovable property that such a person may hold in South Africa.

As a result of his ceasing to be a South African tax resident (an event simply declared by ticking a box on the annual income tax return when submitted), a so-called “deemed disposal” (also sometimes referred to as an “exit charge”) will be activated in terms whereof all the individual’s assets will be deemed to have been disposed of, at market value, on the day before he ceased to be a South African tax resident.

This event, therefore, potentially gives rise to capital gains tax incurred on the deemed disposal. Excluded from this regime, as stated above, is South African immovable property, cash and (although not explicitly stated, though included on a very technical basis) accumulated retirement-related funds. Apart from these assets, all remaining South African and other worldwide assets are included in the “deemed disposal” regime.

Before a taxpayer decides on cessation of tax residency, an investigation should be done into possible tax treaty relief the individual may qualify for. SARS has stated that “an individual who is deemed to be exclusively a resident of another country for purposes of a tax treaty is excluded from the definition of “resident”. It follows that while an individual may qualify as a resident under the ordinarily resident or physical presence tests, that individual will not be regarded as a resident for South African tax purposes if that person is a resident of another country when applying for a tax treaty.”

Based on this, it is clear that section 9H of the Income Tax Act immediately becomes applicable to a taxpayer in the case of financial emigration or the cessation of tax residency, for whatever reason, and may increase tax liability in the current year of assessment in which the cessation of residency occurs. One must, however, always remember the exemptions described above, and in the event that emigration and/or ceasing to be a tax resident is considered, pre-emigration planning is of utmost importance to ensure that a smooth and fluid transition plan is formulated.

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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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Cryptocurrencies: The new generation’s cash

1.1 Background to Bitcoin

Bitcoin, Ether and Litecoin. These are some of the most prominent cryptocurrencies on the market today. Bitcoin is by far the best-known cryptocurrency due to the substantial increase in the price that was experienced in the past couple of years.

Bitcoin is a cryptocurrency – a digital asset designed to work as a medium of exchange that uses cryptography to control its creation and management, rather than relying on central authorities. Bitcoin was developed by an anonymous creator – Satoshi Nakamoto – to enable society to operate with a digital cash system, without the need for third-party intermediaries which are traditionally required for digital monetary transfers.

Should you wish to read the original paper used to introduce bitcoin to the word, please follow this link:  https://bitcoin.org/bitcoin.pdf.

1.2 Tax consequences of cryptocurrencies

For the most part, South Africans have only been able to enter the crypto market locally for a short while, which has drawn the attention of the South African Revenue Service (SARS) to cryptocurrencies.

SARS released a statement on the 6th of April 2018, declaring its stance regarding the taxation of cryptocurrencies. The following is an extract from the statement:

The South African Revenue Service (SARS) will continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income.”

The statement further indicates that for purposes of the Income Tax Act, SARS does not deem cryptocurrencies to be a currency (due to the fact that wide adoption has not been reached in South Africa and crypto can’t be used on a daily basis to transact), but rather defines cryptocurrencies as assets of an intangible nature.

The definition has the effect that cryptocurrencies will be treated as any other investment for tax purposes. The onus lies on the taxpayer to declare all cryptocurrency-related taxable income in the tax year which the taxpayer received or accrued.

Should a taxpayer thus trade in bitcoin, the trades will be deemed to be income in nature and the profit and loss on the trades should be included in the taxpayer’s taxable income. However, if the taxpayer holds the bitcoin as a long-term investment (the same way some investors hold a share portfolio for long-term investing), the income derived from the disposal of the bitcoin will be deemed to be capital in nature, resulting in capital gains tax needing to be declared on the disposal.

1.3 Conclusion

Whether you are for or against cryptocurrencies, it is evident that cryptocurrencies have formed a part of the modern era and will likely remain relevant. This new form of currency/investment has caused quite a stir at SARS and taxpayers are advised to familiarise themselves with the tax treatment of these currencies to prevent any unexpected tax consequences.

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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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How technology is influencing the financial world

Accounting has moved from pen and paper to the cloud, monthly payments can be done through online banking apps, and big purchases like houses and other property can be completed using cryptocurrency. For a business to be successful, it is important that is keeps up with the tech and digital world, which has shown financial and time efficiency. The added advantage is that bulky computers, heavy stacks of coffee-stained documents and long queues are a thing of the past.
  • Clouds now manage your information

Personal information, including security, is no longer stored on the ground where everyone else would have been able to access it. As businesses have transferred everything to the cloud, IT systems have evolved accordingly to manage information and keep abreast of current trends.

There is always opportunity to make the cloud system faster, to become more innovative and to add features that enable efficiency in a competitive marketplace. Information is readily available and up-to-date, and this improves financial decision-making speed.

  • You can be everywhere by being right where you are

Tech efficiency has evolved so much just by providing a solution to what people don’t have time to do. Business owners no longer have the time to rush out of the office to make it to the bank on time, and as such, tech has provided apps for services that were time-sensitive.

With this comes safety. Deposits of large sums can now be cashless, through streamlined payments. Other advantages of conducting online payments are integrated billing and mobile payments, right from where you are.

  • Coffee won’t mess on your files

The need to print documents has decreased significantly due to the ease of storing them on internal drives and other tech software. Tax submissions are also catered for electronically because they can be calculated and completed by cloud accounting systems and submitted online. You can also make quicker payments through faster online invoicing.

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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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Transferring assets from persons to companies

Many business transactions are concluded in terms of section 42 of the Income Tax Act. This section essentially allows a transfer of an asset by a person to a company, in exchange for equity shares in that company, allowing for a tax neutral transaction.

The South African Revenue Service has recently issued Binding Private Ruling 339, relating to a transaction in which listed shares are transferred to a collective investment scheme (CIS) in exchange for participatory interests in a collective investment scheme. The parties to the transaction are a resident discretionary investment family trust (herein referred to as the Applicant) and a resident CIS as defined in the Collective Investment Schemes Control Act (herein referred to as the Fund).

The facts

The Applicant holds assets which comprise fixed properties and listed shares (amongst other things) that are held as long term investments. In this instance, the current market value of the shares exceeds the base cost. Some shares have been held by the Applicant for more than three years, and some for less than three years. The settlor (also a trustee of the Applicant) of the trust has been managing the investments of the trust, while the administration and stockbroking have been attended to by a separate wealth management company. It has been decided by the trustees to transfer the share portfolio to a CIS to be professionally managed and administered. For this to happen, the Applicant will enter into an agreement to transfer shares to the CIS fund in exchange for a participatory interest in this fund.

Ruling

SARS has confirmed that the transaction in this instance would qualify as an asset-for-share transaction as per the definition in Section 42(1) of the Income Tax Act. It was further confirmed that:

  • Shares held for longer than three years would be regarded as capital assets, and that upon transfer, the participatory interests received in exchange for the shares would be deemed to have been acquired on the dates that the listed shares were acquired;
  • There would be no capital gains tax consequences from the disposal of the listed shares as the Applicant would be deemed to have disposed of the shares for proceeds equal to the base cost, and similarly, to have acquired the participatory interests in the CIS on the dates that the initial shares were acquired, for the same expenditure incurred that is allowable;
  • There would be an exemption on Share Transfer Tax for the proposed transaction.

Observation

If one ignores the potential application of the general anti-avoidance rules which apply to all arrangements, it is unclear why the participants to this arrangement approached SARS for a ruling, since the technical analysis is rather straightforward.

There has recently been an increase in such straightforward rulings issued by SARS. In general (and not suggesting that the parties in this ruling did so) one gets the sense that parties approach SARS for a ruling to avoid any attack on a transaction. SARS is however well within its rights to attack a transaction on anti-avoidance, despite a ruling having been obtained. Parties should, therefore, guard against applying for ruling on seemingly straightforward technical grounds, to avoid any attack on anti-avoidance. Such a strategy may end up being unsuccessful.

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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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Transport services to employees: Binding General Ruling 50

In terms of the Tax Administration Act, the South African Revenue Service (“SARS”) can issue Binding General Rulings (“BGR”) on matters of general interest or importance and clarifies the Commissioner’s application or interpretation of the tax law relating to these matters.

BGR 50 provides clarity on the so-called “no-value” provision in respect of the rendering of transport services by an employer to its employees.

Background

Employers may often provide employees with transport services from their homes to the place of employment. Although it typically applies where places of work are remote, such as in the farming or mining sectors, the provision of such services has also become prevalent in urban areas where traffic congestion takes up significant employee hours. In terms of the Seventh Schedule to the Income Tax Act, which deals with fringe benefits, these transport services are taxable as a fringe benefit in the hands of employees. The benefit may, however, attract no value where certain conditions are met, which effectively results in no tax consequences for the employee. Confusion has often arisen on the application of the “no-value” provision, especially where the transport is outsourced to a third party.

Paragraph 2(e) of the Seventh Schedule provides that a taxable benefit is deemed to have been granted by an employer to an employee where the transport service, at the expense of the employer, has been rendered to the employee for private or domestic purposes.

Paragraph 10(2)(b), in turn, provides that such a taxable benefit will attract no value if transport services are rendered by the employer to its employees in general for their conveyance between work and home. The focus of this section is that the “no-value” provision applies where the employer renders the transport service and does not contract it to another party. This is the essence of the distinction for the BGR.

Ruling

Where the transport is not provided directly by the employer (and is outsourced to a specific transport service provider), the employer must make the conditions of the provision of the transport services clear. Transport services:

  • Should be exclusively offered to employees based on predetermined routes;
  • Cannot be requested on an ad-hoc basis by employees; and
  • The contract for the service is between the employer and the transport provider, and no employee is a party to the contract.

The provision and access to general public transport will not be regarded as a transport service provided by the employer and the “no-value” provision will not apply in these circumstances.

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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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