“One doesn’t discover new lands without consenting to lose sight, for a very long time, of the shore.”

Andre Gide

All of the largest businesses in the world started small. Apple, Google, and Amazon were all famously founded in garages. Now these giant multi-billion-dollar companies occupy multiple office blocks that dwarf football stadiums. This happened because at one time their founders moved them out of the garage and into the office. Moving away from a comfort zone can be frightening, but knowing when to move a business into its own space may be one of the most important decisions a company owner can ever make. How do you know it’s time to take the plunge and get your business its own space? Here are the signs.

1. You need more employees than home can handle

This may seem like an obvious sign. Your business is doing so well that it’s time to take on new staff, but you have not done it yet, because you have no idea where you would put their desks. Staff are the lifeblood of any venture and opting not to move your company in this situation would directly and immediately impact its potential for growth.

This is the simplest scenario to recognise and also the one that needs the quickest attention. It will be better to find the new office space and then hire staff, than to hire them now and find that once you have moved, your business is no longer situated in a convenient location for your staff. 

2. You need more space

While finding a home for staff may not be your issue, finding storage or workspace may be. If your business keeps a lot of inventory on hand or needs large work areas then it’s better to find a dedicated space to grow than it is to try and fit it all in your home. While it may be feasible to work surrounded by boxes piled on top of boxes and supplies crammed in the spare bathroom for a while, eventually it’s going to become unmanageable and lead to unhappiness in your home and your personal life. Workplaces where everyone needs to work on top of everyone else also cause employees to become unproductive and unhappy, which in turn leads to disappointed customers, and a decrease in business. If you don’t find a new space to fit the business, you will soon find the business decreases to fit the space.

3. You want to create a brand identity

Your brand is about more than simply the service or product you produce. Think about Google’s offices and what they say about the company, the image they project, the culture they are able to create among employees and the impression it gives to customers. Working from your home may fit your own personal brand, but it becomes difficult to establish a corporate culture and image when the office itself does not reflect what you stand for. 

Moving into a separate workspace allows a business to tailor that area perfectly to reflect what it is all about, and the needs of its employees and customers, better reflecting the brand you are trying to build. Even if you are happy with your employees working from home, having a small space where they can have meetings with clients, share concerns with HR or attend company functions, helps them to feel a part of something that’s bigger than simply your couch at home, and lets them feel like the brand is strong, reliable and somewhere they can easily stake their long-term futures. 

4. The industry is changing

When starting your business you may have had ideas of just who your customers are and what their needs might be. A few years down the line you might be servicing an entirely different customer bracket than expected, selling products you didn’t even think of initially or catering to a market that isn’t even in your city. Depending on the kind of business you run, the changing demands of your customers can dictate exactly where you should be located and what your office needs to look like.

Maybe you are losing out on retail opportunities and need to move closer to customer businesses to better service their needs? Perhaps your suppliers will give you cheaper delivery costs if you are located in a different area? Maybe your customers have all semi-grated away from your city? Or perhaps employees with a particular set of skills can’t be found in the town where you live?

Understanding the needs of your business and your industry will help you to determine where to best situate your company and if that place isn’t near your home, it’s time to consider moving.

5. Home distractions

Working on a new business from home comes with a number of benefits. It allows a founder to easily fit their lives in around the needs of a new company. There will come a time, however, where that personal life and the needs of the family, will become a distraction to the optimal operations of the company. When the demands of family life, including children, start keeping you from achieving what needs to be done then it is definitely time to move your company into its own space. Being able to establish a good work/life balance will be important if you want to both grow a successful business and have the kind of happy, healthy family life that supports the energy it takes to be an entrepreneur. 

6. Money

At the end of the day, money and affordability are going to play the largest part in deciding whether you need your own office space. Perhaps you aren’t being taken seriously by the larger brands or need to scale up quickly if you are to grow? Maybe you want to move, but can’t quite afford it? Carefully considering the pros and cons of moving will ultimately give you the real answer as to whether it’s time to move out of home. The needs of the business and the potential for growth will have to be balanced with the costs of renting and establishing a company space before you can truly determine whether it’s time to move out of the garage.

When you move you must know that the benefits of moving will outweigh the costs of buying office furniture and signing a multi-year lease. You will need to take into consideration, whether you want to own or lease the new space each of which comes with different cost and tax implications, the projected growth of the company over the long term and which employees absolutely need desk space and which can work from their homes. Carefully analysing your budget and balancing it against your needs and projected earnings will give you a clear idea of whether you should move, and if that works out in your favour, and you can 100% afford to pay the bills of the new space, then it would be absolutely foolish not to.

7. Balancing the possible tax benefits

Running a business from home can allow you some tax benefits dependent on a number of factors including how much of the house is used for the business and what exactly that space is used for. Moving into your own space may, however, provide additional tax relief that can sometimes ameliorate the costs of moving out. 

Ask a professional to help you with a careful analysis of the costing and to advise you on whether you stand to benefit in this regard.

Many decisions are made on the basis of careful research and considerations about a variety of issues. Not all these deliberations will necessarily turn out to be correct. That in itself does not place question marks over the leadership’s execution of its responsibilities in terms of the Companies Act to act with due care, skill and diligence or the King IV Report Principle 1 that they should lead ethically and effectively.

Trust

An entity, which has been run and managed in such a way as to build a reputation for ethics, integrity and reliability, will likely have a growing group of loyal customers and other stakeholders, based on trust. 

The size of the entity concerned has no bearing on whether or not it is trusted. That is based entirely on the entity’s consistent, trust-centred behaviour towards all its stakeholders. 

What if things go wrong?

There will be times when a decision turns out to be wrong resulting in a service or product not being delivered on time or otherwise being deficient. The reasons may be beyond the control of management. However, such an event may have the potential to negatively impact stakeholders’ trust.

The cause may be the result of a strategic decision by management to change the nature or make-up of a service or product. For example, by reducing the size or contents of a product without any communication to consumers so as to increase profit margins or to avoid a price increase. This, of course, is a completely different proposition as it is inherently dishonest and lacking in transparency and integrity, questioning the moral mindset of management. Another example would be price-fixing and collusion. Some years ago this was evident in the construction and food processing industries. 

A third example could be a deliberate decision to undertake activities without recognising the potential of damage to the environment; getting environmentalists, conservationists (some of whom may be customers) up in arms, and let’s not forget the reach and impact of social media.

What are the consequences?

In all examples there is a real likelihood of a loss of trust resulting in customers abandoning the entity. In the second set of examples, where there is real or perceived dishonest behaviour on the part of management there are likely to be fines/penalties (which there were in the cases of the construction and food processing industries). However, the real damage may well be the loss of trust – which for a smaller business could be fatal.

In the former case where the problem arose through a situation that was either not anticipated or due to a change of circumstances, the loss of trust is still possible but appropriate remedial action may avoid the destruction of trust.

Finally, in the last example, how the entity responds to the situation will determine the long-term consequences.

Can fairness make a difference? 

Having said that, where an entity responds by treating customers fairly, putting right the problem as a matter of moral rectitude, trust is likely to be retained and may even be enhanced. This, of course, requires swift and transparent communication so that stakeholders are aware of the circumstances of both the issue and the entity’s response to it. 

Consider the Autumn 1982 response of Johnson & Johnson to the deaths of seven people in Chicago who had taken its market leading, over-the-counter painkiller, Tylenol. 

Throughout the crisis thousands of stories ran in U.S. newspapers together with hundreds of hours of national and local television coverage. A major potential trust breakdown for Johnson & Johnson, bearing in mind that Tylenol was the market leading paracetamol in the US and a substantial contributor to J&J’s revenue and profits. After the crisis, J&J said that over 90 percent of the American population had heard the story within the first week of the crisis.

J&J, however, did not have a crisis management plan, unthinkable today, or is it? Do you have anything like it?

So the company’s Chairman, James Burke, went back to the company’s founding credo. This saw the business as having a moral responsibility to society beyond sales and profit. He formed a seven-member strategy team with two tasks: how do we protect people and how do we save this product and our reputation?

First of all they alerted consumers via all available channels of communication not to consume any type of Tylenol product. They halted production and advertising and ordered a nationwide withdrawal of the product. This cost the company millions of dollars, however, it received credit for putting public safety above profit.

The cornerstone of J&J’s recovery, in priority order, was: People, Environment, Property and only then Finance. They restored trust by behaving fairly to the most important people, their stakeholders. J&J’s Tylenol, accordingly, ultimately re-gained its market share.  

This is an example where fairness retained trust. There is even the possibility, as occurred in this case, of the enhancement of trust when, after the event, it is seen that the promise of fairness has been honoured in full. 

Trustworthy fairness

So, all in all, treating all stakeholders fairly is a moral approach to business which enhances relationships. Even in personal relationships, responding with fairness when trust is at risk, can save the relationship. 

An investment in fairness as a matter of corporate value is as essential and generates as good returns as fundamental trustworthy behaviour. 

“In conclusion, it is clear to me that Trust and fairness in the workplace are connected as they are in all of life. Trust defines how we as humans relate to one to another, while fairness is a practical mechanism for maximising the benefits of trust. The two work together, and we need them both to operate consistently at the heart of workplace activity. In other words, ‘Trustworthy Fairness’ provides a foundation for building meaningful and productive workplace life^” (Jonathan Rens).

The European (and South African) authorities (refer to governance codes below) opted for a principles-based approach. However, governance cannot be truly effective without the integrity of purpose and actions which drive the ‘tone from the top’ leading to a strong moral compass founded on ethically-based values.

The governance imperative

Corporate Governance has been a topic of ongoing conversation and even legislation since the early 1990’s. However, in spite of a number of outstanding codes and reports (such as the Cadbury Report, the four King Codes and Reports, the Combined Code and many more around the world), together with the various legislative responses (such as Sarbanes Oxley in the USA), business failures continue. 

Where were the directors of these failed businesses and what were they looking at and asking of management when considering their approval of the financial statements year after year?

Ethics and moral duties

Each director is a steward of the company and should demonstrate: 

• Conscience – intellectual honesty and independence of mind,
• Inclusivity – legitimate interests and expectations of stakeholders,
• Competence – knowledge and skills
• Commitment – diligence, and 
• Courage – to take the appropriate risks and to act with integrity.

There is evidence that suggests that companies displaying consistent ethical values and behaviours based on solid and sustainable moral values driven throughout the organisation where all are aligned to the ‘tone from the top’ deliver better and more sustainable returns.

The ethical and moral imperative

Key questions:

• Is it a reasonable presumption that all know and fully understand the meaning and impact of ethical behaviour, moral values and what drives them?
• Do the directors live out their stated ethical and moral values – the tone from the top?
• What are the views of management and the workforce of the leadership’s (director’s) ethical and moral values and the example set?
• Is it reasonable to assume that management knows how to embed these values throughout the organisation?
• How do directors measure the ethical and moral climate of their organisation?
• Does the ethical and moral climate of the organisation align with those espoused by the directors?

What is understood by ethics and morals – is there a universal standard, a universal moral compass?    

In the Glossary of terms in the King IV report the term Ethics is defined as follows:

“Considering what is good and right for the self and the other, and can be expressed in terms of the golden rule, namely to treat others as you would like to be treated yourself. In the context of organisations, ethics refers to ethical values applied to decision-making, conduct, and the relationship between the organisation, its stakeholders and the broader society”.

However, what is understood by ethical values, behaviours and integrity? Can one assert that there is a set of Universal Principles? Consider the following:

Universal Principles 

Noted anthropologist Donald E Brown found in his research that the moral codes of all cultures include recognition of responsibility, reciprocity, and ability to empathise. Other studies have confirmed his findings. The major world religions preach common values: commitment to something greater than self, responsibility, respect, and caring for others. Genuine behaviour norms in different cultures may distract us from what we have in common with all people – a universal moral compass.  

Stephen Covey suggests more evidence of universal principles: “From my experience in working with different people and cultures, I find that if certain conditions are present when people are challenged to develop a value system; they will identify essentially the same values. Each culture may express those values differently, but the underlying moral sense is always the same.” 

What are these universal moral values?

The authors of Moral Intelligence (Doug Lennick and Fred Kiel, Ph. D) suggest the following from their research:

• Integrity
• Responsibility
• Compassion
• Forgiveness and reconciliation

While the first two seem self-explanatory, what about the last two? 

Compassion shown to an employee in distress may lead not only to a swifter recovery and return to full operational ability but also to a substantial gain in loyalty from employees – and not just to the employee concerned. 

Forgiveness and reconciliation: Is not business the enterprise of risk?  If employees and management are too fearful of making mistakes, how much business risk are they likely to take?

Finally, an organisation that demonstrates these ‘universal values’ from the top through management in alignment with actual behaviour will achieve, through its workforce, greater returns than might otherwise be the case.

So, these ‘soft’ practices have the potential of leading to hard bottom line results.

Ethics and moral values – are they worth it?

It has been suggested that companies with recognised good governance are valued at a premium over those with poor governance records. The same applies to companies with sound ethical records. Ethical companies attract and retain talent.

The Proposition

• Enhanced governance through demonstrated ethical behaviour
• What are your values and ethics?
• Does your behaviour reflect them?
• How do your board colleagues and your first line reports perceive your values, ethics, and integrity?
• What is your staff’s perception?
• How do you go about ensuring the values are embedded throughout the organisation to achieve alignment?
• Starts at the top
• Safety for those really tough and necessary conversations
• Ethics led performance
• Behavioural change and feedback
• Strong business case
• Is your top team up for the challenge?

 “An investment in knowledge pays the best interest,” 

– Benjamin Franklin, American politician and inventor

Most SMMEs (Small, Medium and Micro Enterprises) in South Africa fold in the first two years of doing business. Reports suggest that the lack of education and training are some of the primary reasons for the low level of entrepreneurial activities and the high failure rate of SMMEs. To add salt to the wound, the overall quality of entrepreneurship in South Africa is recorded as lower than average. 

Here are some of the visible results of the impact of, and lack of, education and training for SMME managers along with some corrective recommendations:

1. Quality of SA’s entrepreneurial activity below global average

South Africa’s entrepreneurial activity is rated at 5.1%, which is below the Global Economic Monitor (GEM) average of 6.4% and the average of 6.7% for efficiency-driven economies. (In 2019, South Africa ranked 49th out of 54 economies on GEM’s National Entrepreneurship Context Index, ahead of only Croatia, Guatemala, Paraguay, Puerto Rico and Iran. This index provides a single composite number that can express the average state and quality of the entrepreneurial ecosystem in a country and be compared to those of other economies.)

According to existing research on the subject, “This and other figures show a lower than average level of entrepreneurial activity in South Africa and present challenges to all role players (government, the private sector and educators) for getting programmes that encourage entrepreneurship off the ground, so that this gap can be decreased”.

2. Quality education linked to managerial confidence

In 2019, Ahmad Al-Tit, Associate Professor of Business Administration at Qassim University reported aspects such as the “business owner’s age, educational attainment, management skills, training, business size, and general business experience”, as elements impacting the success of a business. 

“From these factors, the attainment of good quality education, general age, and business experience is believed to result in higher managerial confidence and quickens the procedure of obtaining adequate business finance,” he further stated.

3. Academic recommendation to solving the problem

Considering the importance of SMMEs to the economy, the responsibility to educate entrepreneurs is spread among several stakeholders.

Based on the findings of research published by the University of Fort Hare, the following recommendations are suggested to the stakeholders: 

• Government Agencies: “It is also suggested that government agencies work hand in hand with the banks to ease access to finance (training programmes) by SMMEs”.
• Government: “It is recommended that the government explore other strategies to compliment entrepreneurship education that will help create independent entrepreneurs instead of educated beggars.”
• SMME Owners and Managers: “SMME operators need to take advantage of entrepreneurship education programmes that are offered by institutions of higher learning and government agencies if they really want to improve the performance and survival chances of their businesses”.
• Institutions of Higher Learning: “They need to play a critical role in providing entrepreneurship education, for they have the expertise and resources to do so”.
• Banks: “It is recommended that banks provide financial resources to SMME operators who show potential for success”.

Consider additional education and training for SMMEs offered by the Institute of Directors South Africa (IoDSA) to improve your understanding of good governance requirements. These will improve your likelihood of success and the attractiveness of your business while reducing the potential of regulatory risk.

Many small and medium-sized enterprises (SMEs) are owned and managed by the founder(s), sometimes with the involvement of family members, and in the early stages of the life of a small or medium-sized company there would seem to be little reason or motivation to appoint independent non-executive directors to the board. However, as an entity grows in size, complexity and, hopefully, market share, there may well be a need for, and advantage in, having diversity and independence of thought in the direction of the company. 

All members of the board, whether executive, non-executive or independent non-executive have a legal duty to act with independence of mind in the best interests of the organisation.

Firstly, what exactly is an “independent non-executive director”?

The Companies Act and King IV define a director as “a member of the board of a company, as contemplated in section 66”. There is no definition in the Act of ‘Independent’ or ‘non-executive’. Accordingly, all directors have the same responsibilities.

King IV, however, explains independence as follows: “When used as the measure by which to judge the appearance of independence, or to categorise a non-executive member of the governing body or its committees as independent, it means the absence of an interest, position, association or relationship which, when judged from the perspective of a reasonable and informed third party, is likely to influence unduly or cause bias in decision-making”. 

Why appoint independent non-executives?

• Appointing independent non-executive directors does not, in itself, ensure the entity’s governance is enhanced. 

• However, establishing a well-balanced governing body is a meaningful step towards good governance. The King IV code states: “The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively”.
  
• Bringing in additional skills, experience and thought to the leadership of the entity has the potential of enhancing the ability of the board, recognising and dealing with risks and opportunities, and even lifting quality and effectiveness of the deliberations in the board.
  
• Non-executive or independent non-executive directors are charged with maintaining an arms-length relationship with management, exhibiting professional scepticism and bringing independent judgment to bear on issues of strategy, risk management, performance and resources including key appointments and standards of conduct. Non-executive directors may not have any operational capacity within the entity; no employment relationship; not be a major supplier or major customer and should not be rewarded on the basis of the entity’s performance.

• An entity recognised for its strong ethical and effective governance will likely attract more business as a trusted partner. After all, while a company requires a licence from CIPC (Companies Intellectual Property Commission) to commence business, it also needs a Social License to Operate!

What should the independent non-executive director bring to an SME?

• Someone, as mentioned above, who will bring specific skills and a range of business experience of relevance to the entity. While it may be helpful to have experience in the entity’s particular industry, diversity of experience in other sectors such as, for example, the financial sector, could add value.

• Clearly, an understanding of the business and the industry is essential in order to make a positive contribution. A non-executive director is expected to make a creative contribution to the board by providing objective and constructive challenge and advice.
  
• Owners and management of an SME should not seek to appoint independent non-executives who will simply reflect management’s views, but accept that honest, respectful and robust challenge should be expected and encouraged.

What qualities should you seek in an independent non-executive director?

Clearly, an independent non-executive director should exhibit appropriate behaviour, have a strong ethical stance with absolute integrity; a disciplined and dedicated approach to the role together with a good understanding of the requirements of good governance, controls and risk and opportunity management.

A knowledge and understanding of the regulatory environment of the entity together with the key players and risks in the supply chain and customer base (the entity’s market) is an added advantage.

What should you offer a new appointee to your board?

Any new independent non-executive should insist on an induction programme together with appropriate Directors’ and Officers’ indemnity cover. 

Realistically, most SMEs may not be able to offer competitive fees, compared to large or listed companies. Both the Institute of Directors in South Africa and PricewaterhouseCoopers issue useful annual guides to directors’ fees. SMEs should consider making use of this resource in determining the level of fees they are able to afford. 

Furthermore they need to consider how the fees are determined i.e. per meeting attended; a retainer regardless of meeting attendance or a combination of both – retainer plus per meeting attended. The SME should also undertake annual director’s performance evaluation.

A non-executive and independent non-executive director needs to balance the contribution they can make in considering an appointment where the fees are, perhaps, not quite at the level they expect. Serving on NPO (Non-Profit Organisation) and SME boards is an opportunity to ‘put back’ their experience and skills. They should consider the responsibility and risks they undertake against the potential contribution they can make to these essential sectors of the economy.

“Every advantage has its tax.”

Ralph Waldo Emerson

The purpose of the foreign remuneration exemption, which was introduced in 2000, is to provide relief from any possible double tax that may arise where both South Africa and the foreign country taxes the same income derived from employment, according to a SAICA article on the topic, written by Piet Nel (Project Director: Tax Professional Development). 

Requirements to qualify for the exemption 

• The employee must be a resident of South Africa, for tax purposes.

• The employee must have been physically absent from South Africa and worked outside South Africa for a period or periods exceeding 183 full days in aggregate during any period of 12 months.

• The employee must have been physically absent from South Africa and worked outside South Africa for a continuous period exceeding 60 full days during that period of 12 months.

However, due to recent legislative changes and COVID-19 travel restrictions, many employees who work on foreign assignments or abroad may not qualify for the exemption for the 1 March 2020 to 28 February 2021 assessment period, and face paying double tax. 

Important changes to the exemption

• A new R1.25 million threshold applies for this 1 March 2020 – 28 February 2021 tax period, where previously, there was a full exemption for qualifying foreign sourced remuneration. The individual will, unless the foreign country doesn’t impose a tax on remuneration, be liable for a double tax to the extent that the remuneration exceeds R1.25 million, explains Nel. 

• Furthermore, since March 2020, employers must withhold employees’ tax if the taxpayer is employed by a South African resident employer, registered as such with SARS. If not, the first provisional tax was payable on 31 August 2020 and the second payment is due on 26 February 2021.
  

• COVID-19 travel restrictions around the world prevented many employees from traveling to work outside South Africa to meet the 183-day requirement, and therefore they cannot qualify for the exemption. Although some international travel became possible after 31 May, many workers remain unable to travel internationally. SARS and National Treasury recently proposed some relief through reducing the required number of days abroad by the 66 days of COVID-19 alert levels 5 and 4 (27 March 2020 – 31 May 2020) in South Africa. This would reduce the required number of days abroad from 183 to 117 in any 12-month period, for years of assessment ending from 29 February 2020 to 28 February 2021. The current requirement of 60 continuous days abroad would remain unchanged.

How companies can assist their employees 

Given that the proposed revised rules have been announced so late and that COVID-19 remains a threat to international travel – affecting employees’ ability to accumulate even the proposed reduced number of days working abroad (117) – companies need to assist their employees to plan for their foreign remuneration tax liability. 

1. Keep updated with ongoing changes 

The proposed amendment of the required number of days abroad is only expected to be finalised and approved later this year. In the meantime, South Africa has announced that all international travel can resume subject to stringent health protocols.

While this is great news, it comes at a time when a second wave of COVID-19 has sent much of Europe back into lockdown, and when South Africa is witnessing a resurgence in the number of COVID-19 cases in certain areas, which has prompted government to announce the implementation of a resurgence plan. Widespread concerns remain regarding a future return to a harder lockdown alert level, which may see travel restrictions being implemented again.  

2. Consider the individual impact 

Nel explains that the stipulated period of 12 months is not a year of assessment, but any period of 12 months starting or ending during the year of assessment. It is also not a requirement of the relevant section of the Income Tax Act that the 12-month cycles run consecutively. 

As a result, whether an employee qualifies for the exemption will depend on when their specific 12-month cycle starts, as well as how much time was spent outside South Africa before and after the lockdown. There may also be double tax agreements in place with specific countries that could affect an employee’s tax position. 

Cross-border employees, unable to work during the lockdown, should prudently consider when their new 12-month cycle should start. Those who continued earning remuneration from foreign employers while working remotely from South Africa will see their full income taxed in South Africa.  

It is possible to get credit for foreign tax to provide relief where a double tax arises. The Income Tax Act allows for foreign tax credits to be granted where the same amount was subject to tax, or partially so, in South Africa and in another country, but only on assessment, says Nel. 

In some instances, obtaining a tax directive may also be necessary. The law relevant to employees’ tax (PAYE) doesn’t allow for the foreign remuneration exemption to be taken into account by the employer on a monthly basis. SARS indicated that an employer “may at his or her discretion, under paragraph 10 of the Fourth Schedule, apply for a directive from SARS to vary the basis on which employees’ tax is withheld monthly in the Republic” and that the “potential foreign tax credit is taken into account to determine the employees’ tax that has to be withheld for payroll purposes.”

As Nel points out, there are also other practical implications to consider. Some benefits, which may be exempt from tax in the foreign jurisdiction, may not qualify for an exemption in South Africa. Examples of such benefits include free accommodation provided by the employer, security and travel services. It is also not clear how allowances, such as travel allowances, should be treated. Whilst SARS updated its practice generally prevailing in this respect, these issues are not clarified. 

3. Professional tax assistance  

In light of the ongoing changes in legislation and circumstances, and the need to consider each employee individually while taking into account the myriad factors that apply to the foreign earnings exemption, South African employers are well advised to obtain professional assistance in order to prudently assess their – and their employees’ – current tax positions and how the recent changes in respect of the foreign remuneration exemption will affect their tax liability. 

“He said that there was death and taxes, and taxes was worse, because at least death didn’t happen to you every year.”

Terry Pratchett, Reaper Man

Tax-free savings accounts (TFSAs) have been around for just over five years, and yet many people still do not know about them, are unfamiliar with the benefits or don’t know how to take maximum advantage of this unique investment opportunity.

Amidst the chaos of early COVID-19 and lockdown many may not have noticed that as of 1 March 2020, the annual limit in these types of investments was increased from R33 000 to R36 000 a year with the overall lifetime limit standing at R500 000. The National Treasury introduced these investments to encourage South Africans to save and as a result there are no taxes payable on interest or dividends received, and no capital gains tax (CGT) on funds withdrawn.

Clearly with such an attractive offer a TFSA must be a part of every person’s future investment strategy, regardless of their income level. So just how does one take maximum advantage of these accounts and stand to gain the most future benefit?

1. Long term investment

The real power of a TFSA is in the long-term compounding of the investments. Due to the fact that a TFSA contribution is not immediately tax deductible (as for example a retirement contribution is) the benefits only kick in later when the interest that is being achieved starts overtaking the amount that would have been saved on taxes through other contributions.

Director of advisory services at Investec Asset Management, Jaco van Tonder says, “From a tax benefit perspective, it appears to not make sense for an investor to utilise a TFSA for an investment horizon of less than five years. This picture changes dramatically though after ten years due to the well-known compounding effect of long-term investment returns”.

This is an important aspect for investors to consider, especially as money in a TFSA can be accessed and withdrawn at any time. While that seems attractive there is a further large catch in that once the money has been withdrawn, returning it to the account will be regarded as part of your annual contribution. What this means is that if you have invested R12 000 in the account this year, then withdraw R3000, and return it a month later, the tax man will view this as you having already invested R15 000 in that account.

2. Saving for retirement

Due to the long-term nature of a TFSA, they are commonly used as a way to save for retirement, alongside, and sometimes as an alternative to, a Retirement Annuity (RA). 

While the income tax benefits of investing in an RA still makes them an extremely attractive proposition, a TFSA has a number of other benefits, which those investing in an RA should consider. Firstly, investors can withdraw from a TFSA at any time, and there is no tax on those withdrawals, while RAs are only accessible at retirement (under normal circumstances), and, when you access them, you need to buy an annuity with at least a part (currently two-thirds) of the accumulated value. 

Further, there are absolutely no restrictions on asset allocation in the TFSA, whereas restrictions apply to RAs in terms of Regulation 28 of the Pension Funds Act, meaning the investor may have more choice as to how aggressive they want to be with that investment. 

There are however some complicated considerations which need to be taken into account, and it’s not as simple as cashing in the one to buy the other. In order to protect them from creditors, RA’s are excluded from a deceased person’s estate, and the investor is often encouraged to nominate a beneficiary to whom the benefits will accrue after death. The nomination process for a beneficiary may come with caveats, and instances where pay-outs may not happen, but even if the pay-out is set to be made, this can involve another level of administration and difficulty for the beneficiaries who may not want to deal with two separate companies to wrap up their loved one’s estate. There are, however, often tax benefits to doing so at that stage. 

The issues around which is the superior investment between an RA and a TFSA will therefore ultimately come down to your unique situation, and investment strategy, and it is highly recommended that you speak to your accountant before making the leap.

3. Saving for an education

Despite the powerful points in tip two, one need not necessarily consider a TFSA as only being an alternative to an RA. There are many other investment choices someone may need to make and one of the most important is education. If you intend on sending your children to University one day you might be thinking about starting a fund to pay for the fees. If you do not already have a TFSA think twice and examine all options closely. 

Due to the long-term nature of education savings, a TFSA is the perfect tax-sheltered way to save for your children’s education. With regular education funds, part of the withdrawal may be subject to taxation, but when it comes time to finally cash in the TFSA there are no taxes payable at all and given the long term nature of the investment a TFSA could be the ideal investment tool. 

As an example, if you invest just R620 a month in a TFSA at the relatively common interest rate of 6% for a period of 10 years, you could build up almost R100 000 during this time. This sort of payment is exactly what is needed when it comes time for your child to move from school to an institution of higher learning.

4. Invest your lump sum as soon as possible 

Many people wait until the end of the year to put whatever savings they have left into their TFSA as a lump sum. Sometimes they use their end of year bonuses for this same benefit. Investment strategists suggest that it is wiser to either increase your monthly contribution to as close to R3000 a month as you can, or to pay the lump sum at the beginning of the year. What this does, is allow you to enjoy a full year of tax-free growth, which can add up dramatically over the lifetime of the investment.

A R36 000 lump sum investment on 1 March can grow by R3 600 over the year (assuming a balanced fund investment with CPI+4% return). Tax on interest, dividends, and capital gains in such a portfolio would amount to roughly R600. By rather allowing this lump sum to grow in the TFSA from day one, the investor gets to keep and further grow this R600. Compounded over time this relatively small amount can grow to make a significant difference.

5. Invest in growth assets

Like other funds, TFSAs come in many shapes and sizes. SARS currently says the following kinds of accounts can qualify as Tax free investments: Fixed deposits; Unit trusts (collective investment schemes); Retail savings bonds; Certain endowment policies issued by long-term insurers; Linked investment products and Exchange traded funds (ETFs) that are classified as collective investment schemes.

In order to take the maximum benefit from your TFSA you should ensure that there are as many growth assets included as possible to maximise your long-term growth. Remember, no limits apply as to your asset allocation and as such you are free to make bold choices.

6. Don’t over-contribute

Seeing all of the above, and realising the benefit of a TFSA, one may be tempted to invest more money into TFSAs than is legally mandated. Don’t. The annual contribution limit of R36 000 per individual is strictly enforced, and any contributions in excess of this annual limit can be subject to penalty tax of 40% of the excess. There is no limit to the number of TFSAs you can have, but it is important to manage them closely to ensure that you don’t exceed your annual contribution limit. This R36 000 applies to the sum of all contributions to all your TFSAs so be very careful not to accidentally stray over the line. 

While powerful, a TFSA is not a one-size-fits-all investment opportunity. Investors need to carefully evaluate their different life situations and investment strategies with reference to long-term returns and volatility measures and see how they stack up. There is little doubt that the TFSA should form some part of an overall investment portfolio, but what that role is, needs to be tailored to the individual. 

Speak to us at Emma Pardoe Chartered Accountant to evaluate your personal circumstances and see just how you can take maximum benefit from a tax-free investment. 

Forewarned is forearmed.

Samuel Shellabarger, Prince of Foxes

The daily covid-19 infection rate has decreased considerably over the last month or so. South Africans have found a way to live with the risk of infections and have in the recent past become generally more active. This has increased the fear that there might be a second wave of high Covid-19 infection and mortality rate. Western Cape government, for example, has warned a resurgence is highly probable considering the second wave of mass infections sweeping across internationally.

Explaining why it is still important to be cautious against Covid-19 for the next few months, the National Institute for Communicable Diseases (NICD) warns that “Coronavirus is not going away any time soon”.

“We are seeing second waves in European countries three to four months after their first wave. We don’t know if this will happen in South Africa, but it is possible, and even likely. Also, we know that once you get Coronavirus you are not immune from it for life, and you could become re-infected in the future,” it says in a statement on its website.

SMMEs, like the citizens, have to protect themselves from the possible re-emergence of high numbers of infections, which have crippled a considerable number of them earlier this year.

Based on advice from a collective of experts, here are some tips for SMMEs looking to prepare for the possible second wave of high Covid-19 infection rates:

General working conditions and workplace policies have to be reviewed

According to the Centres of Disease Control and Prevention in the US, the working conditions and policies must be reviewed in order to best assist companies in protecting themselves against the full blow of the virus. Companies are advised to “examine” working conditions and policies in order to protect employees, and ultimately themselves.

“When possible, use flexible worksites (e.g. telework) and flexible work hours (e.g. staggered shifts) to help establish policies and practices for social distancing (maintaining distance of approximately 6 feet or 2 meters) between employees and others, especially if social distancing is recommended by state and local health authorities,” said the organisation.

Consider remote working more as an option than a forced situation.

On the local front, Accelerate CEO, Ryan Ravens, recently spoke on a survey conducted on remote working due to Covid-19.

Inventory and stock

He told radio station Cape Talk, that “increasingly, it (remote working) works better for companies as well as employees. I think there has always been a resistance by our very traditional corporates because they felt employees would not be as efficient and/or wouldn’t deliver more, but I think that notation has been turned on its head. Employees have actually showed up and shown that they can work far better when working from home.”

Consider stocking up on supplies and raw material reasonably, knowing that replenishing them can’t be guaranteed ahead should the stricter lockdown regulations be reimplemented by government. The stockpiling process should be ideal to each business, considering aspects like expiration dates in certain goods, for example, and access to market. Careful management of the inventory is necessary.

Insurance

The importance of having quality insurance in general can never be overstated, and the same thinking prevails in business. Policyholders are encouraged to relook at the fine print of their business insurance policies to refresh their memories and for better understanding, bearing in mind the unusual circumstances the world is operating in. Insurers on the other hand are encouraged to “pick-up the pace”. However, the global scourge is seen as a challenge that should motivate insurers to put customer-care first.

A jointly authored blog by Price Waterhouse Cooper’s global insurance advisory leader, Abhijit Mukhopadhyay, and leading practitioner in “customer experience”, John Jones, expounds on this narrative. The two expert authors express that “Policyholders will want to know their claims will be paid. But it doesn’t always work out that way — especially with a pandemic, which is not generally covered by insurance (except possibly through costly business continuity insurance). Customers are bound to be confused and anxious, and they need to feel that their questions and concerns are addressed with honesty and empathy.”

Understand the seasonal cycle of business

Businesses prepare and operate with attention to their annual business cycles. They are advised to prepare knowing that the unidentified length of the possible viral resurgence might overlap their business season, i.e. quarters and other periodic demarcations of business. 

Minimise spending

SMMEs are advised to minimise spending in order to have as much in the piggy bank as possible. Reserves will be critical in a period where there is minimal income. Careful budgeting could be the possible rabbit out of a hat for successful businesses during the dreaded possible re-emergence of stricter lockdown restrictions.             

Get familiar with the government’s Covid-19 Relief Fund for SMMEs

This could be critical for SMMEs. Understanding the qualification process and benefits described by the Department of Small Business Development (DBSD) can be the determining factor between relief aided continuity and capitulation. The current amount given to businesses that qualified for the Covid-19 Relief has eclipsed R500 000, according to the department.

The department supposedly updates information related to the relief fund on its website for entrepreneurs to peruse, according to the set business classifications of the SMMEs.

The coronavirus pandemic arrived like a thunderbolt and the unique situations it created found many companies unprepared and disorganised. Around the world, organisations began closing as it was found their emergency planning was not up to scratch and basic functions of the company could not exist in the new world.

Now that we are half a year into the outbreak some companies are still playing catch up and many will never manage. For those who have survived and even thrived, there are plenty of lessons to take away from COVID-19 that will hopefully change the way we do business and future proof our endeavours for the inevitable coming emergencies. We discuss six of the most important business lessons we can all benefit from.

“Given the nature of the crisis, all hands should be on deck, all available tools should be used”

Christine Lagarde, President of the European Central Bank

1. Working from home is possible

Ever since the creation of the internet employees have been pushing for more opportunities to work from home and the vast majority of companies have been resisting it, worried that productivity would plummet or that team culture would suffer. With their hands forced many will now admit that working from home is not only possible but also saves the company money.

Some of the largest businesses in the world are leaning into the trend. Twitter and Square have both notified employees that they may work from home permanently if they choose, while Google and Facebook have extended work-from-home options through to the end of the year.

South African Business and Automation Analyst Grant Buchanan explains, “We are going to see a shift towards shorter and more flexible leases as firms realise they actually require significantly less floor space than before. There will be an emphasis on collaboration spaces and desk sharing and this is going to have an impact on the demand for commercial office space.”

2. Understand your whole supply chain

What the pandemic has made abundantly clear is that businesses do not operate in a vacuum. Your suppliers, in turn, have other suppliers and a disruption to one link in the chain can result in your whole business suffering. It has therefore never been more important to understand just who your suppliers are, how their businesses operate and just what sorts of emergencies may impact them down the line.

Knowing what to expect is half the battle won, as you cannot plan for emergencies you were not expecting. It’s easy to control the issues and items within your own company only to be let down by the actions of others.

Buchanan says it’s important to understand which suppliers you are dependent on for your most critical goods and services. Do you understand how many supply options you have, and do you have plans in place for if they fail to deliver? How capable are your service providers of delivering when they are ill, trade wars kick in, or their key suppliers hit snags? What sort of emergency procedures do they have in place to ensure you will not be negatively affected?

3. Communication and crisis planning is essential

During the scramble of early lockdown a number of companies realised there were flaws in their communication and crisis management systems.

While email works perfectly well in an environment where in-house emergencies can be dealt with on a quick walk across the office, employees at home required other solutions.

Does your company have a way to communicate with all employees quickly and efficiently without relying on email? There are many stories of IT managers breaking curfew to try to fire up servers that had frozen, resulting in significant delays.

The same goes for crisis management. How do you secure your premises and assets? How do you notify your staff? What systems are in place to protect them in the event of a catastrophic incident? And how do you minimise the damage from a future pandemic or related drama?

Leaders need to put plans in place, introduce new technology and train their staff in these new processes before they become necessary.

4. Use the available technology

It’s easy to get caught up using systems that have always been in place. In smaller businesses particularly it’s common to use manual systems for accounting, payroll and other functions, and companies that did this were badly exposed by the virus.

Many smaller, local retailers and restaurants were caught off-guard by the pandemic. Where they should have been at the ready to serve online customers, and provide delivery or curbside pickup to keep afloat, they instead took many months of lost income to get there.

Technological uptake has been phenomenal over the past few months. The need to meet up has seen collaboration apps booming with Zoom experiencing a 1,125% spike, Webex 560%, and Microsoft Teams 108%.

The trick is to take that collaboration app approach across the board, look closely at what solutions are already out there and find innovative ways to use that technology to make your business work away from your desk before the next event strikes.

5. Build relationships with your accountants, bankers and lawyers

Some people only see their accountant, lawyers or bankers during a crisis or tax season but these relationships have recently played an integral part in the survival of many companies.

The COVID-19 business rescue loans were implemented via the banking system, and banks, which are overloaded with applications, are giving first preference to their current customers. Those companies that have a good working relationship with their bankers appear to have more luck with these applications and get them processed faster due the banker’s familiarity with their accounts.

Similarly company accountants and lawyers have been working overtime helping their clients interpret the regulations for obtaining disaster loans and TERS funding, as well as guiding them on seldom-used aspects of business such as suspending rent payments, delaying vendor invoices, and chasing non-paying customers.

“Understanding our clients’ businesses has been integral over the last few months,” says Robin Gerhold of Gerhold & van Wyk Attorneys in Sandton. “Knowing the details of how they operate has allowed us to tailor solutions and secure aid much more easily, efficiently and ultimately, cheaply, than if we were coming in cold without that information”.

6. Broad-based skills are important

The tendency when hiring is to focus on getting in highly-trained niche experts for each position. The pandemic has, however, shown us that the organisations which were able to rethink their business model and pivot quickly had a much better chance of adapting to market conditions and surviving, and these organisations were also full of employees with broad skills, emotional agility and a wide range of competencies.

It is a well-known fact that companies should constantly be innovating, and the pandemic has shown us just why. Being able to shift quickly relies on an employee base of innovative and creative thinkers who are empowered by company culture to take risks and develop new ideas.

According to one of the world’s leading management thinkers and award-winning Harvard Medical School psychologist Susan David, organisations today, “operate within unprecedented complexity resulting from many forces including technology, globalisation, and strong competition. At present, organisations are also feeling the added impact of the COVID-19 crisis. All these pressures require companies to offer swift responses.”

However, she says, “organisations themselves can never be truly agile unless the people who work within them are agile.”

David advises hiring and rewarding out-of-the-box thinkers and supporting those who are risk-takers.

It’s impossible to ignore the difficulties of doing business in 2020. The lessons learnt this year have been hard won, but by putting them into practice, and reaching out for help when we lack the expertise, we can ensure the next set of challenges won’t be our last.

The South African economy could take as long as seven years to get back to the size of R5.1 trillion it was at the end of 2019 before Covid-19 and the national lockdown.

This forecast is according to Citadel chief economist Maarten Ackerman, who expressed this view during an interview.

Long way back

Christopher Loewald, South African Reserve Bank (SARB) head of economic research, told the Tax Indaba that it was going to take a long time to get back to a real activity level of 100% again.

During the same event, Ismail Momoniat, National Treasury Deputy Director-General for tax and financial sector policy, said that it wouldn’t be an easy road to get the South African economy back to its 2019 level.

“We need a Covid-19 vaccine, and we need to ensure that sufficient people get vaccinated. I think we need to be careful about talking about post-Covid. I think we are years away from that,” he added.

Advice for SMEs

Economists suggest that small businesses gear themselves for tough times, keep costs low, and ensure they are highly innovative.

“Small businesses need to be lean and mean. They need to have a buffer to get them through difficult times,” Ackerman said.

Every business needed to think carefully about how they expanded, he added.

Make your plans in the context of the forecasts we discuss below…

The local economy has contracted

This advice comes amid a local economy that has stagnated since 2015 and contracted for the past year, including a 51% contraction, on an annualised basis, in the second quarter because of the nationwide lockdown that started on March 27.

Sanisha Packirisamy, MMI Investments and Savings economist, said during an interview, that she was expecting the local economy to contract by 8.1% this year, followed by a muted rebound of 2% in 2021 when anticipated Eskom power cuts will constrain the economy.

Ackerman said that an 8% contraction of the local economy would be the biggest decline since 1920 when there was a 12% contraction.

A worrying sign

A worrying sign was that the outlook for fixed investment and household consumption, both key to the long-term economic health, were both bleak, Packirisamy added.

For 2022 and 2023, she is forecasting growth of about 1.5% for both years.

“We are stretched on the fiscal side, and confidence is extremely muted. We face policy uncertainty and slow structural reform. It is that combination of factors that makes it very difficult for us to grow faster,” she added.

Mild inflation outlook

The inflation outlook is positive.

Packirisamy is forecasting inflation to average 3.2% in 2020 and 3.8% in 2021 before rising to 4.5% in both 2022 and 2023.

Economists forecast that interest rates will stay low.

Packirisamy said that the SARB could cut interest rates further, but interest rates were likely to increase from the second half of 2021.

At the end of 2021, Packirisamy expected the prime interest rate to be 7.5%, and by the end of 2023, the prime interest rate maybe 8.5%.

Credit rating to fall even further

In March this year, Moody’s Investors Service cut the South African government’s credit rating to “junk” status or sub-investment grade, which is the grade that its two rivals, Fitch Ratings and S&P Global Ratings had the country on since April 2017.

“We are probably going to see more downgrades, and by 2023 the country’s credit rating will be two or three notches lower,” Ackerman said.

He said that the government was facing a fiscal crisis, and the only way for the South African state to avoid that was to embark on big expenditure cuts, but the state was baulking at doing that.

Public finances are dangerously overstretched

“Public finances are dangerously overstretched. Without urgent action…a debt crisis will follow,” the National Treasury said in July.

The government budget deficit, which is the amount by which revenue fails to fund expenditure, will widen to 15% during the fiscal year ending March 2021, according to Ackerman.

Then in the fiscal year ending March 2022, the budget deficit will recover to 10%, he expects.

In five to seven years, Ackerman forecasts that government debt will climb to 100% of GDP, he said. By comparison, the National Treasury estimates that national debt will reach 81.8% of GDP by the end of March 2021.

Unemployment rate to soar

According to Packirisamy, the unemployment rate would climb because South Africa was not growing fast enough to absorb the new people entering the labour force.

Ackerman predicts that the rate of unemployment would rise to 35% by 2023 from 30%.

South Africa needs growth of at least 3% before the unemployment rate declined, he added.

How to get out of the debt trap?

South Africa needs to get out of its debt trap by igniting economic growth. In the meantime, it needs to find international or other funding to plug the gap in the state budget.

There are fears that the state might force managers of pension funds to allocate a portion of their clients’ money to fund the running of the government and state-owned enterprises.

But Treasury’s Momoniat told the Tax Indaba that the state was not looking to put in place any prescribed asset regime.

Could an IMF bailout follow the loan?

In July, the International Monetary Fund (IMF) approved a US$4.3 billion loan to the South African government.

The state intends to borrow US$7 billion from multilateral finance institutions, including the IMF, the National Treasury said in early July.

There is a possibility that the South African government will be forced to go back to the IMF in the future for further debt in the form of a wider-ranging bailout.

“I think an IMF bailout would be very positive for markets, because it installs a bit of a policy anchor, and it forces the government to do things that it may not feel comfortable to do otherwise,” Packirisamy said.

About the value of the rand, Packirisamy said that she expected the rand would maintain its long-term depreciating bias because of South Africa’s high level of inflation when compared with its major trading partners and the deteriorating local economic fundamentals.

The National Lockdown, recently extended for another two weeks, presents businesses of all sizes with an unprecedented set of existential challenges.

Of course sooner or later this crisis will end, but for now it is a case of survival for many businesses, and particularly for those smaller enterprises forced now to close for 21 days. Don’t despair, help is at hand! We list the various relief initiatives announced to date. The list will change, as will the details of and processes for accessing each initiative, but be aware of, and take advantage of, the assistance that is out there – or will be out there shortly.

“We will prioritise the lives and livelihoods of our people above all else, and will use all of the measures that are within our power to protect them from the economic consequences of this pandemic”

President Cyril Ramaphosa

The President assuring the nation that their lives and livelihoods will remain a priority, has announced a variety of initiatives to assist SMMEs (Small, Medium and Micro-Enterprises) that will need assistance in surviving the three week lockdown and economic disruptions flowing from the COVID-19 coronavirus.

Please note these are new initiatives, so expect delays, changes to schemes, new proposals and differing interpretations.  Everyone’s patience will be tested!

Some of the announced measures discussed below still need to be enacted and may be different when they are finalized.  Expect ongoing changes and keep Googling for ongoing lists of proposed and implemented avenues of business relief.

1^st: UIF Money

The UIF has an estimated surplus of R180 billion and this is the logical first port of call when looking at incentives, especially as money given by the UIF is not a loan, and thus doesn’t have to be repaid. There are two routes to access this money – using the traditional UIF method (National Disaster Benefit) or making use of the new Temporary Employer/Employee Relief Scheme (TERS) which is discussed below.

For either method, the employer must be registered with the UIF and be making monthly contributions. If you are behind on contributions, you can pay in any backlog you have.

National Disaster Benefit

1. Temporary shut down
   
   If the employer temporarily shuts down the business, then the UIF will pay out R3 500 per employee per month for up to three months. Documents needed:
   • A letter from the employer confirming the operation is temporarily closing down due to the coronavirus
   • A copy of the employee’s ID
   • UI19 and UI12.7 (employer to complete)
   • UI2.1 – application form
   • UI2.8 – Confirmation of bank account
     
     
2. Reduced work time
   
   The payout is the difference between what the employer pays and UIF benefits.
   
   
   • Forms to be Completed:
     • UI19 and UI2.7 (completed by Employer)
     • UI 2.1 (application)
     • UI 2.8 (bank form completed by the bank)
     • A letter from the Employer confirming Reduced Work Time is due to the coronavirus
     • Copy of ID document
       
       
3. Quarantine and illness
   
   In cases where employees are put in isolation for 14 days or more.
   
   
   • Requirements:
     • Letters from the employer and employee that the person is in quarantine. No medical certificate is needed
     • If the quarantine is longer than 14 days, a certificate is required from the employee’s doctor, along with the form UI3
       
       
   • Forms to be Completed:
     • UI19 and UI2.7 (completed by Employer)
     • UI2.2 (a portion of which is completed by the Doctor)
     • UI 2.8 (bank form completed by the bank)
     • Copy of ID document
       
       
4. Death benefits
   
   If the employee dies, the UIF will pay the funds to beneficiaries.
   
   
   • Forms to be Completed:
     • UI19 and UI 53 (completed by the Employer)
     • UI 2.5 or UI2.6 (deceased application)
     • Death Certificate
     • ID of deceased and applicant
     • UI 2.8 (bank form completed by the bank)
     • Copy of ID documen

You can also download the UIF’s “Easy-Aid Guide for Employers” here.

Temporary Employee/Employer Relief Scheme (TERS)

This applies to businesses who temporarily shut down – a three-month period is envisioned but this could be extended. The UIF then pays salaries to all staff, based on the current UIF pay outs – a maximum of R6 731 p.m. for staff earning R17 162 or more down to the minimum wage of R3 500.

There is quite a bit of documentation here – send an email to Covid19ters@labour.gov.za and you will get the forms to be completed and other requirements needed.

A Memorandum of Agreement is signed and the employer submits (in the required format) a spreadsheet of employee details and salary, proof of payment of the last 3 months’ salaries, bank confirmation of the applicable bank account.

You will need to open a separate bank account for this and prove each month that all staff have been paid.

There is quite a bit of work here and getting the forms accurate will prevent delays in payment.

Which of the two schemes to choose from depends on your business – there is some crossover, for example, quarantined employees can claim under the National Disaster Benefit (see Quarantine and Illness). On the face of it, TERS looks more lucrative but it is very admin intensive in setting up, and as a new scheme it may be subject to teething problems. Ask Emma Pardoe Chartered Accountant (SA) for advice in doubt.

2^nd: The Department of Small Business Development (DSBD)

R500 million has been set aside to help SMMEs due to the impact of the coronavirus. The money will be in the form of loans at prime less 5%. Assistance falls into two categories:

• Business Growth/ Resilience Facility: This applies to businesses whose products are aligned to helping to combat the pandemic. Examples are making hand sanitisers, medical protective clothing, medical supplies etc. SMME logistics companies may also apply for funding.
  
  Funding will cover bridging finance, asset finance, stock and working capital needs.
  
  
• Debt Relief Fund: Companies will need to show how the coronavirus has impacted on their business. The relief focuses on purchase of stock and other operating needs. Funds will be released based on the company’s cash flow requirements.

The starting point is to register on the DSBD’s portal (www.smmesa.gov.za) – the registration entails staff breakdown between males and females, the number of youth employees and racial classification of staff. There is also a section on who owns the business and annual turnover. The business needs to be 100% South African owned and the work force is to be 70% local.

The DSBD is setting up an SMME database which will be used in future interventions.

Once registered follow the application process which opens on 2 April. How much each business gets is still unclear.

Call the DSBD’s hotline 0860 663 7867 or email info@dsbd.gov.za to check what kind of government support you qualify for.

3^rd: Department of Trade and Industry

R3 billion assistance has been set aside with a main focus on providing funding to “vulnerable” businesses and to provide financing help to companies involved in the battle to roll back the coronavirus. It’s not that dissimilar to the DSBD’s approach but it serves all business, not just SMMEs. Of the R3 billion, R500 million will be for importing needed medical products and R700 million will be for financing equipment and working capital requirements. Guidelines as to how to apply are forthcoming.

4^th: The Solidarity Fund

This has been set up with R150 million from the government (www.solidarityfund.co.za) and it is designed to help stop and detect the virus, look after the people with it, plus help those people who are vulnerable as a result of the coronavirus. Mary Oppenheimer has pledged R1 billion to this fund and Naspers has committed R500 million.

You may wish to donate to the fund or apply for help for struggling staff members.

5^th:Private and Corporate Funds

The Rupert and Oppenheimer families and the Motsepe Foundation, have each pledged R1 billion. Motsepe’s money will go towards helping poor communities fight the coronavirus by supplying them with hand sanitisers etc. The Ruperts’ and Oppenheimers’ funds will be to help struggling small businesses and employees, as a result of the coronavirus. In addition, Naspers has pledged R1.5 billion (in addition to the R500 million to the Solidarity Fund) to source medical supplies and protective equipment, from China, for health care workers.  .

The Rupert funds will be disbursed by Business Partners and application forms will soon be released – although details are not yet available, the money will be a loan. 

The Oppenheimer money will be paid out from the “South Africa Future Trust” through the major four banks in the form of a five-year interest free loan – for details see SAFT’s website. SMMEs will apply to their bank which will then pay salaries directly into employees’ bank accounts. No liability will be incurred by employees – the business will be liable for repayment. Speak to your bank manager for how to apply – the system begins operating on 3 April.

Details on the Motsepe and Naspers disbursements are still outstanding.

6^th: SARS Relief Measures

• The Employment Tax Incentive (ETI) has been extended to include all staff earning less than R6 500 per month from ages 18 to 65 – they will qualify for an additional R500 per month which can be claimed via the monthly PAYE return.

All staff members currently receiving ETI benefits will get an additional R500 per month.

These measures will apply for four months from April to July this year. The ETI has been paying out twice a year but this will now be monthly.

• Tax compliant companies with turnover of less than R50 million will be able to hold back 20% of their PAYE payments and a portion of their provisional tax payments, as follows:
  • The business must be tax compliant and using eFiling.
  • PAYE returns due May 7, June 7, July 7 and August 7, you only pay 80% of your PAYE liability
  • From September 7 and for the next five PAYE returns, the 20% reduction is to be paid back in equal amounts e.g. if you received a R30 000 reduction in PAYE for the months April to July, then you will repay an additional R5 000 each month on your PAYE return.
  •  Provisional Tax payments due from April 1 to September 30:
    • The first payment at 15% of the estimated tax liability
    • The second payment at 65% of estimated tax liability (i.e. 50% is due on the second payment)
    • In your top up payment you will be required to pay your full tax liability.

Note: the above applies to companies – measures for individuals will be announced later.

7^th: Competition Act amendments re banks and retail tenants

The Competition Act has been amended to allow banks to work together to come up with solutions to help indebted companies and people. The major banks have announced cash flow relief measures – these will have to be repaid. Speak to your bank for more details and see a summary of bank-by-bank relief as announced to date here.

The Competition Act has also been relaxed to allow retail tenants to get together and present a unified negotiating position to landlords in the areas of evictions, rental discounts and rental “holidays”. This is already happening with “active” negotiation and demands between retail landlords and tenants.

8^th: Tourism sector relief

A R200 million fund has been set up to help SMMEs in the tourism sector (Read “COVID-19 interventions for the tourism sector” here).

It applies to SMMEs with R2.5 Million or less. 70% of pay outs will be to Black owned Businesses with a bias towards rural areas.

9^th: Other

The CIPC have extended the deadline for submission of the Annual Return, if you are required to submit during the lockdown process to April 30. 

Government is considering suspending employers and employees UIF contributions and employer payments to the Skills Development Fund.

To date most businesses are reportedly finding that Business Interruption Insurance claims are not being considered by insurance companies.

Expect more initiatives to emerge as we move deeper into the coronavirus crisis. How much these measures will cushion the shock to the economy is unknown. They are, considering how little fiscal space there is, a creative and welcome attempt to help business and people affected by the lockdown and other restrictions. Nevertheless, the economy is virtually certain to enter a deep recession, particularly following the downgrade by Moody’s on March 27.

Remember we are facing desperate times and the nation, led by President Ramaphosa, has shown courage and determination in facing down the coronavirus.

The bottom line for businesses – help is at hand if you need it!

We all know times are tough and many companies are embarking on cost-cutting exercises. Unfortunately, this is a necessary procedure but think of the impact on staff morale and the potential loss of productivity when undertaking cost reduction. You don’t want to end up leaving your business worse off.

A few tips

1. Communicate effectively. Cost-cutting is not a pleasant experience, so be open with staff – why it is necessary, how much you plan to save and how this exercise will make the business more sustainable.
2. Be fair. If you plan to stop business class travel for some employees but keep it for senior executives think of the possibility of staff resentment and the potential for an “us versus them” situation to develop.
3. Keep perspective. A company recently stopped funding junior staff’s cell phones. Not only did this cause widespread anger but the actual saving was too small to have a real impact on reducing expenses.
4. Think it through holistically. In another example, a business made significant cuts to travel expenses and used video conferencing for team members to communicate with each other. This reduced team ethos, effectiveness and productivity was lost.
5. Think of the side effects. In another travel cost-cutting scheme, staff were not allowed to use taxis. This, in effect, stopped travel after hours as staff then opted to travel during business hours. Thus, the company lost up to two working days a week when staff undertook business trips.
6. Don’t skimp on contractors – such as not letting them use your canteen. They do important work for your company, so don’t put this at risk by treating them badly.

Use common sense as your guide when you undertake cost cutting.

“Prediction is very difficult, especially if it’s about the future” (Niels Bohr, theoretical physicist and Nobel Prize winner)

After shrinking sharply in the first quarter, the economy rebounded to show “record” 3.1% positive growth in the second quarter. Does this mean that quarter one was an aberration driven by load shedding or is there ongoing bad news awaiting us?

Let the positives speak

Some sectors were very strong in quarter 2, mainly mining which grew by more than 14%. Part of this turnaround was due to the absence of load shedding but there was also a steady rise in the price of key minerals like platinum and gold. Whilst manufacturing also was positive – up more than 2%, it has since come under pressure with the Purchasing Managers’ Index (PMI) declining sharply in August. The PMI is a key indicator of manufacturing activity.

Another argument is that the Medium-Term Budget is working on the assumption that all departments of government will cut their budgets by 5, 6 and 7% over the next three years. This will help the government to restore the fiscal discipline that had been ebbing away.

Capital investment grew by 6.1% in the second quarter – this is undoubtedly good news as this will translate into economic growth in the coming months.

Another positive is consumer expenditure held up well in quarter 2, mainly driven by growth in durable goods. However, durable goods are usually one-off purchases, like cars, so one can question just how sustainable this is.  

Perhaps the best news came from Moodys who announced they have no immediate plans to downgrade South African debt.

And the bad news…

No one can argue that the last decade has seen a progressive slippage of government’s policy to keep fiscal policy within an acceptable framework. Just over a decade ago the government showed a budget surplus. Since then state expenditure on salaries and wages has considerably increased. Not surprisingly this has been accompanied by low growth as spend on salaries of public servants crowds out investment and thus is a drag on economic growth. In turn, this has led to a significant growth in government debt which now has led to a 4% budget deficit which continues to grow. Our borrowing to Gross Domestic Product has more than doubled to more than 50% and the reality is that just paying off South Africa’s sovereign debt has risen by 23% and now not only threatens not just infrastructure investment but our ability to continue to finance the growth in social grants. 

If you layer the steady decline in State-Operated Entities (SOEs) onto this, then one can appreciate why economists and businesses have become increasingly worried about our economic predicament. Eskom, for example, now has a debt of R500 billion and its two new power stations, Medupi and Kusile, are struggling to generate electricity. We have already seen the impact Eskom had on the economy in the first quarter and critics are pointing out that little progress has been made in restructuring Eskom. Other SOEs are also non-performing and South African Airways and the Public Broadcaster also need bailouts.

Can our economy be fixed?

With will and sensible policies, the economy can be restored onto a growth path. The difficulty is the fact that without some severe cost-cutting, the path to growth will be extremely hard. Economists estimate that with the current cost structures in government and SOEs the economy will need to grow 6.8% just to be able to absorb these cost pressures; this is clearly not feasible, so cost reductions are needed.

A major stumbling block is said to be the unions which grew their power base in the years when Jacob Zuma was president.

Without a credible plan to put the economy on a new growth track, the ratings agencies will almost certainly, over time, further downgrade South Africa’s debt.

Muddling through?

For the last decade or so there have been dire warnings about the need to restructure the economy but somehow or other we manage to muddle through. Quite possibly we will continue to do so for a while longer – the most urgent need to fix the economy was driven by the potential of a Moodys downgrade, but this is off the table for the immediate future. It seems quite likely that the economy will remain on a low growth path.  

“Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (Gro Harlem Brundtland)

The word sustainability is seemingly on everyone’s lips. What does it mean and what can you and I do about it?

Deconstructing sustainability

The above quote encapsulates what it means. It is a holistic concept and is a mix of many actions and ideas.

If you want your business to be sustainable, then you are thinking long term and planning that your business will still be operating for future generations. This means no short cuts but well thought out plans with a clear vision. In addition to this, you will need to set strong values for your company to stick to, such as always being transparent, fair and ethical.  The company needs to have leaders who will live by the vision and values.

These values will be used in dealing with all stakeholders – shareholders, employees, suppliers and customers.

Whilst technology may have a sizeable impact on processes, a strong strategic framework accompanied by the vision and values will put in place strong foundations to allow future generations to continue to remain competitive and successful.

With climate change becoming increasingly real, part of this vision needs to include that your company will minimise its carbon footprint.

No doubt your business is based on strong platforms, so continue to tweak it to make it more sustainable, competitive and resilient.

“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell” (Sir John Templeton, billionaire investor)

You are it seems in good company if you view times of depressed property prices and general uncertainty as a great buying opportunity.

Just be aware that if it is a house you are after, whether as an investment or to live in, you should do your homework if the property is (or might be) occupied. Generally speaking, buying a property with occupiers is fine if you know about them and have a binding deal in place with them (see the end of this article for more on that).

But, as a recent High Court decision illustrates, if you aren’t aware of occupiers and/or don’t have a proper agreement in place with them, you could find yourself unable to evict them even if you buy the property “free of lease”.

Before we discuss the case itself, it is important to know that to get an eviction order from a court, you need to prove in terms of PIE (the Prevention of Illegal Eviction From and Unlawful Occupation of Land Act) both –

1. That the occupants are “unlawful occupiers” and
2. That it is “just and equitable” to grant such an order after considering all the relevant circumstances.

The Bo-Kaap flat, the sale in execution, and the occupiers

• A property investor bought a flat in a sectional title development on a sale in execution. As we shall see below, the history of the flat’s ownership, and its location in Cape Town’s historic Bo-Kaap area, were relevant to the outcome of this matter.
• The Sheriff of the High Court sold the flat for R375,000 “free of lease”, but also with “no warranty that the Purchaser shall be able to obtain personal and/or vacant occupation of the property or that the property is unoccupied and any proceedings to evict the occupier(s) shall be undertaken by the Purchaser at his/hers/its own cost and expense….”
• The people living in the flat refused to leave or to “legalise … their rights to the property”, and the investor applied to the Court for their eviction.
• The eviction order was refused firstly because the investor was unable to prove that the persons it was trying to evict were “unlawful occupiers” for lack of information as to –
  • Who the occupants of the flat actually were, with the result that “the court has scant knowledge of essential details of the occupiers of the property in circumstances where these are material to the exercise of the court’s discretion under the provisions of PIE”. Crucially, there was nothing before the court as to the ages or circumstances of the occupiers, so it was unable to consider “all the relevant circumstances including the rights and needs of the elderly, children, disabled persons and households headed by women”.
  • When and under what legal right the occupiers originally took occupation (lease, right of habitation, usufruct etc), when that right was terminated and under what circumstances. Note that timing is important here because once unlawful occupation has lasted for more than 6 months, the question of relocation to land supplied by the municipality or government becomes relevant.
  • Whether or not the occupants had any form of written or verbal lease. That’s important because of our law’s “huur gaat voor koop” principle – literally “lease goes before sale”, meaning that you are generally bound to honour an existing lease (there are a few exceptions – take specific advice).
• Secondly, the investor failed to convince the Court that it was “just and equitable” to grant the eviction.

Again, the lack of information as to the occupiers was relevant, and the Court’s comments on the particular facts of this matter are worth noting in full (our emphasis): “The residents of the area are, generally speaking, not wealthy and Bo-Kaap is home to many poor and working-class people. An eviction of the type sought in this matter, in which a group of related persons appear to occupy a family home that was acquired from the City of Cape Town some time ago, might well render them homeless or at the very least require them to relocate to one of the outlying suburbs that are now home to the many who fell foul of the Group Areas Act. If those circumstances obtain, a court would be required to think long and hard about the justice and equity of ordering people to vacate a dwelling, long occupied, which has been snapped up by a buyer distant to the neighbourhood for investment or development potential. Certainly, it is to be expected of such buyers that when they seek to move established families out of their homes, they do their homework properly and place all relevant facts before the court.”

Do your homework, and do it properly!

Investor or not, the Court’s warning to do your homework applies to you. Establish whether anyone is living in the house, exactly who they are, how long they have been there, and on what basis.

Bear in mind that because leases need not be in writing, you could find yourself battling occupiers who claim to be tenants under a verbal lease. Without a written record they could well claim to be entitled to pay minimal rent and to have many years left on their “verbal lease”.

So first prize will always be to reach a written, water-tight deal with any occupants before buying – ask your lawyer for help.

“Never take your eyes off the cash flow because it’s the lifeblood of business” (Richard Branson)

A recent Supreme Court of Appeal (SCA) judgment has confirmed that when a property developer enters into an agreement with a buyer to transfer the property, even if the developer only actually gets paid in a subsequent tax year, the income is deemed to have accrued to the developer at that date. The developer must therefore include the full proceeds of the sale in its income tax return for the year the agreement was signed. 

This has the effect of the property developer paying tax before receiving the proceeds of the sale, putting the developer out of pocket until transfer to the purchaser takes place.

A R1.9m tax assessment challenged

A property developer in Cape Town entered into sales agreements for 25 units. Each agreement called for a deposit of R5,000 with the balance of the money to be paid on completion of the development. Purchasers could take possession once the full sale price had been secured or within 60 days of the sale. By the end of the first year 18 purchasers had taken possession and in all 25 cases the purchase price had been fully secured.

Transfer of the properties took place in the next tax year. The developer did not include the sale proceeds in his tax return for the year of concluding the agreements but showed the proceeds in the next tax year.

The Court upheld the decision by SARS to tax the developer in full in the first tax year. The assessment at just under R1.9m was based on taxable income of R6.8m.

Why the developer lost

Property developers assume a substantial risk when they undertake a development – they spend millions of Rand upfront and if they can’t sell the developed properties they make a considerable loss. They mitigate this risk by selling the properties upfront – usually before they commit to building. Clearly they will not get paid until the property is transferred, so they accept a deposit plus a guarantee (usually from the purchaser’s banker) for the balance of the selling price, or alternatively the buyer placing the funds in the conveyancer’s trust account. 

Once the developer is assured of selling the properties it then proceeds with the development. On this basis, banks will advance the cost of the development to the developer.

However, in terms of the law as now confirmed by the SCA, the proceeds of the sale of the properties are deemed to have accrued to the developer and are taxable in the year the agreement is signed.  

Developers need to be aware of, and plan for, the cash flow implications.

“… it is necessary for an unequivocal message to be sent out that corruption on the part of politicians, especially those holding high office, will not be tolerated and that punishment for those who act as Mr Block has done in this case will be severe” (extract from SCA case below)

We are all of us tired of reading about the rampant corruption in our society, and even if you aren’t one of the many businesses or individuals directly affected, everyone is ultimately a victim.
Let’s take heart then from two recent Supreme Court of Appeal (SCA) decisions.

Firstly, to set the scene…

Minimum sentences for corruption

• Corruption in terms of the Prevention and Combating of Corrupt Activities Act is an offence which, when more than R500,000 is involved, carries a minimum sentence of 15 years’ imprisonment, even for first offenders, “unless there are substantial and compelling reasons justifying a lesser sentence”.
• The R500k threshold is reduced to R100k where a “common conspiracy” is at play and to only R10k where a law enforcement officer is involved.
• Confiscation orders are also common, being designed to deprive criminals of the benefits of their corruption. In the case below for example, a R60m confiscation order (and +R1m fines) accompanied the jail sentences.

“Big Chief” gets 15 years for a corrupt relationship

• The first SCA case involved a former high ranking politician and provincial Finance MEC (known to at least one of his subordinates as “Big Chief”) on the one hand, and on the other a businessman with interests in a property group.
• Both were convicted of corruption relating to “gratifications” paid to the politician for using his “considerable political clout” to help the property group lease premises to government departments on favourable terms and at inflated rentals, without following proper tender procedures.
• It was irrelevant, held the Court, that the gratifications were only paid after the event, they were “paid and received as part of an on-going corrupt relationship where it was accepted by both sides that one hand would wash the other, so to speak, in respect of other favours already made or anticipated in the future.”
• Neither did claiming that the payments were made for “consultancy services” and “business assistance” cut any ice at all with the Court.
• An attempt to appeal to the Constitutional Court having failed, the 15 year sentences must now be served.

Beyond the grave: Still payback time

The second SCA case involves the same matter but another politician and former provincial Head of Department, who faced much the same charges as the others but died before her trial ended.

That didn’t stop the state from obtaining a High Court order forfeiting to the state both the shares given to the deceased in one of the property-owning companies (worth R28m at the time), and her R2m house.

On appeal the SCA upheld the share forfeiture order but, on the principle that forfeiture is designed to remove the incentive for crime rather than to punish it, set aside the forfeiture of the entire property and instead ordered the executor of the deceased estate to pay R758k to the state’s criminal assets recovery account.

Victims of corruption – what to do

Whether you have lost out on a tender, are on the wrong end of a bribe solicitation, or are in any other way a direct victim of corruption, report it!

Our laws and our courts are behind you.

The greatest need in many small businesses is for cash flow. Picture this scenario: 

Three people start a business and after a few years it is beginning to make profit – in a year it will go cash positive. One of the shareholders is killed (or disabled) in an accident, leaving the spouse and children desperate as neither the company nor remaining shareholders can afford to buy the dead shareholder’s equity.  The family put his or her shares up for sale. The other two shareholders now face the prospect of a new shareholder who may not agree with their strategies. The outlook for the business is suddenly very uncertain.

Buy/sell policies   

Had the shareholders put in place a buy/sell policy when they started the company, the death of the one shareholder would not have threatened the business. The policy on the death (or disability) of the shareholder results in the remaining shareholders acquiring the shares and proceeds of the policy going to the family of the dead shareholder.

In this way the shareholders keep control of the business and the family of the shareholder receive a pay out which will help remove the financial uncertainty they face.

Generally, buy/sell policies are governed in terms of a shareholders’ agreement. 

If the shareholders have loans then make sure they are covered in the agreement – they will need to be dealt with anyway on the death or disability of the shareholder. 

Also ensure the agreement is aligned with your Memorandum of Incorporation (MOI) as the MOI has preference over a shareholder agreement.

Key person insurance

If you have shareholders who are active in your company or you have a key manager(s) and the loss of any of these people could have a detrimental impact on the business, then the company can take out insurance on these key people. Proceeds from key person insurance flow into the company.

Suppose, for example, that you recruit a marketing executive who substantially grows your business. Should this executive be killed or disabled, it will lead to a material loss in sales. Taking out key person insurance will give your company the financial space to recruit and train a new marketing manager and will give you time to make up the lost sales.

Many companies have failed by not providing for the loss of a shareholder or key manager.

Take expert advice when taking out either of these policies as there are legal, potential tax and or death duty exposures.