What you should consider when investing in a business

You have worked hard for many years, and have finally saved enough funds and mustered the courage to take the big leap that you have been dreaming about for such a long time… you are going to invest in your own business. You have found the perfect business and is excited about your new journey, when you suddenly realise, however, that you have never been in this situation, and suddenly have no idea what to do next.

The first step

It is important to understand what you wish to gain out of your investment. Some people may solely invest in a business for financial gain, while for others it may be fulfilling a life-long dream, or to chase a very specific passion, such as having the opportunity to jump out of an airplane every single day through your newly acquired skydiving school, for instance.

Although motivation will differ for each person and will likely include a number of factors, it is important to understand what drives your decisions, in order to invest smartly.

Start with the end in mind

Once you understand the why behind your investment decision, it is a good principle to start with the end in mind. Ask yourself where do I want to be in the next three to five years (skydiving every day, the richest person in my street, having loads of free time, etc.) and how you will be able to leverage your business to get you there.

Good questions to ask might include –

  1. Is the business scalable (the ability to multiply a business model);
  2. Is the business labour/time intensive;
  3. Do you have adequate and necessary skills to manage the business;
  4. Are you aware of all the risks that you are assuming through investment;
  5. Is the price that you are willing to pay for the business substantiated and reasonable;
  6. Etc.

Practical considerations

In practical terms, there are a number of ways in which to invest in a business, primarily including acquisition of a going concern, as opposed to equity/members interest in an existing entity. It is also important to understand the advantages/disadvantages of the structure in which you choose to invest. You might decide to invest as a sole proprietor, through a company, a corporate structure or a trust (etc.) for instance.

The above considerations can have a major influence on a variety of factors, including statutory risk, tax consequences, contracting procedures, etc. and if the process is not approached correctly, it can cause many unnecessary headaches in the long-run.

Summary

Investing in a business, is no doubt always a very exciting prospect which, if approached correctly, can have a profoundly positive impact on a person’s life. It can be a precarious process, however, if not negotiated carefully.

It is therefore recommended to find a credible and experienced partner, to help guide you through the process, and even to further strategically aid and assist you post the investment.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

“Booking” capital losses on shares is not that easy

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

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

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

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

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

[1] No. 58 of 1962

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Is it possible to backdate an agreement?

A popular question which comes up during a consultation with a client when the drafting of commercial documents is discussed is, “what is the effective date of the transaction?” It is common practice that the effective date be expressly defined in the agreement, this is to indicate when the agreement will come into force and effect. The effective date of a transaction is of great importance especially when there are certain conditions which must be adhered to prior and/or after the date on which the agreement was signed by the relevant parties.

In some instances, the effective date of an agreement will either be set on an earlier or later date than on which the agreement was signed by the parties. It is often found that the effective date of an agreement is earlier than the signature date, which can also be referred to as backdating of an agreement. Despite the fact the aforesaid is permissible, the effect of backdating any agreement must not be overlooked by parties. Backdating any agreement means that the agreement binds the parties retrospectively from the earlier date.

Due to the retrospective effect of the agreement, it is necessary that the parties ensure that no representations are made during negotiation stages and/or signature of the agreement which they know to be untrue and/or not possible to adhere to. In cases where a misrepresentation is made and lead to certain losses, it can result in one party instituting civil procedures against the other. Parties must declare all facts known to them which may affect the transaction between the signature and effective date to avoid situations where a party to the agreement suffer losses which could result to civil and/or criminal liability. Furthermore, should all obligations and terms of the agreement be of such nature that they have been executed timeously and the effective date is earlier than the signature date, same must be properly recorded in the agreement which will only be signed at a later stage.

Although it is possible to backdate an agreement, it is advisable to ensure that parties timeously approach professionals which specialise in the drafting and implementing of commercial documentation to properly record the agreement between the parties.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Employer Annual Reconciliation Due

VDJ_PAYE-01
Employers should be aware that Employer Annual Reconciliation submission due date is fast approaching. If the relevant deadlines are missed, certain penalties will apply.

When should it be paid?
 

The Employer Annual Reconciliation starts on 1 April 2018 and employers have until 31 May 2018 to submit their Annual Reconciliation Declarations (EMP501) for the period 1 March 2017 to 28 February 2018 in respect of the Monthly Employer Declarations (EMP201) submitted, payments made, Employee Income Tax Certificates [IRP5/IT3(a)], and ETI, if applicable.

What do I need to do?

Employer Annual Reconciliation involves an employer submitting an accurate Employer Reconciliation Declaration (EMP501), Employee Tax Certificates [IRP5/IT3(a)s] to be issued and, if applicable, a Tax Certificate Cancellation Declaration (EMP601).

Every employer who is registered at SARS for Pay-As-You-Earn (PAYE), Unemployment Insurance Fund(UIF) or Skills Development Levy(SDL), should submit an EMP501. An employer is required to submit accurate reconciliation declaration (EMP501) in respect of the monthly declarations (EMP201) that was submitted, payments made and the IRP5 / IT3(a) certificates for the following periods:

  • Annual period: this is for the period from 1 March 2017 to 28 February 2018
  • Interim period: this is for the period from 1 March 2018 to 31 August 2018

What is PAYE?

Employees’ Tax refers to the tax required to be deducted by an employer from an employee’s remuneration paid or payable. The process of deducting or withholding tax from remuneration as it is earned by an employee is commonly referred to as Pay-As-You-Earn, or PAYE.

What happens when you miss the deadline?

Employers who miss deadline submissions on any of the below are subject to a percentage-based penalty:

  1. Non-submission of an Employer Annual Reconciliation (EMP501) on or before the due date.
  2. Non-submission of employee IRP5 / IT3(a) certificates.
  3. Submission of incorrect or inaccurate data relating to the IRP5 / IT3(a) certificates.

This penalty will be charged for each month that the employer continues to fail to remedy the non-submission.

Avoid the confusion and late submission by contacting us for assistance.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

VALID TAX INVOICE REQUIREMENTS
FOR VAT VENDORS

Images-04When making a purchase for your business, you should always ensure you receive a valid VAT invoice. This enables you to claim input VAT from SARS. With the change in VAT rate from 14% to 15%, VAT has come under the spotlight. This brings more focus on VAT compliance and more specifically on when we can claim input VAT on an invoice, and what constitutes a valid VAT invoice. This is something small that is very much neglected when it comes to monthly bookkeeping. It is very important to pay attention to the invoices that are sent to your accountants as these invoices need to be “valid” before the input VAT can be claimed from the South African Revenue Service (SARS).

Please read through the following crucial information carefully with regard to valid VAT invoices.

South Africa operates on a VAT system whereby VAT registered businesses are allowed to claim the VAT (input VAT) incurred on business expenses from the VAT collected (output VAT) on the supplies made by the business. The most crucial document in such a system is the tax invoice. Without a valid tax invoice, a business cannot deduct input tax paid on business expenses.

The VAT Act prescribes that a tax invoice must contain certain details about the taxable supply made by the business as well as the parties to the transaction. The VAT Act also prescribes the timeframe within which a tax invoice must be issued (i.e. 21 days from the time the supply was made).

A business is required to issue a full tax invoice when the price is more than R5 000 and may issue an abridged tax invoice when the consideration for the supply is R 5 000 or less than R5 000. No tax invoice is needed for a supply of R50 or less. However, a document such as a till slip or sales docket indicating the VAT charged by the supplier will still be required to verify the tax deducted.

As from 8 January 2016, the following information must be present on a tax invoice for it to be considered valid by SARS:

  • Contains the words “Tax Invoice”, “VAT Invoice” or “Invoice”;
  • Name, address and VAT registration number of the supplier;
  • Name, address and where the recipient is a vendor, the recipient’s VAT registration number;
  • Serial number and date of issue of invoice;
  • Correct description of goods and /or services (indicating where the applicable goods are second hand);
  • Quantity or volume of goods or services supplied; and
  • Value of the supply, the amount of tax charged and the consideration of the supply.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

CRYPTOCURRENCY

Images-06Cryptocurrency and blockchain has been the hot topic in the media the past year.  It is a concept that few truly understand, and could change the future for everyone in a major way.

But what is cryptocurrency and blockchain?

Per the online dictionary:

A cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.

The most popular currently in the market is Bitcoin; others include Eutherian and Litecoin. There are various platforms on which to trade in cryptocurrency, for example Luno. Luno functions like the JSE, where willing buyers and willing sellers transact in shares / cryptocurrencies.

Blockchain is a digital ledger in which transactions made in Bitcoin or another cryptocurrency are recorded chronologically and publicly.

An example to demontrate how blockchain works:

Pete wants to buy Bitcoin from Mary.  They both use Luno as platform to trade on.

By joining Luno, Pete and Mary effectively each receives a copy of the big overall “ledger” that shows where each unit of Bitcoin is at that point in time and where each unit of Bitcoin has been.

Each transaction is represented as a block. Each time a transaction is authorised, a block is then added to the other blocks already in place creating a chain, hence the term “blockchain technology”.

The chain is then compared between all the copies of the “ledgers” that are spread out over the world to validate them.  You can actually add Bitcoin to your own account without actually purchasing any, but as soon as your ledger compares to the others around you, it will see the unauthorised transactions and reject your version.

Bitcoin is severly encrypted, therefore to be able to finalise a transaction, there are people in the market who solve very complex mathematical problems using a significant amount of expensive computing power to authorise the transaction. These people are called “miners”. They receive one Bitcoin for every transaction they finalise.

As soon as the transaction between Pete and Mary is authorised by the miner, the “ledger” is updated by adding another block to the chain.

The question that then arises is why would hackers not just hack and authorise transactions for themselves? This is where the magic of blockchain technology comes in – the computing power required to solve the complex problem is so expensive, that is more costly to hack than to rather just act as miners themselves and earn Bitcoin. Therefore, no one needs to trust each other and the technology allows the users to trust the system.

It is this level of technology that will regulate the future, effectively eliminating the need for lawyers and banks. The concept is throwing governments across the globe into a state of panic as there is currently no proper regulation inbedded in current tax laws.

Like Da Vinci’s inventions, the technology is a little ahead of its time and the rest of the world needs some time catching up.  It is therefore critical to keep an eye on further developments as this will impact the way business is done in future.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

CHANGES TO INCOME TAX RETURNS
FOR TRUSTS

Images-02The South African Revenue Service (“SARS”) implemented several changes to the income tax returns for trusts (the ITR12T) on 26 February 2018. These changes apply in respect of the year of assessment ending on or after 28 February 2017, unless taxpayers have already saved or submitted the relevant 2017 ITR12T prior to the implementation of these latest changes.

One of the important changes includes the updating of the supporting trust participant schedule to the ITR12T in order to identify loans granted to the trust that are subject to the provisions of the newly introduced section 7C of the Income Tax Act.[1] This section deals with interest-free or low-interest loans to a trust that are made directly or indirectly by a natural person or a company in certain specific circumstances. Should these provisions apply, section 7C deems the interest foregone on the loan to be a continuing annual donation that attracts donations tax. This donation is deemed to be made on the last day of the year of assessment of the trust[2] (which is generally the last day of February) and is payable by the end of the month following the month during which the donation takes effect (which would then be the end of March).[3]

Also, trusts that are collective investment schemes or employee share incentive schemes are no longer required to disclose information relating to the details of persons that transacted with the trust. However, all other trusts must ensure that income distributed by the trust to other persons are fully disclosed. Additional validations in this regard were therefore also introduced.

Other amendments to the ITR12T include the introduction of a new local income type which relates to dividends that are deemed to be income in terms of section 8E and section 8EA of the Income Tax Act. (These provisions are aimed at penalising debt instruments that have been disguised as equity in order to avoid tax.)

The ITR12T also includes a new detailed schedule relating to learnerships for purposes of claiming the deduction in terms of section 12H of the Income Tax Act. Separate disclosure is required for learners with a disability and learners without a disability for both NQF levels 1 to 6 and NQF levels 7 to 10. Also, the number of learners and the allowance amount for each of these fields must be completed.

The take away is that trusts should carefully consider these new requirements in order to ensure that the new ITR12T is completed correctly.

[1] No. 58 of 1962

[2] Section 7C of the Income Tax Act

[3] Section 60(1) of the Income Tax Act

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

EMPLOYEES’ TAX RECONCILIATION 2018

Images-08April to May each year is the time that employers are given to perform their employees’ tax reconciliation. During this Employer Reconciliation process, employers are required to submit an EMP501 declaration which reconciles the taxes collected from employees with the monies paid to SARS and the total tax value of employees, income tax certificates (IRP5), for the respective period.

The Income Tax Act No. 58 of 1962, states inter alia, that employers are required to:

  1. deduct the correct amount of tax from employees,
  2. pay this amount to SARS monthly,
  3. reconcile these deductions and payments during the annual and the interim reconciliation, and
  4. issue tax certificates to employees.

To comply with the Income Tax Act, employers must submit their Monthly Employer Declarations (EMP201s) to SARS on or before the 7th of the following month.

SARS has over the past few years improved the process of reconciliations with the use of applications, such as eFiling and e@syfile. It has significantly reduced the administration required to submit the reconciliations.

The EMP501 reconciliation for the 12 months ended 28 February 2018, must be rendered on or before 31 May 2018.

Some important pointers to bear in mind:

  • E@sy-File Employer software has been updated to version 6.8.3
  • Employers are urged to check their PAYE banking details on the e-Filing RAV01 form.
  • This will ensure that the banking details are correct in cases where an ETI refund is expected.
  • If the details are incorrect, employers will need to visit a SARS branch to update it.
  • Copies of all declarations submitted and related supporting documents (relevant material) must be kept for five years.
  • Send your reconciliation before the deadline to avoid penalties and interest being charged.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

WHY IT IS IMPORTANT TO KNOW THE VALUE OF YOUR BUSINESS?

Images-02A properly considered business valuation can be the first step in many essential business processes and activities. Although there are many examples, these might include procurement of a buy and sell policy or facilitation of a business restructuring process, for instance.

Initiating negotiations during a sale of business transaction, probably remains the most common business valuation trigger however, and for many business owners, such event might be the first and only time the thought of having a business valuation performed will occur.

Business valuations are therefore often treated as the end, rather than the means to an end.

Growing a successful business requires an enormous time investment. When doing it right, this investment is justified however, since no other investment has the potential to reward your time investment over the long-term, better than a successful business. For this reason, we have always found it peculiar when business owners are willing to wait until just before sale before deeming it important to quantify the value of their plans, time (often years), efforts, etc.

This is probably where the value of proper valuation is mostly overlooked – we tend to view valuation as the end while it should maybe rather be viewed as a guiding key performance indicator on the journey to comfortable retirement or eventual exit from a business, regardless of what the reason for exit might be. Valuations should be the means to an end, employed to help inform decision making and strategic process, not when you are ready to sell, but rather while it is still possible to make positive adjustments to your business.

In this context, we generally advise that a business valuation be performed at least on an annual basis, even if only employed in internal processes, as a key performance indicator. By taking this approach, performance and growth can be measured periodically while the necessary strategic and operational adjustments can be made while there is still time to build value through good and prudent business decisions.

Having said this, it is important to note that the value of a valuation is limited to the quality of its interpretation and application. It is important that a valuation instructs focussed action, and it is therefore always a good idea to involve a trusted and experienced financial advisor in your strategic, as well as financial processes.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

THE VAT INCREASE AND REAL ESTATE SALES

Images-08On 21 February 2018, former Finance Minister, Malusi Gigaba announced National Treasury’s decision to increase the VAT rate from 14% to 15%, with effect from 1 April 2018. Since then our practice has been inundated with queries regarding the correct treatment of VAT specifically in the context of residential properties being sold. Where an agreement has already been concluded for the sale of a property by a VAT vendor, is VAT required to be levied at 14% or 15%? The question is of specific relevance in the property market given the high values typically associated with such transactions.

Ordinarily, output tax would become due when immovable properties are sold by VAT vendors at the earlier of when any amount as part of that transaction has been paid, or when the transfer of the property has been registered in the Deeds Office.[1] Therefore, ordinarily, when an agreement for sale of a property (by a VAT vendor) has been signed by both parties, output VAT only needs to be charged once any payment is made by the purchaser (which would include payment of a deposit) or when the sale is registered with the Deeds Office.

The concern is therefore that properties for which an agreement has already been signed may be subject to VAT at 15% due to the delayed effect that the above provision gives rise to in determining the time of supply for VAT purposes.

In the case of a change in the VAT rate, the above rule does not apply. Which VAT rate is to apply then is not determined by when the underlying VAT is payable. Rather, section 67A(4) of the VAT Act provides the necessary relief.[2] It determines essentially that where any residential property is sold in terms of an agreement signed and concluded before 1 April 2018, that that transaction will still be subject to VAT at 14%.

The above therefore provides at least some reprieve for residential property purchases concluded prior to the announcement of the VAT increase. However, we have come across various more complex scenarios and would encourage affected parties to contact us to ensure that the VAT treatment of their immovable property transactions is correctly accounted for.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

[1] Section 9(3)(d) of the VAT Act, 89 of 1991

[2] (4) … [W]here, before the date on which an increase in the rate of tax leviable … becomes effective, a written agreement is concluded for – the sale of fixed property consisting of any dwelling together with land on which it is erected, or of any real right conferring a right of occupation of a dwelling or of any unit …; or

(b) the sale of fixed property consisting of land, or of any real right conferring a right of occupation of land for the sole or principal purpose of the erection by or for the purchaser of a dwelling … on the land, as confirmed by the purchaser in writing; or

(c) the construction by any vendor carrying on a construction enterprise of any new dwelling, and- the price in respect of the sale or construction in question was determined and stated in the said agreement, as in force before the said date, and that agreement was signed by the parties thereto before the said date; and

(ii) the supply of such fixed property or services under the said agreement is in terms of section 9 deemed to take place on or after the said date,

the rate at which tax is in … leviable in respect of that supply, shall be the rate at which tax would have been levied had the supply taken place on the date on which such agreement was concluded.