The CIPC to intensify compliance enforcement from January

The Companies and Intellectual Property Commission (CIPC) has announced new requirements for companies when completing their Annual Returns.

From 1 January 2020 it will be mandatory for the following companies to complete a compliance questionnaire when submitting their Annual Return:

  • Incorporated – Inc (21)
  • Proprietary Limited -(Pty) Ltd (07)
  • Limited – Ltd (06)
  • State Owned Company – SOC (30)
  • Non-Profit Company – NPC (08)
  1. The Rationale for the questionnaire

The CIPC will use the questionnaire to assess areas of non-compliance within the Companies Act (“the Act”) and will take action where it sees the need to address any weaknesses.

It also serves to ensure that directors and officers of companies know and understand the mandatory compliance aspects of the Act.

If you do not complete the questionnaire, then you will not be able to file the Annual Returns.

  1. What is in the questionnaire?

You are asked to state whether you comply with a list of important areas of the Companies Act.

The main areas covered are:

  • Did the company meet solvency and liquidity requirements?
  • Does your MOI and shareholders agreement or changes thereto comply with the Act?
  • Have you compiled Annual Financial Statements in line with the Acts requirements?
  • Do you handle financial assistance to directors correctly?
  • Is your shareholder register compliant?
  • Do directors run the company along the stipulations set out in the Act?
  • Do you have a company secretary?

It is an offence to make false declarations to the CIPC.

These answers need to be true and accurate. It is critical that the person completing the questionnaire understands the Act and the requirements of the relevant sections of the Act and applies their mind to the answers provided.

  1. Why the compliance checklist

To ensure compliance of the mandatory requirements of the Companies Act such as described    in Section 15 – requiring every company to have an MOI.

Serves as an educational tool for directors and company secretaries, in guiding them with regards to their responsibility in terms of the Companies Act.

CIPC will utilized the Checklist to monitor and regulate proper compliance with the Companies    Act and if trends of non-compliance appear, to act accordingly.

4. When to submit your Annual Return

Companies are required to submit their Annual Return in the thirty (30) business days after the   anniversary of their date of incorporation – i.e. if the company was incorporated on 10 June then you have thirty business days from 11 June to complete the return.

  1. If you fail to submit an Annual Return, the CIPC will take this to mean your company is no longer active and will begin company deregistration proceedings.

If Nwanda attends to your company’s annual returns, there is no need to be concerned as we will deal with the new requirements on your behalf.

If you are not a client and would like Nwanda to handle these requirements for your company,    please contact Samantha@nwanda.co.za

 

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Fixed and reimbursive travel allowances

When determining the best remuneration package for travelling employees, South African employers and employees are continuously considering the benefits between a travel allowance, a reimbursive travel allowance or both. For this purpose, the employees’ tax (“PAYE’’) and income tax consequences of these two allowances are set out in more detail below.
 
A travel allowance is an allowance granted by the employer to the employee for the use of his or her private motor vehicle for the employer’s business purposes. This includes any fixed travel allowances, petrol, garage and maintenance cards.
 
A reimbursive travel allowance is any allowance which is based on the actual distance travelled for business purposes and is normally paid by the employer to the employee by multiplying the actual business kilometres travelled by a fixed rate per kilometre.
 
For PAYE purposes, 80% of the fixed travel allowance must be included in the employee’s remuneration. This percentage is reduced to 20% if the employer is satisfied that at least 80% of the use of the motor vehicle for the tax year will be for business purposes. Employees must keep a record of the actual distance travelled during the year for business purposes by way of a logbook. The full amount of the allowance is disclosed in the IRP5 under code 3701.
 
In respect of the reimbursive travel allowance, no PAYE is payable on an allowance paid by an employer to an employee up to the rate of 361 cents per kilometre, regardless of the value of the vehicle. The reimbursement does also not have to be substantiated by a logbook. But is only available to an employee if no other form of an allowance or reimbursement (other than for parking or toll fees) is received from the employer in respect of the vehicle. Any excess reimbursed portion (exceeding 361 cents per kilometre) is, however, subject to PAYE just like a fixed travel allowance. Disclosure of this allowance is under codes 3702, 3722 and 3703 on the IRP5.
 
For income tax purposes, the full (100%) of the fixed travel allowance, as well as the taxable reimbursive travel allowance, will be added together on assessment.
 
The employee will, however, be allowed to claim actual business travel expenses against the travel allowance (subject to certain limits) and the portion exceeding the claim will be taxable on assessment.
 
Where no actual costs are claimed, the South African Revenue Service provides a table which sets out fuel costs (per kilometre), maintenance costs (per kilometre) and a fixed cost which may be claimed against a travel allowance depending on the value of the vehicle. However, no fuel cost or maintenance cost may be claimed in instances where the employee has not borne the full fuel or maintenance cost.
 
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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Buying out shareholders

We are often approached by clients to advise on the most tax efficient manner in which a shareholder can sell an investment in a private company. Typically, the parties involve a majority shareholder of a company that is interested in buying out the minority shareholders in the company and which will ensure that that majority shareholder becomes the single remaining shareholder of that company.

In essence, two options are available through which a shareholder may dispose of a share in a company to achieve the above goal: it could either sell its shares to the purchasing shareholder, or it could sell the shares owned back to the company (i.e. a so-called “share buyback”). These two different options have varying tax consequences, and taxpayers should take care that these (often material) transactions are structured in the most tax appropriate manner possible.

Where a share is sold to another shareholder, the selling shareholder will simply pay a capital gains tax related cost. For companies, such capital gains tax related cost will effectively be 22.4% of the gains realised, whereas the rate for trusts is 36% (if gains are not distributed to beneficiaries), or up to 18% if the seller is an individual.

Where shares are however sold back to the company whose shares are being traded, that share buyback constitutes a dividend for tax purposes (to the extent that contributed tax capital is not used to fund that repurchase). Capital gains tax is therefore no longer relevant, but rather the dividends tax. Dividends would typically attract dividends tax (levied at 20%), rather than capital gains taxes.

It may therefore be beneficial for an existing shareholder (that is itself a company) to opt for its shares to be sold back to the company whose shares are held (and which shares are therefore effectively cancelled), rather than to sell these to the remaining shareholders and pay capital gains tax. This is because if the shares are sold to the remaining shareholders, a 22.4% capital gains tax related cost arises. However, where the shares are bought back, the “dividend” received by the company will be exempt from dividends tax and therefore no dividends tax should arise, since SA resident companies are exempt from the dividends tax altogether. A company selling its shares back to the entity in which it held the shares may therefore dispose of its investment without paying any tax whatsoever: no capital gains are realised since the shareholder receives a “dividend” for tax purposes, and the dividend itself is also exempt from dividends tax.

Share buybacks have become a hot topic recently and National Treasury has now moved to introduce certain specific anti-avoidance measures and reporting requirements that apply in certain circumstances. Still, there are perfectly legitimate ways in which to structure many corporate restructures where a buyout of shareholders takes place, and taxpayers will be well-advised to seek professional advice to ensure that such transactions are structured in as tax effective manner as possible.

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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Changes to income tax returns for companies

The South African Revenue Service (“SARS”) implemented several changes to the annual income tax returns for companies (the ITR14) on 26 February 2018 as part of SARS’ ongoing efforts to promote efficiency and compliance.

Two new schedules were added to the ITR14. Firstly, companies that wish to claim the learnership allowance in terms of section 12H of the Income Tax Act[1] will now need to disclose details of its registered learnerships in a separate schedule. In terms of this schedule, separate disclosure is required for learners with a disability and learners without a disability for both NQF levels 1 to 6 and NQF levels 7 to 10. Also, the number of learners and the allowance amount for each of these fields must be completed.

The second schedule relates to controlled foreign companies (“CFCs”). In terms of section 72A of the Income Tax Act, resident companies that hold at least 10 percent of the participation rights in any CFC (otherwise than indirectly through a company which is a resident), must submit a return to SARS. The “old” IT10B Adobe PDF schedule has been replaced with a simplified MS Excel IT10B schedule, which enables companies to declare all CFC information in one consolidated schedule that can be uploaded to eFiling as a supporting document, regardless of the number of interests held in CFCs. The new IT10B schedule must be used and uploaded on eFiling for all ITR14s submitted from 1 June 2018 onwards. This is to accommodate taxpayers that already completed CFC information based on the old format.

Additional disclosure requirements were also introduced for groups of companies that prepare consolidated financial statements. In future, companies with subsidiaries are required to submit a complete group structure together with the ITR14. New questions with regards to the country-by-country reporting regulations have also been added.  Companies that are subject to these regulations will have to specify the tax jurisdiction of the reporting entity for the multinational entity group as well as the name of the reporting entity. A number of additional line items have furthermore been added to the tax computation portion of the ITR14 to take other legislative amendments into account.

An example of this new ITR14 is available on SARS’ website for further consideration. Tax compliance officers of companies should carefully consider these new requirements in order to ensure that the relevant ITR14 is completed correctly and that all the required supporting documentation is submitted together with the ITR14. Companies that have already created new tax returns on eFiling but which have not yet been submitted should furthermore consider to what extent these changes will affect such returns.

[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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Salary sacrifice schemes – Latest judgment by supreme court of appeal

Salary sacrifice schemes are popular in practice.  Typically, they involve employers paying a decreased salary to their employees, with an added fringe benefit to make up for the lost ‘cost to company’ sacrificed by the employee to obtain the benefit.  For example, an employee may prefer to enter into a salary sacrifice with his/her employer in exchange for being allowed to use an employer provided motor vehicle or accommodation.

From both the employer and employee’s perspective, the income tax and PAYE consequences linked thereto are very often unchanged.  The decreased salary paid by the employer is deductible for income tax purposes as well as such expenditure incurred to provide the benefit to the employee, whilst the employee is subject to income tax on both the decreased cash amount received as a salary as well as the fringe benefit provided by the employer.  The employer is also liable to withhold PAYE as calculated on the total remuneration paid to the employee (which would include both the decreased salary amount as well as the fringe benefit provided).  (See the Seventh Schedule to the Income Tax Act, 58 of 1962.)

The salary sacrifice scheme of Anglo Platinum Management Services (Pty) Ltd recently came under scrutiny.  After having lost in the Tax Court, Anglo Platinum appealed to the Supreme Court of Appeal (Anglo Platinum Management Services (Pty) Ltd v CSARS [2015] ZASCA 180 (30/11/2015)).  In essence, the appeal involved a salary sacrifice scheme implemented by Anglo Platinum whereby it would purchase motor vehicles – selected by its employees – for use by its employees, in exchange for the employees agreeing to a salary sacrifice equal to the value of the benefit.  The vehicles would remain the property of Anglo Platinum until enough has been sacrificed by the respective employees to equate to the purchase amount of the vehicles plus interest calculated thereon.

During this period, Anglo Platinum withheld PAYE on both the salaries paid to its employees, as well as the value of the fringe benefit derived by the employees in using Anglo Platinum’s motor vehicles.  This is hardly contentious, and SARS did not dispute this treatment.  What was in dispute however was whether there really was a salary sacrifice, and whether PAYE should not also have been withheld on the sacrificed amount (and the employees therefore taxed on this amount too).  SARS argued that the scheme, although valid, was incorrectly implemented.  In essence, so the argument went, the employees were still receiving their full salaries, and amounts withheld from their salaries were in essence payments made to the employer to facilitate funding for the acquisition of the vehicles.  SARS cited two main indications in support of this, being that the employees were ostensibly responsible for insurance payments on the vehicles, and that notional accounts with payments, interest and related vehicle expenses were kept:  employees would be responsible to pay any shortfall amounts on these accounts, and similarly be entitled to access any credits available on excess amounts withheld.

The Supreme Court of Appeal upheld Anglo Platinum’s appeal, largely based on the evidence of Anglo Platinum’s Mr Broodryk who testified on behalf of the taxpayer and who devised and implemented the scheme.  It is clear that the court placed great emphasis on the implementation of the scheme to objectively consider whether the scheme in implementation reflected a true salary sacrifice by employees.

The legal matters in the case are not contentious.  At issue is the implementation which is what so often goes awry where tax related advice is concerned.  Our clients should take note of this:  it is not good enough to have a positive tax opinion as regards a proposed structure or transaction.  It is necessary, if not essential, to involve your tax experts in implementation too, be it in salary sacrifice matter, or any other transaction.  Had Anglo Platinum not heeded this principle, the judgment by the Supreme Court of Appeal may very well have gone in SARS’ favour.

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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Allowances and fringe benefits: Part 2

In the previous newsletter we discussed the difference between a travel allowance and the right of use of a motor vehicle and attempted to illustrate the pros and cons of each.  We then found that each case should be evaluated separately since there are various factors that need to be considered to obtain the best possible tax benefit. In this newsletter we will look at subsistence and other allowances that an employee may receive and also consider the tax benefits and drawbacks applicable to each.

Subsistence allowance

A subsistence allowance is normally paid to an employee when the employee undertakes a business trip and has to incur certain expenses, e.g. for accommodation, transport, meals or other incidentals, and the employer wishes to reimburse the employee.

The question arises whether the employee is taxed on the amounts paid/reimbursed to him/her, even if the expenses were incurred solely in the execution of the employee’s duties.

The short answer, in most cases, is yes. However, the South African Revenue Service (SARS) permits certain deductions and exemptions, which provide relief to the employee.  Therefore it is important that every employee is aware of the deductions and exemptions available to him/her.

Section 8(1)(a)(i) of the Income Tax Act No 58, 1962 determines that all allowances or advances must be included in the taxable income of the receiver, excluding amounts actually spent on accommodation and/or meals and other incidentals when, in the course of executing his/her duties,  the employee is obliged to spend at least one night away from his/her normal place of residence.

Accommodation

Section 8(1)(a)(i) of the Act touches on two scenarios.

Firstly, in a case where the employer provides an allowance per night to the employee, the allowance is taxed on the amount actually paid/granted to the employee minus the actual expense incurred by him/her. For example, if Julius receives an allowance of R4 500 for three nights’ accommodation and spends only R3 000 on the accommodation, only R1 500 (R4 500 – R3 000) is included in his taxable income.

Secondly, it sometimes occurs that an employer pays an advance to an employee and requests the employee to hand in, on return from the trip, proof of expenditure together with the remainder of the advance. The taxable portion of the advance is then the amount of the advance minus the amount actually spent on accommodation minus the amount returned to the employer.

In both instances it is important to provide proof of the expenses incurred. It is also important to note that the allowance should not create losses. Should the costs incurred exceed the allowance, no deduction will be allowed for the amount by which the allowance is exceeded.

Meals and other incidental expenditure

Where the employer pays the employee an allowance or advance in respect of meals and other incidental expenses, the allowance or advance is also included in the employee’s income but the employee is entitled to claim one of the following deductions:

The amount actually spent on meals and/or other incidentals; or

The amount determined by the Commissioner of SARS for each day or part of a day the employee spends away from his/her normal place of residence.[1] (Note that the employee should spend at least one night away from home in order to qualify.)

The employee may choose the most beneficial option, provided the expenses do not exceed the allowance/advance.

In practice SARS permits the subsistence allowance to be included as a non-taxable allowance on the employee’s IRP5. Thus the deduction is allowed in most instances. It should be noted, however, that especially when an allowance is paid for accommodation, the provisions of Section 8(1)(a)(i) as set out above must be complied with.

Other allowances

Where a salaried person receives another allowance (e.g. an entertainment or cell phone allowance) the allowance is included in his/her taxable income and the expenses incurred (even the expenses incurred for business purposes) may not be deducted for tax purposes.

This, of course, creates a problem for some salaried persons who, by nature of their daily duties, have to incur business expenses that are not deductible against the relevant allowance received.

However, a “deduction” for these expenses may well be accomplished since, although SARS does not permit expenses incurred as other allowances to be deducted, the refunding of business expenses incurred by an employee is not included in the definition of other allowances.

Certain conditions apply, though. The expenses must be incurred on instruction of the employer for the purposes of the employer’s business, and proof of such expenditure must be submitted to the employer.

This means that an employee who is required by his/her employer to entertain clients from time to time, can incur this expense and claim it from the employer without any amount being included in the employee’s taxable income.

It is clear, therefore, that there are cases where the expenses incurred by an employee for business purposes, are indeed tax deductible, although it would be taxable if it were in the form of an allowance. Employers should therefore take into account the tax implications before deciding to include the provision of allowances in employee contracts.

[1] For the 2013 tax year the deduction for meals and incidental expenses for travel in the RSA amounted to R303 per day, and for incidental expenses only, R93 per day. Daily expenses for foreign travel are determined per country and are published by SARS in the Government Gazette.

This article is a general information sheet and should not be used or relied on 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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Requirements to restore a deregistered company

There are various circumstances in which a company (or close corporation) can become deregistered at the CIPC.

  1. The company itself can apply for deregistration at the CIPC, for any number of reasons.
  1. If a company has not submitted and paid its annual returns for more than two successive years, the CIPC will inform such a company of the fact and the intention of the CIPC to deregister said company. If such a company does not take any steps to remedy the situation, the CIPC will proceed to finally deregister it.
  1. If the CIPC believes that the company has been inactive for seven or more years.

However, it is possible to restore such a company or close corporation which has been finally deregistered, but all outstanding information and annual returns (including the fees) will have to be lodged with the CIPC. An additional R200 prescribed re-instatement fee must also be paid.

Recently, the CIPC has set additional requirements to do this, which also impacts on the time, administration and cost to restore such a company. These requirements took effect from 1 November 2012.

The steps and requirements for the re-instatement process are:

  1. The proper application CoR40.5 form Application for Re-instatement of Deregistered Company must be completed and submitted, originally signed by the duly authorised person.
  1. A certified copy of the identity document of the applicant (director / member) must be submitted.
  1. A certified copy of the identity document of the person filing the application must be submitted.
  1. A Deed Search, reflecting the ownership of any immovable property (or not) by the company, must be obtained and submitted together with the application.
  1. If the company does in fact own any immovable property, a letter from National Treasury must be submitted, indicating that the department has no objection to the re-instatement of the company.
  1. Also, if the company does in fact own any immovable property, a letter from the Department of Public Works must be submitted, indicating that the department has no objection to the re-instatement of the company.
  1. An advertisement must be placed in a local newspaper where the business of the company is conducted, giving 21 days’ notice of the proposed application for re-instatement.
  1. If the deregistration was due to non-compliance with regards to annual returns, an affidavit indicating the reasons for the non-filing of annual returns must be submitted.
  1. If the company itself applied for deregistration, an affidavit indicating the reasons for the original request for deregistration must be submitted.
  1. Sufficient documentary proof indicating that the company was in business or that it had any assets or liabilities at the time of deregistration must be submitted.
  1. All outstanding annual returns must be submitted and paid, along with any penalties.

Upon compliance of all of the above requirements, the CIPC will issue a notice to the company that it is restored.

This article is a general information sheet and should not be used or relied on 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.

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Minutes of the board meetings

apr-01Clients are reminded of the legal requirements relating to board meetings as stipulated in Art. 73 (6), (7) and (8) of the Companies Act, 71, 2008.

The Act requires a company to keep minutes of meetings of the board and of any of the board’s committees, and that a majority of the directors must be present before a vote may be called at a meeting of the directors. Each resolution taken by the board and also any statement made by a board member must be recorded in the minutes. A board resolution takes effect on the date that the resolution is made unless another date of implementation is recorded in the resolution. Attention is drawn in particular to the requirement that resolutions must be dated and numbered sequentially.

Providing that a company’s Memorandum of Incorporation allows therefor, a board meeting may also be held by means of electronic communication, or one or more directors may participate in a meeting by means of electronic communication. This is conditional on the electronic communication facility enabling all participants in the meeting to communicate with each other without an intermediary.

Minutes of a meeting, or a resolution, signed by the chair of the board meeting or by the chair of the next meeting is evidence of the proceedings of that meeting or adoption of the particular resolution.

This article is a general information sheet and should not be used or relied on 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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Financial statement and accompanying reports: An overview

03BThe commencement of the Companies Act No 71 0f 2008 created more awareness amongst company directors, shareholders, investors and other users of financial statements, of the different types of financial statements that exist. The following brief overview attempts to place these instruments in some perspective.

There are, amongst others, financial statements with an audit report, financial statements with a review report, financial statements with a compilation report, provisional financial statements, and management statements. The type of financial statement to be drawn up depends on several factors, namely the requirements of the Companies Act No 71 0f 2008 together with the memorandum in the case of acompany or close corporation, the trust deed in the case of a trust, the constitution in the case of a non-profit organisation, the investors in the entity, and other users of the financial statements. If, in terms of the provisions of the Companies Act No 71 of 2008, only a review report or a compilation report is required, the directors, shareholders, investors or any other user of the financial statements may require a voluntary audit.

What is the difference between an audit report, a review report and a compilation report?

An audit report provides the user of the financial statement with assurance that the financial statement is in all essential respects a reasonable account of the entity’s financial state. An audit comprises an in-depth investigation of the entity’s controls, and the execution of validation tests and analytic tests to obtain applicable and adequate proof that the financial statements are in all essential respects a reasonable account. An audit report can be modified in one of three ways: the auditor may qualify the report, he may hold back his opinion or he may express a negative opinion about the financial statements. A qualified audit report means that the financial statements are in all essential respects a reasonable account except for certain audit areas that are pointed out. If the auditor holds back his opinion it means that he does not express assurance about the financial statements and has not found applicable and adequate audit proof to support an unmodified audit opinion. If the auditor expresses a negative opinion about the financial statements it means that he wishes to warn the user of the statements that the statements are faulty.

An audit report may only be issued by a registered auditor.

A review report provides limited assurance to the users of the financial statements. A review mainly involves obtaining proof by means of enquiries made to management, and the execution of analytic procedures.

The number of procedures executed are fewer than in the case of an audit. A review report may only be issued by a registered auditor or a chartered accountant. A compilation report is issued for entities which are not subject to an audit or a review. A compilation report provides no assurance that financial statements are free of misrepresentation in all essential respects.

When is an entity obliged to be audited?

In the case of a company or a close corporation, the provisions of the Companies Act No 71 0f 2008 apply. A Public Interest Score is calculated based on the company or close corporation’s number of employees, its turnover, its third party debt, and the number of individuals who have a direct or indirect interest in the entity. If the Public Interest Score exceeds 350 the company/close corporation must be audited. If the score is less than 350 but more than 100, a review report is required, while only a compilation report is required if the score is less than 100. Regardless of the size of the Public Interest Score an audit must be done if required by the company’s deed, or if the directors are not the shareholders, or if the company holds assets of more than R5 million in a fiduciary capacity on behalf of third parties.

A trust deed may require that the trust be audited, and the constitution of a non-profit entity may likewise require that an audit be done.

In terms of an announcement by the Estate Agency Affairs Board (EAAB) on 21 June 2011, the trust accounts and business accounts of all estate agencies must be audited. The Attorneys Act 87 of 1989 determines that the trust accounts of attorneys must be audited.

What is the difference between a provisional financial statement and a management statement?

A provisional financial statement is one that has been drawn up but is not yet complete and is therefore subject to change. It is not accompanied by a report. A management statement is drawn up by an entity’s accountant or financial manager as required by the user of the statement (usually the management of the entity). It is usually done monthly. Management statements are simply an indication of the financial state and performance in the review period and do not provide any assurance.

This article is a general information sheet and should not be used or relied on 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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