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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Do tenants still have to pay rent during the lockdown?

Common Law position – in absence of a “force majeure” clause

A force majeure is an act of God or man (such as a war, strike, riot, crime, plague, or an event described such as a hurricane, flood, earthquake, volcanic eruption, etc.),  that is unforeseeable, out of the reasonable control of the parties to a contract and which makes it objectively impossible for one or both of the parties to perform their obligations under the contract.

In the absence of such a clause, or if the clause doesn’t specify the unforeseen event(s) on which the parties can reply, then the parties may be able to rely on the common law principle of “supervening impossibility of performance” to suspend their obligations under the contract, provided that it has become objectively impossible for them to perform under the contract as a result of an unforeseeable and unavoidable event(s). For the doctrine to be enforceable, the following applies:

  • The impossibility must occur after the conclusion of the contract.
  • These events must be unavoidable and make proper performance of the contract impossible and must not merely make performance more burdensome or economically onerous.
  • If performance becomes objectively or absolutely impossible, the contractual obligation is extinguished and the duty to perform and the corresponding right to claim performance falls away.
  • Objective impossibility includes instances of actual physical impossibility and also where performance remains physically possible but cannot reasonably be expected to be performed.
  • Both parties’ obligation to perform the contract will be extinguished.
  • If the event causing the impossibility was foreseen or foreseeable and could have been avoided, then the parties cannot rely on this doctrine to not perform their obligations.
  • Once the force majeure event has come to an end and performance has become possible again, the contract will continue.
  • The creditor will have the option to terminate the contract if the interruption is likely to endure for an unreasonably long time.

In applying the doctrine of supervening impossibility, the SCA in Transnet Ltd t/a National Ports Authority v Owner of MV Snow Crystal [2008] held that in order to determine whether the doctrine applies, it is necessary to consider factors such as the nature of the contract, the relationship of the parties, the circumstances of the case and the nature of the impossibility. Accordingly, any analysis of whether a party would be able to rely on the defence of supervening impossibility in respect of its inability to perform its obligations in terms of an agreement due to the COVID-19 virus outbreak must take into account all of the surrounding circumstances of a case.

Contractual position – force majeure clauses

The principal objective of such a clause is to relax obligations and to set a limit to the strict liability imposed on a party to perform in terms of a contract, in the event of certain circumstances arising, which prevent or have an effect on the party’s ability to perform.

Parties often include time periods during which the contract will be suspended if a force majeure event occurs. This gives any party the right to elect to terminate the agreement unilaterally by way of notice to the other party should the force majeure event continue for longer than the set period. This period will depend on the agreement between the parties and the nature of the obligation, the contractual performance and the practicality of allowing for such a suspension.

Both parties will be excused from performing, because the impossibility of performance, due to an event beyond the control and foreseeable expectation of the parties, causes their intention of performing an agreement to be extinguished, and frustrates the purpose of their agreement.

If existing contracts have force majeure clauses in them, then one may be able to rely on these clauses, instead of the common law principle of “supervening impossibility of performance” to suspend one’s obligations under a particular contract if performance of that contract becomes impossible as a result of an uncontrollable event. However, if force majeure clauses are vague and incomprehensive, their interpretation could be problematic, as presumptions of interpretation are applied in our law to determine the meaning of words that are unclear.

In the case of Sucden Middle-East v Yagci Denizcilik ve Ticaret Ltd Sirketi (The ‘Muammer Yagci’) – [2020] 1 lloyd’s rep. 107, the UK court noted that the phrase “force majeure” is simply a phrase to label a list that includes a mixture of matters. The list informs the meaning of the phrase and not the other way around. The South African courts would likely follow the same approach. The parties cannot simply rely on a clause that is labelled as a “force majeure” clause or contains those words but does not list or elaborate on what the parties agree a force majeure to be. Force majeure clauses must be detailed and specifically list the force majeure events that the parties agree will suspend their performance of the contract (such as an epidemic). In this regard, parties should specifically list broad catch-all wording to contracts such as “act of God” or “acts of authorities” that they can rely on to encompass events they may not reasonably have foreseen.

Reference List:

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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Caring for your loved ones by caring for their future

We’ve all seen it in movies and novels: A young unsuspecting person wakes up one day to find out that they had been left an extraordinarily large estate from a distant relative that they hardly knew existed. We chalk it up to an absurdity. Something like that would never happen in real life, would it?

Although it may seem farfetched, intestate succession happens far more often than one might realise. Statistics from the Master of the High Court in September 2019 showed that 70% of working South Africans do not have a will (or by extension, estate plan). Apart from the emotional distress caused by the death of a beloved, the families of these South Africans are in for a tough time should they pass away.

When somebody over 16 years of age dies, their property will be distributed according to a will or estate plan. If there is no will to speak of, the estate of the deceased is distributed in accordance with the Intestate Succession Act 81 of 1987.

In many respects, intestate succession is a complex and unnecessary complication in the distribution of an estate after death. Although somewhat clear cut regarding who is included in the distribution of the estate, the Intestate Succession Act leaves much of the how of the distribution and transfer of the estate to the inheriting parties.

In the case of intestate succession, the estate of the deceased will be distributed in accordance with a predetermined line of succession, which usually includes their spouse, children and/or parents. Intestate succession can lead to procedures that take time, money and energy, which are luxuries for those who are mourning and settling the estate.

One should keep in mind that the largest part of any estate is often real and private property. Without a plan for the distribution of one’s estate, it means that the physical property of the deceased also becomes part of a plan for distribution, which can take extremely long to settle (since assigning a monetary value to physical assets depends on valuation).

As for the how of the distribution of the estate, it ends up falling on the shoulders of the heirs to the estate to nominate someone to act as executor, failing which an executor is appointed by the Master of the High Court. For this reason, family disputes are a commonplace in intestate succession as the fair distribution of the estate is brought into question.

More often than not, there is very little liquidity in the estate to cover debts and taxes related to the property to be inherited. Since most of the real and private property does not have an immediate monetary value, any possible liquidity in these assets are locked up until the executor makes a decision on how the property is to be managed.

Having a will is one thing, but estate planning goes further than a mere will, in that it gives direction for the management of the estate in preparation for when you die. Where a will only gives an indication of how assets should be distributed, a complete estate plan will give guidance as to how money is made immediately available to those who need it and how investments and financial assets are to be managed.

Issues of custody, settling of debt, the continuation of school fees, and management of digital assets, among many other urgent matters, can also be simplified through a well-developed estate plan.

The purpose of an estate plan, then, is to guide the management of your assets in a way that a will cannot. Good estate planning can speed up the processes that take so long when executing a will and comprises a holistic strategy to ensure that your loved ones are cared for after you die.
In the case of estate planning, the adage holds true: Failure to plan is planning to fail. Don’t leave your dependents in a vulnerable position while they mourn. Instead, give them the best chance to live the life you’ve always hoped for them.

References:

Wills Act 7 of 1953
Intestate Succession Act 81 of 1987
https://www.moneyweb.co.za/financial-advisor-views/no-will-in-place-it-will-have-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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2020 Tax filing season and important changes

The 2020 filing season covers the period 1 March 2019 to 29 February 2020.

In support of the President’s call to the Covid-19 pandemic, that Social Distancing be observed at all times and that we should at most stay indoors and limit movement, SARS is responding by rapidly enhancing its efforts to enhance filing requirements for individual taxpayers and removing the need to travel in 2020. Through the increased use of third-party data, SARS will obtain more information regarding your tax affairs more accurately than ever.

Due to the pandemic, tax filing season has been delayed and will only open on the 1st of September 2020. SARS have advised that they will however commence a new process of issuing auto-assessments for non-provisional taxpayers during the course of 1 August 2020 and 31 August 2020.

We strongly suggest that you supply us with your tax documents during the course of August as we will also need to dispute or confirm and accept any auto-assessments issued by SARS. The correctness of the auto-assessment can only be verified against your own financial data. We accordingly need you to provide us with your tax   information as soon as possible.

Individual income tax return filing dates for the 2020 filing season have been revised as follows:

  • 1 August to 31 August 2020: Auto assessments for Non-Provisional taxpayers.
  • 1 September to 16 November 2020: 
  • 1 September to 22 October 2020: Taxpayers who cannot file electronically can do so at a SARS branch.
  • 1 September 2020 to 29 January 2021: Provisional taxpayers who file electronically.

The delayed filing dates will not effect the interest charged by SARS on tax due for the 2020 tax period. Such interest will accrue from 1 October 2020.

If there is a possible shortfall on tax payments for the 2020 fiscal year on provisional tax, we will still be able to calculate your top-up payment in order to provide you with the option of settling your income tax liability “interest-free” on or before 30 September 20. We therefore need your information as soon as possible.

Due to the time limits we kindly request that you forward the following documentation (where applicable) to our office as soon as it has been received:

  • Income – IRP5 or IT3(a) certificate
  • Income from investments/Interest on loan accounts – IT3(b) certificate
  • Local/foreign Capital Gain/Loss – IT3(c) certificate (including sale of property, shares in private companies, etc.)
  • Any other income – please provide details (e.g. inheritance received, etc.)
  • Business income – full details of income and expenditure
  • Lump sum income – IRP5 certificate
  • Rental income – full details of property, income and expenditure including period let
  • Medical contributions certificate and expenses – medical aid certificate and proof of “other expenses”
  • Donations – S18A certificate reflecting proof of donation made
  • Pension Fund or Retirement Annuity Fund contribution certificates – certificate reflecting proof of contribution paid
  • Travelling allowance – make/model of motor vehicle, registration number, cost thereof and opening and closing km’s (kindly provide us with your compulsory logbook detailing split between business/ private mileage, destination, reason for travel).  Please detail any change in motor vehicles.
  • Subsistence allowance – detail number of days spent away from home on business (local and international) and kindly include destination/i> 
  • Changes to Assets and Liabilities including sale and purchase of fixed property.

We wish to stress that we cannot take any responsibility for incorrect or incomplete information furnished to us. Furthermore, we cannot be held responsible for any penalty charges for late submission of your return should you fail to provide us with the required information timeously.

Please advise us if any of your personal details have changed (e.g. physical address, telephone numbers or e-mail address).  SARS require details of your banking account irrespective of whether you are entitled to a refund or not.  Should you have provided us with this information, please confirm that the details remain the same.

Kindly note that we cannot request documentation on your behalf from third parties (i.e. previous employers, insurance companies, banks, etc.) for confidentiality reasons.  It is therefore of the utmost importance that you provide us with all the necessary documentation and information to enable us to submit your tax return correctly and timeously.

We wish to point out that SARS are confirming investment income information received from Financial Institutions with details recorded in the tax returns submitted.  Please ensure all investment income is supplied to us.

Please do not hesitate to contact us should you require any further information.

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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On-Line Accounting Benefits

In recent years, cloud technology has revolutionised our day-to-day lives. We post our family photos to Facebook and Instagram, we pay our monthly bills through online banking, we order and pay for our groceries online and we use our smartphones to check our email on the move.So, if we are utilising the cloud in our everyday lives, why are we not doing the same in our business lives? Cloud-based accounting software now offers all the functionality and reliability of your tried and trusted desktop accounting system, but with a number of additional benefits that only online technology can deliver.If your business is looking for a more effective way to manage its financial affairs, here are six reasons for seriously considering a move to cloud accounting.

  1. Mobile access at any time
  • With cloud accounting, you can access your accounts and financial figures at any time, from anywhere. When you use an old-fashioned, desktop-based system, you are effectively tied to the office. Your software, your data and your accounts are all located on a local drive. That limits the access you can have to your financial information. Cloud-based accounting frees you up from this restriction. Your data and records are all safely encrypted and stored on a cloud server, and there is no software application for you to download – you log in and work from your web browser, wherever you have Wi-Fi and an Internet connection. So, wherever you are, you can always check on the status of your business.
  1. A cost and time-effective solution
  • Working online reduces your IT costs and saves you time by keeping you constantly connected to the business.
  • Desktop-based systems require an investment in IT hardware, plus the maintenance of that hardware. You require a server to house the application software and the related data. In addition to that, you will need to pay an IT expert to maintain both the server and the office network – that can be an expensive overhead.
  • Online accounting is carried out entirely from the cloud. There is no costly IT infrastructure for you to maintain, and you can access the software whether you are in the office, working from your dining room table or out at a meeting. Rather than waiting until you are back at the office, you can immediately approve payments, or send out invoices to customers, saving you time and making your financial processes far more effective.
  1. Watertight security and no time-consuming back-ups
  • When you are cloud-based, your accounts and records are all saved and backed up with military levels of encryption. If you have used desktop accounting, you will be aware of the need to back-up your work at the end of each day, and you will also know about the need for updates each time your provider brings out a new version of the software.
  • On a cloud platform, back-ups and software updates become a thing of the past. You’re always logged in to the most up-to-date version of the software, with all the latest functions, tax rates and necessary returns. In addition to that, your work is saved automatically as you go, so you save both time and money on tedious back-up procedures.
  • Security is another area where cloud accounting outperforms a desktop system. Your data is no longer located on a physical server in the office, or on the hard drive of your laptop. All your accounting information is encrypted at source and saved to the cloud. The only person who can access your confidential information is you, plus selected members of your team and advisers.
  1. Share and collaborate with ease
  • Working with colleagues, and sharing data with your advisers, is an extremely straightforward process when you’re based in the cloud.
  • Using the old, desktop approach, you had limited access to your accounts – and that made collaboration with colleagues and advisers difficult. If your accountant needed specific numbers, they would need to be emailed back and forth, or saved to USB memory stick and couriered directly to their office.
  • With an online accounting system, you, your colleagues, your management team and your advisers can all access the same numbers – instantly, from any geographical location. So, collaboration is as easy as picking up the phone and logging in to your online accounting package of choice, with the key numbers in front of you.

  1. Reduces paperwork and is more sustainable
  • Using cloud accounting can deliver the dream of having a paperless office. With traditional accounting, dealing with paperwork, data-entry and financial admin can start to eat into your business time. Everything must be printed out and dealt with in hard copy, and this is slow, ineffective and bad for the environment.
  • With an online accounting system, you can significantly reduce your reliance on paperwork. Invoices can be emailed out directly to clients, removing the costs of printing and postage – and speeding up the payment process. Incoming bills and receipts can be scanned and saved directly with the associated transactions in your accounting software.
  • Because your documents are all digitised and stored in the cloud, there is no need to keep the paper originals – saving on filing space and storage costs.
  1. Better control of your financial processes
  • The efficiencies of online accounting software give you greatly improved control of your core financial processes.
  • Online invoicing function streamlines the whole invoice process, giving you a better view of expected income, an overview of outstanding debts and a clear breakdown of what each customer owes your business.

Are you beginning to see the benefits of a cloud accounting approach for your financial management?

If you are currently using a desktop-based accounting system, and want to see first-hand how cloud accounting can benefit your business, please do get in touch with us for a demo of an online accounting package that best suits the needs of both your business and your financial team.

Give us a shout and let us assist you in moving to cloud accounting.

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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Setting your business up for expansion

When businesses expand, they often look beyond national borders. With such an expansion, there are several added advantages for establishing a holding company, which then owns the various group operating companies in different jurisdictions. Various aspects contribute to considering an ideal holding company location, and a brief discussion is outlined below.

Political stability
Political instability and constant political upheavals cause uncertainty within the jurisdiction and foreign countries that do business with that jurisdiction.

Ease of doing business
This does not specifically refer to actual business done by the company but relates to the associated (support) industries that one may encounter within the jurisdiction. Reputable banking institutions are required for transferring funds and investing capital; and competent service providers who know the industries, laws and practices.

Robust legislative framework
Laws and legal frameworks that allow the broader business plan and its associated structures to function are non-negotiables and the protection of property rights is essential. Beyond this, it is commonplace for many countries to implement (especially tax) laws to the detriment of citizens and resident retroactively. These jurisdictions could be harmful to an estate planning structure.

Ease of doing business with other jurisdictions
Considerations relating to tax- and trade treaty networks, business councils/chambers and foreign-owned company presence is important to ensure that a jurisdiction does not become isolated, and ceases to serve its intended purpose.

Structures and mechanisms to remove risk from the client
Some jurisdictions cater for structures such as trusts or foundations that may remove the inheritance- or capital gains tax burden or forced heirship rules from the business owner’s estate. This minimises tax liability on death, allows for the smooth succession of high-value assets, and ensures that management and control of assets remain central with professionals. Essential estate planning goes hand-in-hand with global expansion.

Substance requirements (laws)
As a requirement of meeting the “compliant” status that is issued by the OECD, jurisdictions have been required to reform and implement “substance laws”. To lay these out shortly, they are essentially a set of laws that ensure that no fraudulent money laundering activities take place through fictitious entities with fictitious members. In terms hereof, any structures that are established are required to meet the substance requirements as follows:

Carry out core income-generating activities in the jurisdiction (depending on which jurisdiction is chosen);
Ensuring that a ‘warm body’ is available to manage structures and that the “post box” effect is eliminated; and
At least a level of expenditure that is proportionate with the investing and management activities of the entity.

Advantageous tax and exchange control laws
A consideration in global expansion is choosing a tax-efficient jurisdiction that has easy-to-comply-with or no exchange control restrictions. These allow for ease in capital deployment, and benefits the owners when profits are derived. Taking advantage of tax-friendly countries to serve global expansion should, however, not be the only consideration.

The above provides only some of the primary considerations for a choice of headquarter location when expanding. It may also be that as part of an expansion, one jurisdiction is more suitable from an estate planning perspective, and another for business purposes, which tends to complicate matters. What is important, though, is a robust framework for the choice of jurisdiction, to ensure that ease of business and expansion efficiency may be 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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“Booking” capital losses on shares is not that easy

There is a number of techniques that taxpayers use to reduce their capital gains tax (CGT) exposure on long-term share investments. A common practice is to utilise the annual exclusion of R40 000 provided for in paragraph 5 of the Eighth Schedule of the Income Tax Act[1] by selling shares that have been bought at a low base cost, at a higher market value and then immediately reacquiring those shares at the same higher value, thereby ensuring that the investments’ base cost is increased by as much as R40 000 per year. If the gain on those shares is managed and kept below the annual R40 000 exclusion, taxpayers receive the benefit of a ‘step-up’ in the base cost of the shares to the higher value for future CGT purposes, without having incurred any tax cost.

A reverse scenario is to build up capital losses for off-set against any future capital gains and taxpayers are often advised, especially during times of market volatility, to ‘lock-in’ capital losses created by the expected temporary reduction in share prices. This involves selling shares at a loss and then immediately reacquiring the same shares at the lower base cost, but with the advantage of having created a capital loss – a technique known as ‘bed-and-breakfasting’.

Without placing an absolute restriction on ‘bed-and-breakfasting’, paragraph 42 of the Eighth Schedule limits the benefit that could have been obtained from the ‘locked-in’ capital loss. The limitations of paragraph 42 apply if, during a 45-day period either before or after the sale of the shares, a taxpayer acquires shares (or enters into a contract to acquire shares) of the same kind and of the same or equivalent quality. ‘Same kind’ and ‘same or equivalent quality’ includes the company in which the shares are held, the nature of the shares (ordinary shares vs preference shares) and the rights attached thereto.

The effect of paragraph 42 is twofold. Firstly, the seller is treated as having sold the shares at the same amount as its base cost, effectively disregarding any loss that it would otherwise have been able to book on the sale of the shares and utilise against other capital gains. Secondly, the purchaser must add the seller’s realised capital loss to the purchase price of the reacquired shares. The loss is therefore not totally foregone, but the benefit thereof (being an increased base cost of the shares acquired) is postponed to a future date when paragraph 42-time limitations do not apply.

Unfortunately, taxpayers do not receive guidance on complex matters such as these on yearly IT3C certificates or broker notes, since these are generally very generic. Therefore, taxpayers wishing to fully capitalise CGT exposure on market fluctuations are advised to consult with their tax practitioners prior to the sale of shares.

[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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