On 26 February 2020 the Minister
of Finance, Tito Mboweni, will be making his annual budget speech.
Traditionally, the Minister asks
the public what they would like to see in the budget and a “Budget
Tips” portal on the National
Treasury website is open. Citizens are encouraged to submit their tips to the
Minister either on that Portal or by Twitter @TreasuryRSA with the hashtag #TipsForMinFin and “#RSABudget2019” (presumably Treasury will
update that hashtag to 2020). This year he asks in particular for your views on “What can government do to achieve faster
and more equitable economic growth?”
If you have ideas, make your voice
count! Last year there were many differing tips, from the amusing (give free
Lotto tickets to regular electricity payers) and the serious (reduce corporate
tax to 15% for companies with a turnover of less than R10 million to encourage
job creation) to the overly optimistic (give a tax rebate to those who have
upgraded security in their homes).
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An issue that has been
around for a while has been employees misrepresenting their qualifications to
their employer. This has adverse consequences for the employer as the employee
often proves incapable of doing the required job – this leads to wasted time in
disciplinary hearings, dismissal and then a new recruiting cycle begins. That’s
in addition to all the damage that an under-qualified employee can do the
employer’s business before his or her duplicity is exposed.
This has
been worsened by fake institutions which offer people fraudulent
qualifications.
The statutory amendment and its
wide reach
In a move to address the situation, a statutory amendment makes employees
who mislead employers and fraudulent academic institutions liable for up to
five years’ imprisonment and/or a fine. The amending Act has been signed into
law but will only come into effect on a date or dates still to be determined.
The changes when in effect will provide employees and fake learning
institutions with a strong incentive to be honest in the future.
So broad is the legislation that anyone can report to SAQA (The South
African Qualifications Authority) any employee or any institution peddling
false qualifications.
For example, if X learns from Twitter that Y has faked his or her
credentials, then SAQA is bound to investigate if X reports Y to them. This can
result in Y being prosecuted and facing prison time.
This all heralds good news for employers
with its potential to both reduce their risk of under-qualified employees damaging
their businesses, and to save them considerable administration time.
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The past few years have
seen scandals emerging in both the private and public sectors. Steinhoff, State
Capture, Eskom, the Guptas and Bosasa, to name a few, have revealed how endemic
corruption has become in South Africa.
The National
Prosecuting Authority (NPA) is now beginning to charge those who have been
involved in these scandals. This has been greeted with relief by the public,
who have become increasingly frustrated that perpetrators have appeared to have
escaped from accountability for their actions.
Clearly, the directors
and senior managers of these affected entities are being scrutinised and face potential
prosecution.
Your obligations and your risks
The Companies Act
places onerous obligations on directors and senior managers who are to perform their
duties:
Having
the necessary skills and experience to make informed, independent decisions,
Keeping
themselves up to date on the plans and activities of the company,
Having
sufficient data to make carefully considered and impartial recommendations to all
issues raised at directors’ meetings, and
With
no conflicts of interest. If a director has a conflict or potential conflict,
then that director(s) shall make full disclosure of the conflict to fellow
board members.
Failure to adhere to
these standards opens directors to the possibility of being liable for any
damages or losses incurred. In certain instances they face the potential to be
held criminally liable and directors who transgress by failing to meet their
obligations can also be disbarred as directors either permanently or on a
short-term basis.
Additionally stakeholders,
such as unions, may undertake class action against directors personally.
Other danger areas
Now that all directors
are under increasing scrutiny, you also need to bear in mind issues such as your
company causing environmental damage, trading in insolvent circumstances (for
example SAA directors face potential litigation here), failing to ensure your
business is protected against hackers, poor accounting policies and being party
to the company suffering reputational damage which leads to a collapse in the
share price (Tongaat directors risk exposure to this).
As a director, remember
you are in the public’s and the NPA’s sights. Be extra careful that you execute
your duties in line with the dictates of the Companies Act.If
in doubt, use your accountant as a sounding board and advisor.
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“Why do approximately 70% – 80% of small businesses fail within five years? Why are certain entrepreneurs more successful than others?”
Extract from UWC article below
Recent research by the
University of the Western Cape on the rate of failure of small businesses makes
for interesting reading and provides insights that we all really need to take
on board, particularly in these hard economic times.
SMMEs, their importance and their failure rates
Globally 60 to 70% of
jobs are found in SMMEs (Small, Medium and Micro-Enterprises) but in South
Africa this figure is only just over 28% despite more than 95% of businesses in
South Africa being SMMEs.
South Africa has a
higher failure rate of SMMEs than elsewhere in the world (70% – 80% of our small
businesses fail within 5 years). In previously disadvantaged communities only
1% of businesses progress from employing less than 5 people to having staff of
10 or more.
6 factors that can make or break an SMME
business
The research indicates
that in terms of success factors, 40% can be attributed to the entrepreneur.
The characteristics of this person are crucial and they need to show:
Persistence,
being proactive and being a self-starter,
That
they do not react to events but are continually planning (good planning is an important
success indicator), innovating, having an ability to learn and apply this
learning and having a culture of achievement.
The factors contributing
to failure are ones we are aware of:
Lack
of skills – government and large corporates snap up almost all of South
Africa’s limited skills,
Difficulty
in accessing finance – lending institutions require a track record before
providing funding to businesses,
Poor
accounting records and limited information systems,
Late
payment by state institutions and large corporates (Kenya is considering
passing legislation that compels paying SMMEs on time).
There are others too
like corruption crowding out legitimate SMMEs and low bargaining power.
Entrepreneurs – what can you do?
Have a look at the 6
factors listed above. Maximise the positives, and do something about the
problem areas. Remember, your accountant is there to help you succeed so don’t
be shy to ask for advice.
What can government do?
Clearly the country is
missing a sizeable opportunity to grow the economy and to reduce our 27%
unemployment rate.
One way to get this
going is through mentoring and training. Government programs are having a
limited impact and there is space for business to also play its part. Why not
interview some SMME owners and determine if they have the characteristics as
shown above? Those that have the attributes can be successfully mentored to get
good accounting records and systems, skills can be addressed as well as access
to finance.
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“There are two systems of taxation in our country: one for the informed and one for the uninformed”
U.S. Judge Learned Hand
Small and medium-sized enterprises
(SMEs) have limited access to capital markets. As SMEs are considered to be the
cheapest and most cost-effective sector in creating jobs, the Revenue
authorities sought to address this by creating an attractive allowance for Venture
Capital Companies (VCC) in 2009.
The VCC allowance gave
a massive boost to venture capital in South Africa, and also to SMEs who have
received R6 billion in investment since 2009. Venture capital now accounts for
2% of GDP (in the USA this is 4%).
For you the taxpayer it
offers an attractive way to reduce your tax as you are allowed to deduct R2.5 million
from your taxable income if you invest in a VCC. This is in your own capacity
or via a trust; if you use a company to make the investment, it can deduct R5
million.
How it works initially
Note: The examples below relate to an
investment in your own personal name, and different tax rates and net returns
will apply if you invest through a trust or company.
Assume you have R2.5
million in taxable income. It is 20 February, you have little more than a week before
you will have to pay provisional tax and you want to reduce your tax liability and
make a good investment.
You have researched the
VCCs and decide to invest R2.5 million in a VCC which invests in solar power.
You have saved yourself R1.125 million in tax.
To avoid having this
tax deduction of R1.125 million reversed, you will need to be invested with the
VCC for five years.
How it works in subsequent years
The VCC onward invests
the R2.5 million in a qualifying SME (the SMEs need to be registered with SARS)
which then installs solar power in, say, a block of flats. Of interest here is that the SME also gets a 100% deduction on the R2.5
million.
If you cash in on the
investment after 5 years, this will be the position:
In summary, you
received a tax deduction of R1.125 million and 5 years later paid R450 000 in
capital gains tax. Your investment of R2.5 million has been refunded to you. If
you discount these cash flows, this equates to an after-tax return of just over 10% over five years which is
pretty good as inflation is currently just below 4%, i.e. a real return of 6%.
As a comparative the stock market delivered a return of just below 6% in the
last decade.
This excludes any costs
you may be charged.
Beware of costs
There are many VCCs out
there and they charge varying fees, so be very careful of these costs as they
come in many guises such as performance fees, administration costs, annual
charge etc.
It is worth getting
your accountant to check these costs.
Look for the gems
As we saw above, the
qualifying SME (the entity that installs the solar power), gets a 100% upfront
write-off of the investment (R2.5 million in this example for a tax saving of R700
000). Some creative VCCs have used this tax saving to return income to you the investor.
Take the example of a residential complex where the qualifying company installs
solar power in the complex and then charges the owners of the complex for the
electricity they consume using solar power (this charge is at a substantial
discount to Eskom’s rate). The qualifying company returns this charge to the
VCC which then pays these amounts as dividends to you, the investor.
Thus, everybody scores:
Residents
of the complex don’t pay for the installation of the solar power and get cheap electricity,
The
qualifying company takes its profit out of the R2 500 000 investment and tax
saving of R700 000,
The
VCC makes money from charging you fees, and
You,
the investor, get a return (after-tax and net of all costs) of over 20% over the 5 year period, which is excellent.
Don’t delay, the clock
is ticking!
The only downside to
this is that the allowances will fall away in June 2021. VCC companies are
lobbying government to extend this program past June 2021, but even if they are
unsuccessful, you have just under 18 months to take advantage of this scheme.
Of course this sort of investment isn’t for everyone; ask
your accountant whether it might suit you.
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