- Steven Jones - Moneyweb Tax
If services are rendered that income will be taxed whether it is a tip for waitressing, voluntary bonuses or rewards for information.
Sub-paragraph (c) of the definition of “gross income” as contained in Section 1 of the Income Tax Act stipulates that gross income includes “any amount, including any voluntary award, received or accrued in respect of services rendered”. In simple English, this means that any amount that you receive is potentially subject to tax if it can in any way be linked to a service that you render.
It also makes no difference whether there is a contractual obligation for payment in respect of such services, or whether the payment is voluntary - the fact that an amount is received is sufficient for it to fall within this section. The defining criterion is the rendering of services.
Now on the face of it, this topic may seem obvious and not worthy of further discussion. After all, you render services, you are paid for those services, and therefore you should be taxed on such payment received. End of discussion.
Well ... not quite.
In a 2002 court case, Commissioner: South African Revenue v Kotze [64 SATC 447], the taxpayer provided information to the South African Police Service with information regarding illegal diamond dealings, for which a reward of R200 000 was paid. While the Special Tax Court held that such amount did not relate to services rendered and was therefore not taxable, the Cape High Court decided otherwise and the amount did indeed form part of the taxpayers gross income.
The judgement indicated that while the motivation for the taxpayer making the telephone call to the police may well have been to avoid being implicated in the crime and thereby suffering damage to his reputation, the payment had nothing to do with this motivation. It was paid directly as a result of the service rendered, ie, the information provided. The link is straight-forward: No information, no reward.
Other situations that fall within this paragraph include voluntary bonuses, gratuities received by waiters, and similar payments. The question one needs to ask here is: Would the payment have been received if a service had not been rendered? In the case of tipping waiters, clearly one would not tip a waiter unless they were a restaurant patron, and then only to the person who waited upon them. Clearly the waiter cannot expect a gratuity if they havent actually provided any service.
However, the situation is not always cut and dried, and the following example hits somewhat close to home, considering my current position as a minister in the Methodist Church. This situation concerns payment to clergy, but can also apply to internships whereby the amount paid is intended to cover ones cost of living, rather than a salary in the regular sense of the word.
A long-held argument is that since ministers receive a stipend (living allowance), and not a salary per se, such amounts should not form part of gross income. This argument has long been settled on the basis that such payment would not accrue unless the recipient actually rendered services as clergy. Clearly there is a direct link between the stipend paid and the services rendered, and (unfortunately for me) calling it a stipend instead of a salary does not change its nature as far as tax is concerned.
Fair enough, one may say - “render unto Caesar that which is Caesars”, and all that. However, as many a minister has found, congregations include quite generous folk who want to care for their minister. The question is where that fine line is between payments for services rendered, and acts of generosity? In this case, the link between services rendered and amounts received is less clear-cut.
Let me say at the outset that I dont believe that Sars is too concerned that Aunty Mabel blesses her minister with a chocolate cake every second week. Nor, for that matter, would I imagine that Sars Commissioner Pravin Gordhan would lose any sleep over the fact that a minister may be invited for lunch from time to time by one of their congregants. However, payments for funerals and weddings may be another matter entirely, since the minister has clearly rendered a service by conducting such wedding or funeral. Where these amounts are nominal, there may not be too much hassle, but if they were to become substantial...
The counter-argument, of course, is that people often give gifts as an expression of gratitude. This is not only limited to the ministry, either - I once received a wonderful fruit basket from a client for whom I managed to sort out a long-standing query with Sars. My fee for time spent in sorting out the query was naturally raised in my books and declared, but should I have declared the value of the “thank-you” gift?
Of course, such a situation can be abused, and a situation whereby the service provider arranges to charge, say, R50 for the service plus a cash “gift” of R5 000, would be a clear-cut case of tax evasion. However, when it comes to the normal courtesies extended between people, one cant help wondering how far Sars would want to take it if push came to shove?
Thursday, May 7, 2009
A Tax Risk Management Consultancy To Have on Your Side
- Tax Risk Management Services
The tax consultancy of Daniel Erasmus (who is a senior tax consultant in the USA, South Africa and Europe) has undergone a brand name change, in line with the globalisation of Erasmus’ tax practice. Erasmus’ firm Daniel Erasmus Tax Consulting has been re-launched and introduced into the marketplace as the new “Tax Risk Management Services” (TRM Services) in association with the law firm he founded (16 years ago) EFG Attorneys Inc.
Erasmus and his team are now operating internationally and also known as the tax S.W.A.T team by multi-nationals, assisting in tax audit management and resolution, not only in South Africa and Africa, but in Europe and abroad. They apply a set of well oiled international principles that get results – they have solved client tax problems valued in excess of R10bn in the last few years.
Daniel Erasmus Consulting, now “Tax Risk Management Services” (TRM Services) has a successful track record in Tax Risk Management, Tax Uncertainties, Tax Advice, Tax Alternate Dispute Resolution, Tax Court and Tax planning, and has risen to the top of in its sector of expertise.
Erasmus has a team of Tax Consultants worldwide, available through satellite offices and associations in New York, West Palm Beach, Johannesburg, Cape Town, London and Port Louis in Mauritius.
“Tax Risk Management Services” (TRM Services) will be hosting a series of seminars and workshops on Tax Risk Management in Business in South Africa in June, August, and November 2009. Details of these will be made available on the TRM Services website: www.dnerasmus.com
As part of a their new launch initiative TRM Services is offering new clients an opportunity to discuss their needs at no cost to them (1 hr no obligation consultation). If you would like to take up this opportunity please contact Razaan Mohammed to make an appointment: Razaan@danielerasmus.co.za (011) 782 - 2751
The tax consultancy of Daniel Erasmus (who is a senior tax consultant in the USA, South Africa and Europe) has undergone a brand name change, in line with the globalisation of Erasmus’ tax practice. Erasmus’ firm Daniel Erasmus Tax Consulting has been re-launched and introduced into the marketplace as the new “Tax Risk Management Services” (TRM Services) in association with the law firm he founded (16 years ago) EFG Attorneys Inc.
Erasmus and his team are now operating internationally and also known as the tax S.W.A.T team by multi-nationals, assisting in tax audit management and resolution, not only in South Africa and Africa, but in Europe and abroad. They apply a set of well oiled international principles that get results – they have solved client tax problems valued in excess of R10bn in the last few years.
Daniel Erasmus Consulting, now “Tax Risk Management Services” (TRM Services) has a successful track record in Tax Risk Management, Tax Uncertainties, Tax Advice, Tax Alternate Dispute Resolution, Tax Court and Tax planning, and has risen to the top of in its sector of expertise.
Erasmus has a team of Tax Consultants worldwide, available through satellite offices and associations in New York, West Palm Beach, Johannesburg, Cape Town, London and Port Louis in Mauritius.
“Tax Risk Management Services” (TRM Services) will be hosting a series of seminars and workshops on Tax Risk Management in Business in South Africa in June, August, and November 2009. Details of these will be made available on the TRM Services website: www.dnerasmus.com
As part of a their new launch initiative TRM Services is offering new clients an opportunity to discuss their needs at no cost to them (1 hr no obligation consultation). If you would like to take up this opportunity please contact Razaan Mohammed to make an appointment: Razaan@danielerasmus.co.za (011) 782 - 2751
Monday, April 20, 2009
New tax method to help small firms
- Sanchia Temkin, Professional Services Editor - Business Day
Many businesses have yet to respond to the opportunities offered by the turnover tax system.
The country’s new turnover tax system will be of benefit to many small and medium-sized enterprises .
The tax system, which was recently launched by the South African Revenue Service (SARS), is expected to reduced the time and cost of submitting tax returns.
“Strangely enough, though, for thousands of small firms the penny has yet to drop,” said Muneer Hassan, project director for tax at the South African Institute of Chartered Accountants , who highlighted the significant potential savings in administration costs at the weekend.
SARS spokesman Adrian Lackay said recently the new tax system was intended to cut red tape and reduce the administrative burden on small businesses. The new tax system was announced by Finance Minister Trevor Manuel in last year’s budget. It is incorporated into the Income Tax Act.
Hassan said micro-businesses would be taxed under a table very different to those which applied to other taxpayers and companies.
SA’s small businesses face the heaviest tax burden when it comes to the time and cost of filing tax returns, according to recent independent research carried out at the request of the SARS and the Treasury.
It costs the average small business R1478 to register, one reason why about 60% of them decide to stay informal. Tax professionals identified provisional tax as the “most burdensome” tax for small businesses, although value-added tax (VAT) was the most expensive and time consuming, the research said.
The new legislation would be available to small businesses with a turnover of up to R1m a year and replaces income tax, provisional tax, capital gains tax and VAT. The tax will be levied on turnover and not the taxable income to which we are all accustomed, Hassan said.
He said this would make life a lot easier for small businesses because the determination of taxable income could be a highly complex exercise. Further, secondary tax on companies, where dividends were less than R200000 annually, would not be applied.
Regarding capital gains tax, the turnover tax would include 50% of the amounts received from the disposal of business assets in taxable turnover. Immovable property would only be included to the extent that it was used for business purposes.
Hassan said the turnover tax was levied annually, from the beginning of March to the end of February of the following year. Payments were to be made in two six-monthly interim, or provisional, payments.
He advised that in order to opt for the turnover tax a business needed to apply before the beginning of the year of assessment and remain in the system for at least three years, unless disqualified.
This year SARS extended the registration date to April 30.
Many businesses have yet to respond to the opportunities offered by the turnover tax system.
The country’s new turnover tax system will be of benefit to many small and medium-sized enterprises .
The tax system, which was recently launched by the South African Revenue Service (SARS), is expected to reduced the time and cost of submitting tax returns.
“Strangely enough, though, for thousands of small firms the penny has yet to drop,” said Muneer Hassan, project director for tax at the South African Institute of Chartered Accountants , who highlighted the significant potential savings in administration costs at the weekend.
SARS spokesman Adrian Lackay said recently the new tax system was intended to cut red tape and reduce the administrative burden on small businesses. The new tax system was announced by Finance Minister Trevor Manuel in last year’s budget. It is incorporated into the Income Tax Act.
Hassan said micro-businesses would be taxed under a table very different to those which applied to other taxpayers and companies.
SA’s small businesses face the heaviest tax burden when it comes to the time and cost of filing tax returns, according to recent independent research carried out at the request of the SARS and the Treasury.
It costs the average small business R1478 to register, one reason why about 60% of them decide to stay informal. Tax professionals identified provisional tax as the “most burdensome” tax for small businesses, although value-added tax (VAT) was the most expensive and time consuming, the research said.
The new legislation would be available to small businesses with a turnover of up to R1m a year and replaces income tax, provisional tax, capital gains tax and VAT. The tax will be levied on turnover and not the taxable income to which we are all accustomed, Hassan said.
He said this would make life a lot easier for small businesses because the determination of taxable income could be a highly complex exercise. Further, secondary tax on companies, where dividends were less than R200000 annually, would not be applied.
Regarding capital gains tax, the turnover tax would include 50% of the amounts received from the disposal of business assets in taxable turnover. Immovable property would only be included to the extent that it was used for business purposes.
Hassan said the turnover tax was levied annually, from the beginning of March to the end of February of the following year. Payments were to be made in two six-monthly interim, or provisional, payments.
He advised that in order to opt for the turnover tax a business needed to apply before the beginning of the year of assessment and remain in the system for at least three years, unless disqualified.
This year SARS extended the registration date to April 30.
Thursday, April 2, 2009
Small businesses VAT headache
- Monique Vanek - Moneyweb Tax
Sarss new registration requirements are making it incredibly onerous for small businesses to comply.
If one had to pinpoint the two big tax issues that are getting up South Africans noses it would be provisional tax (see: Provisional tax: a tax nightmare) and VAT registrations.
According to Colin Wolfsohn, a member of the Saica National Tax Committee, the South African Revenue Services (Sars) new VAT registrations are proving to be incredible onerous for small businesses, making it harder for them to comply. The registration process is causing substantial delays and increasing the cost of registering an entity for VAT significantly, adds Wolfsohn.
Sarss decision to change the VAT registration process in November 2008 followed the discovery of significant VAT fraud last year (see: Sarss employees caught out) after it simplified the registrations process in February 2008. Sars at first became incredibly draconian before backing down (see Sars backtracks on harsh VAT registration ) to the current situation, which has its own problems.
Currently:
1. Applications have to be submitted in person by a vendor, or duly authorised and registered practitioner. These practitioners have to be in possession of a valid practice number. A practitioner must submit an original letter of authority or power of attorney together with the application form, in which they are duly authorised to act on behalf of the vendor.
2. The following validation on new applications are then done by Sars:
a. Completeness of the form - incomplete forms are not processed.
b. Each application has to include proof of identity; a copy of the municipal account of the enterprise and copies of the last three months bank statements or the financial information on which the turnover is based for purpose of VAT registration.
c. Confirmation that the applicant is a valid enterprise. This entails a short interview with a Sars auditor. Sars advises practitioners to either empower themselves with all relevant information relating to the vendor upfront, or to ensure that the vendor is available telephonically to answer any questions Sars may have during the interview.
d. This could be followed up by a site visit to the vendor if required.
Sars also increased the threshold for registering for VAT to R1m of turnover from R300 000 with effect from March 1 2009.
Small businesses which operate from home have found it impossible to prove identification through municipal accounts (as these accounts will be in the name of the owner and not that of the VAT entity), reckons Wolfsohn while new businesses find it difficult to work out what their turnover will be. And yet they have no choice but to some how try and comply. Failure to do so will be regarded as “an offence in terms of section 58 of the VAT Act and as such shall be liable to conviction to a fine or to imprisonment for a period not exceeding 24 months“, says Saicas Muneer Hassan “The entity will also be liable for huge penalties and interest,&rldquo; adds Hassan.
To deal with the crisis, Wolfsohn suggests Sars allow tax practitioners to do some of the verification work and if Sars is concerned about fraud then it should do an audit.
Sarss new registration requirements are making it incredibly onerous for small businesses to comply.
If one had to pinpoint the two big tax issues that are getting up South Africans noses it would be provisional tax (see: Provisional tax: a tax nightmare) and VAT registrations.
According to Colin Wolfsohn, a member of the Saica National Tax Committee, the South African Revenue Services (Sars) new VAT registrations are proving to be incredible onerous for small businesses, making it harder for them to comply. The registration process is causing substantial delays and increasing the cost of registering an entity for VAT significantly, adds Wolfsohn.
Sarss decision to change the VAT registration process in November 2008 followed the discovery of significant VAT fraud last year (see: Sarss employees caught out) after it simplified the registrations process in February 2008. Sars at first became incredibly draconian before backing down (see Sars backtracks on harsh VAT registration ) to the current situation, which has its own problems.
Currently:
1. Applications have to be submitted in person by a vendor, or duly authorised and registered practitioner. These practitioners have to be in possession of a valid practice number. A practitioner must submit an original letter of authority or power of attorney together with the application form, in which they are duly authorised to act on behalf of the vendor.
2. The following validation on new applications are then done by Sars:
a. Completeness of the form - incomplete forms are not processed.
b. Each application has to include proof of identity; a copy of the municipal account of the enterprise and copies of the last three months bank statements or the financial information on which the turnover is based for purpose of VAT registration.
c. Confirmation that the applicant is a valid enterprise. This entails a short interview with a Sars auditor. Sars advises practitioners to either empower themselves with all relevant information relating to the vendor upfront, or to ensure that the vendor is available telephonically to answer any questions Sars may have during the interview.
d. This could be followed up by a site visit to the vendor if required.
Sars also increased the threshold for registering for VAT to R1m of turnover from R300 000 with effect from March 1 2009.
Small businesses which operate from home have found it impossible to prove identification through municipal accounts (as these accounts will be in the name of the owner and not that of the VAT entity), reckons Wolfsohn while new businesses find it difficult to work out what their turnover will be. And yet they have no choice but to some how try and comply. Failure to do so will be regarded as “an offence in terms of section 58 of the VAT Act and as such shall be liable to conviction to a fine or to imprisonment for a period not exceeding 24 months“, says Saicas Muneer Hassan “The entity will also be liable for huge penalties and interest,&rldquo; adds Hassan.
To deal with the crisis, Wolfsohn suggests Sars allow tax practitioners to do some of the verification work and if Sars is concerned about fraud then it should do an audit.
Tuesday, March 31, 2009
How business can qualify for new tax incentives
- How business can qualify for new tax incentives 22 March 2010
Tim Desmond* - Moneyweb Tax
Follow the right procedures and you could claim as much as R900m back in tax for a greenfield project or R550m for a brownfield project.
National Treasury recently released draft regulations relating to tax incentives in support of governments industrial policy strategy. These tax incentives were announced in the 2008 Budget. The Revenue Laws Amendment Act, 2008 then inserted a new section 12I into the Income Tax Act.
The tax incentives comprise additional investment and training allowances for approved industrial policy projects. The projects that will qualify are greenfield and brownfield projects in the manufacturing sector (with some specific exclusions), that will spend certain minimum amounts on manufacturing assets (50% within four years of approval) and will upgrade an industry. There are limitations for companies obtaining other benefits and a requirement for a tax clearance certificate.
The minimum amounts to be spent on manufacturing assets are R200m for greenfields projects and at least R30m for brownfields projects. A project will be regarded as upgrading an industry if it provides skills development and utilises new technology resulting in improved energy efficiency.
If a project meets the qualifying criteria, an adjudication committee will consider its application on a points scoring basis. If five out of ten points are scored, a project will qualify for an additional investment allowance of 35% of the cost of manufacturing assets, up to a maximum of R550m for a greenfield project or R350m for a brownfield project. If eight or more points are scored, a project will have ""preferred status"" and its allowance will increase to 55% and the maximum amount claimable to R900m for a greenfield project or R550m for a brownfield project.
The additional investment allowances can be claimed in the year that the manufacturing assets are brought into use and are in addition to other allowances. If they increase recently incurred assessed losses, such increase may be enhanced by a notional interest amount.
The point scoring criteria cover the following: innovative processes, improved energy efficiency, general business linkages, SMME utilisation, direct employment creation and skills development. Greenfield projects can also score for being located in an industrial development zone.
The total additional investment allowances available under the programme will be R20bn. The cut-off date for applications is December 31 2014.
Training costs incurred for the furtherance of an approved project, within six years of approval, will qualify for an additional training allowance. Such allowance may not exceed R36 000 per employee or a total of R30m for projects approved with preferred status or R20m for those without.
*Tim Desmond is a director of tax and commercial departments at Garlicke & Bousfield Inc
Tim Desmond* - Moneyweb Tax
Follow the right procedures and you could claim as much as R900m back in tax for a greenfield project or R550m for a brownfield project.
National Treasury recently released draft regulations relating to tax incentives in support of governments industrial policy strategy. These tax incentives were announced in the 2008 Budget. The Revenue Laws Amendment Act, 2008 then inserted a new section 12I into the Income Tax Act.
The tax incentives comprise additional investment and training allowances for approved industrial policy projects. The projects that will qualify are greenfield and brownfield projects in the manufacturing sector (with some specific exclusions), that will spend certain minimum amounts on manufacturing assets (50% within four years of approval) and will upgrade an industry. There are limitations for companies obtaining other benefits and a requirement for a tax clearance certificate.
The minimum amounts to be spent on manufacturing assets are R200m for greenfields projects and at least R30m for brownfields projects. A project will be regarded as upgrading an industry if it provides skills development and utilises new technology resulting in improved energy efficiency.
If a project meets the qualifying criteria, an adjudication committee will consider its application on a points scoring basis. If five out of ten points are scored, a project will qualify for an additional investment allowance of 35% of the cost of manufacturing assets, up to a maximum of R550m for a greenfield project or R350m for a brownfield project. If eight or more points are scored, a project will have ""preferred status"" and its allowance will increase to 55% and the maximum amount claimable to R900m for a greenfield project or R550m for a brownfield project.
The additional investment allowances can be claimed in the year that the manufacturing assets are brought into use and are in addition to other allowances. If they increase recently incurred assessed losses, such increase may be enhanced by a notional interest amount.
The point scoring criteria cover the following: innovative processes, improved energy efficiency, general business linkages, SMME utilisation, direct employment creation and skills development. Greenfield projects can also score for being located in an industrial development zone.
The total additional investment allowances available under the programme will be R20bn. The cut-off date for applications is December 31 2014.
Training costs incurred for the furtherance of an approved project, within six years of approval, will qualify for an additional training allowance. Such allowance may not exceed R36 000 per employee or a total of R30m for projects approved with preferred status or R20m for those without.
*Tim Desmond is a director of tax and commercial departments at Garlicke & Bousfield Inc
Wednesday, March 18, 2009
For every door that closes, another opens for BEE
- Paul Austin, Head of Corporate Finance - BDO Spencer Steward
Many of the black economic empowerment (BEE) deals struck in recent years after painstaking negotiations may have to be renegotiated – dealing a blow to the Department of Trade and Industry’s goal for an unencumbered 25 percent of the economy to be in black hands by 2017, according to Werksmans Attorneys and auditors BDO Spencer Steward.
Roughly R41 billion worth of potential BEE deals have been wiped out due to unfavourable trading conditions in the past two years, according to statistics sourced from BEE rating agency Empowerdex. Last year alone the total value of BEE deals sealed on the JSE declined fivefold to R13 billion (from R66 billion in 2007). But the real threat is that deals already struck may begin to unwind.
A solution, according to Morné van der Merwe, Werksmans senior director in the corporate and commercial department, with special focus on M&A, would be for government to consider a bail-out package to ensure no BEE deals fail, and the country remains on target to meet DTI objectives.
Van der Merwe says that a number of BEE deals will undoubtedly be under threat during the current economic slowdown, especially those deals struck in the mining sector at the top of the cycle, as many were last year, to meet the Mining Charter deadline.
“However, I’m confident a large portion of the deals should be safe in light of the fact that a significant number of the latest wave of BEE deals were struck on a vendor-finance basis, using less bank finance than was the case under the model that collapsed during the Nineties market correction.
“We will not see anything like that this time round,” adds van der Merwe. “Vendors tend to be a lot more sympathetic and would rather renegotiate the deal to save it than see it collapse.”
However, many deals (especially the large value deals) were structured using bank and private equity funding.
Paul Austin, Head of Corporate Finance at BDO Spencer Steward in the Cape, says that where bank finance is present in a deal, the structure may be under stress, not so much because of the share price collapse, but due to falling company earnings in an economic slowdown.
“A lot of BEE deals are still financed with debt, and bankers the world over are under pressure to find more security and reduce their exposure to risk.
“Although banks have a substantial exposure to BEE finance, we have not yet seen any deals actually collapse, because there is a degree of robustness in many of the older deals. Even if a share price has collapsed from, say, R500 to R300, if the deal was done in 2005 it is likely to still be in the money. For instance, the original share price might have been R100,” says Austin.
“It would only affect deals either done at the peak of the cycle last year, or where the share price collapse has been of spectacular proportion,” he adds. However, there have been some such spectacular collapses in share price of as much as 94 percent in the case of Super Group. Austin says many of these deals still have a long time horizon in which to recover, and BEE partners are therefore no worse off than other shareholders.
In most deals involving bank finance, a certain rigour was introduced by the banks’ process of due diligence. Austin says although banks have been heavily involved in funding BEE deals, “they never gave anything away, and every deal had to be bankable with their loan capital well secured”.
In the few cases where deals have to be renegotiated, both van der Merwe and Austin see a positive aspect to it: only last September were the Codes of Good Practice finally published, and only in February this year was the final piece of the jigsaw put in place when a verification system was authorised.
Therefore, says Austin, only now can broad-based BEE fully get under way. This means all the earlier deals, while in most cases perfectly valid, did not fully comply with the Codes.
Van der Merwe says any renegotiation therefore offers the opportunity to strike new fully-compliant deals which offer maximum scorecard points, and create the opportunity for more broad-based partners to be brought into any deal.
Van der Merwe says this would align with a financial role by government agencies in supporting vulnerable deals.
“Government has charged agencies such as the Industrial Development Corporation and National Empowerment Fund with supporting BEE, and they could play a role – especially if there was now the opportunity to make them more broad-based – to provide finance or guarantees to such deals, and even facilitate the introduction of specific BBBEE groups,” he says.
“Banks aren’t lending, and government has funds for BBBEE as well as the infrastructure to accomplish it through its development finance institutions. Government really needs to step in here to ensure all the good work achieved in BEE is not undone by factors which started beyond our borders, as well as helping preserving the good parts while improving those aspects deserving of criticism,” says Van der Merwe.
Austin says in the absence of a government bailout or renegotiation, there are few alternatives still open to BEE groups: “It’s very difficult to raise new finance in this market to replace debt, and if you can do so it will most likely be expensive.”
Should the worst happen and some deals collapse, companies might even view this as a benefit, as it would give them the opportunity to negotiate a new deal from scratch – one that complies with the DTI Codes and can now be verified as such by one of the accredited BEE verification agencies, says Austin.
Many of the black economic empowerment (BEE) deals struck in recent years after painstaking negotiations may have to be renegotiated – dealing a blow to the Department of Trade and Industry’s goal for an unencumbered 25 percent of the economy to be in black hands by 2017, according to Werksmans Attorneys and auditors BDO Spencer Steward.
Roughly R41 billion worth of potential BEE deals have been wiped out due to unfavourable trading conditions in the past two years, according to statistics sourced from BEE rating agency Empowerdex. Last year alone the total value of BEE deals sealed on the JSE declined fivefold to R13 billion (from R66 billion in 2007). But the real threat is that deals already struck may begin to unwind.
A solution, according to Morné van der Merwe, Werksmans senior director in the corporate and commercial department, with special focus on M&A, would be for government to consider a bail-out package to ensure no BEE deals fail, and the country remains on target to meet DTI objectives.
Van der Merwe says that a number of BEE deals will undoubtedly be under threat during the current economic slowdown, especially those deals struck in the mining sector at the top of the cycle, as many were last year, to meet the Mining Charter deadline.
“However, I’m confident a large portion of the deals should be safe in light of the fact that a significant number of the latest wave of BEE deals were struck on a vendor-finance basis, using less bank finance than was the case under the model that collapsed during the Nineties market correction.
“We will not see anything like that this time round,” adds van der Merwe. “Vendors tend to be a lot more sympathetic and would rather renegotiate the deal to save it than see it collapse.”
However, many deals (especially the large value deals) were structured using bank and private equity funding.
Paul Austin, Head of Corporate Finance at BDO Spencer Steward in the Cape, says that where bank finance is present in a deal, the structure may be under stress, not so much because of the share price collapse, but due to falling company earnings in an economic slowdown.
“A lot of BEE deals are still financed with debt, and bankers the world over are under pressure to find more security and reduce their exposure to risk.
“Although banks have a substantial exposure to BEE finance, we have not yet seen any deals actually collapse, because there is a degree of robustness in many of the older deals. Even if a share price has collapsed from, say, R500 to R300, if the deal was done in 2005 it is likely to still be in the money. For instance, the original share price might have been R100,” says Austin.
“It would only affect deals either done at the peak of the cycle last year, or where the share price collapse has been of spectacular proportion,” he adds. However, there have been some such spectacular collapses in share price of as much as 94 percent in the case of Super Group. Austin says many of these deals still have a long time horizon in which to recover, and BEE partners are therefore no worse off than other shareholders.
In most deals involving bank finance, a certain rigour was introduced by the banks’ process of due diligence. Austin says although banks have been heavily involved in funding BEE deals, “they never gave anything away, and every deal had to be bankable with their loan capital well secured”.
In the few cases where deals have to be renegotiated, both van der Merwe and Austin see a positive aspect to it: only last September were the Codes of Good Practice finally published, and only in February this year was the final piece of the jigsaw put in place when a verification system was authorised.
Therefore, says Austin, only now can broad-based BEE fully get under way. This means all the earlier deals, while in most cases perfectly valid, did not fully comply with the Codes.
Van der Merwe says any renegotiation therefore offers the opportunity to strike new fully-compliant deals which offer maximum scorecard points, and create the opportunity for more broad-based partners to be brought into any deal.
Van der Merwe says this would align with a financial role by government agencies in supporting vulnerable deals.
“Government has charged agencies such as the Industrial Development Corporation and National Empowerment Fund with supporting BEE, and they could play a role – especially if there was now the opportunity to make them more broad-based – to provide finance or guarantees to such deals, and even facilitate the introduction of specific BBBEE groups,” he says.
“Banks aren’t lending, and government has funds for BBBEE as well as the infrastructure to accomplish it through its development finance institutions. Government really needs to step in here to ensure all the good work achieved in BEE is not undone by factors which started beyond our borders, as well as helping preserving the good parts while improving those aspects deserving of criticism,” says Van der Merwe.
Austin says in the absence of a government bailout or renegotiation, there are few alternatives still open to BEE groups: “It’s very difficult to raise new finance in this market to replace debt, and if you can do so it will most likely be expensive.”
Should the worst happen and some deals collapse, companies might even view this as a benefit, as it would give them the opportunity to negotiate a new deal from scratch – one that complies with the DTI Codes and can now be verified as such by one of the accredited BEE verification agencies, says Austin.
Thursday, March 12, 2009
SARS turns screws on rich tax cheats
- Simpiwe Piliso - Sunday Times
The taxman has unleashed his investigators on some of the country’s richest cheats, who could include banking executives, media barons, IT moguls, sports stars, celebrities and empowerment millionaires.
As part of a major crackdown, SARS has launched a review of the files of more than 600 wealthy individuals, including their family trusts.
Wealthy tax dodgers are short-changing the government’s coffers of billions of rands, leaving ordinary South Africans to carry the can.
SARS spokesman Adrian Lackay said: “SARS is owed billions by people who have the capacity to pay their tax, but choose not to.”
Wealthy individuals are those whose annual income is between R5-million and R40-million, or who have net assets exceeding R75-million.
The files under review include 273 associated entities — such as offshore accounts, private companies or close corporations — 103 trusts and 231 individuals.
Measures used by SARS to check assets against declared income include:
* Agreements with 35 tax havens to improve transparency and establish the effective exchange of information in tax matters; and
* A rigorous lifestyle questionnaire that asks about holidays, flights, restaurants, cellphone bills and shopping habits.
“Any taxpayer who receives a lifestyle questionnaire has ample reason to believe they are under serious investigation for possible tax evasion,” said a statement by Grant Thornton, the specialist tax and advisory services firm.
The questionnaire is sent to an individual as part of a preliminary investigation, which could lead to a search-and-seizure warrant being issued.
However, it is not just these taxpayers who will feel the heat. The taxman has uncovered that there are about 400000 unregistered taxpayers by simply cross-checking IRP5 information, which employers are now compelled to submit.
“These people are employees for which an employer issued an IRP5, but who were not on the SARS register. Therefore, they do not necessarily represent individuals who had not paid tax, but rather those who had failed to register as required,” Lackay said.
Grant Thornton points out in its report, The Tax Line, that the number of people being investigated by the tax authorities has increased significantly in recent years.
And while there are legal tax avoidance measures, independent tax consultant Nathan Endersby warned: “Some large companies and rich individuals are exploring forms of avoidance that they may think are legal, but SARS thinks are illegal.”
These include transferring money to tax havens that facilitate tax avoidance schemes.
Tax havens with which SARS has entered into agreements include the Seychelles, Mauritius, the Bahamas, Bermuda, the Isle of Man, the British Virgin Islands and Liberia.
Investigators said that although a lot of the information had been gleaned from lifestyle surveys , other information to catch tax cheats was based on public information on salaries, bonuses, share options, and the sale and purchase of shares by directors of listed companies.
Notices of company takeovers, new appointments or the retirement of top management officials also provided information.
Lackay said data accessed from the Masters Office, the Deeds Office and the Departments of Home Affairs and Transport were also used.
In addition, records of the sale and purchase of assets such as private jets, wine farms and racehorses also came in handy.
One such example is billionaire entrepreneur Dave King, who is fighting a marathon R2.3-billion claim against SARS.
The claim was sparked by a senior SARS investigator who noticed an Irma Stern painting in King’s mansion in Hyde Park, Johannesburg.
King, who stated that he earned R80000 a year in his tax returns, had snapped up the painting for a record R1.76-million at an auction.
Investigators this week said a lot of the information had been drawn up from lifestyle surveys carried out by Sars, while other information was based on public information on salaries, bonuses, share options and the sale and purchase of shares by directors of listed companies.
Notices of company takeovers, new appointments or the retirement of top management also provided information.
Sars has also been probing HNWI making use of resident and offshore trusts as conduts to redirect revenue in order to reduce their taxable income.
Sars has also collected and compiled information on complex structures used such as trusts, close corporations, syndicates and family companies.
Other information tools used for risk identification and detection purposes, said Lackay, include data accessed from other agencies and government departments, such as the Masters Office, the Deeds office, the Home Affairs Department, the Transport Department.
Also monitored by Sars are the sales and purchases of personal assets such as private jets, wine farms, racehorses and luxury homes and cars.
The public pursuit by tax officials of billionaire Dave King, embroiled in one of SA’s biggest tax claims, is one of the examples of this approach, targeting individuals who lead lavish lifestyles that seem to be at odds with their declared earnings.
A senior Sars investigator, reading a business magazine, noticed as an Irma Stern painting hanging in King’s Hyde Park mansion, north of Johannesburg.
King, who reportedly stated that he earned R80 000 a year in his tax returns, had snapped up the painting for record R1.76-million at an auction.
Realising that King had also applied to be deregistered as a taxpayer, investigator Charles Chipps, wrote to King asking him, among other questions, why it was that with only R80 000 a year “declared income”, he had bought the Irma Stern painting and wine farms in the Western Cape.
King, who is facing a tax claim of R2.3-billion (comprising of R913-million in personal tax and R1.4-billion for his trust, Ben Nevis) was arrested in May 2002 and faced 322 criminal charges.
The taxman has unleashed his investigators on some of the country’s richest cheats, who could include banking executives, media barons, IT moguls, sports stars, celebrities and empowerment millionaires.
As part of a major crackdown, SARS has launched a review of the files of more than 600 wealthy individuals, including their family trusts.
Wealthy tax dodgers are short-changing the government’s coffers of billions of rands, leaving ordinary South Africans to carry the can.
SARS spokesman Adrian Lackay said: “SARS is owed billions by people who have the capacity to pay their tax, but choose not to.”
Wealthy individuals are those whose annual income is between R5-million and R40-million, or who have net assets exceeding R75-million.
The files under review include 273 associated entities — such as offshore accounts, private companies or close corporations — 103 trusts and 231 individuals.
Measures used by SARS to check assets against declared income include:
* Agreements with 35 tax havens to improve transparency and establish the effective exchange of information in tax matters; and
* A rigorous lifestyle questionnaire that asks about holidays, flights, restaurants, cellphone bills and shopping habits.
“Any taxpayer who receives a lifestyle questionnaire has ample reason to believe they are under serious investigation for possible tax evasion,” said a statement by Grant Thornton, the specialist tax and advisory services firm.
The questionnaire is sent to an individual as part of a preliminary investigation, which could lead to a search-and-seizure warrant being issued.
However, it is not just these taxpayers who will feel the heat. The taxman has uncovered that there are about 400000 unregistered taxpayers by simply cross-checking IRP5 information, which employers are now compelled to submit.
“These people are employees for which an employer issued an IRP5, but who were not on the SARS register. Therefore, they do not necessarily represent individuals who had not paid tax, but rather those who had failed to register as required,” Lackay said.
Grant Thornton points out in its report, The Tax Line, that the number of people being investigated by the tax authorities has increased significantly in recent years.
And while there are legal tax avoidance measures, independent tax consultant Nathan Endersby warned: “Some large companies and rich individuals are exploring forms of avoidance that they may think are legal, but SARS thinks are illegal.”
These include transferring money to tax havens that facilitate tax avoidance schemes.
Tax havens with which SARS has entered into agreements include the Seychelles, Mauritius, the Bahamas, Bermuda, the Isle of Man, the British Virgin Islands and Liberia.
Investigators said that although a lot of the information had been gleaned from lifestyle surveys , other information to catch tax cheats was based on public information on salaries, bonuses, share options, and the sale and purchase of shares by directors of listed companies.
Notices of company takeovers, new appointments or the retirement of top management officials also provided information.
Lackay said data accessed from the Masters Office, the Deeds Office and the Departments of Home Affairs and Transport were also used.
In addition, records of the sale and purchase of assets such as private jets, wine farms and racehorses also came in handy.
One such example is billionaire entrepreneur Dave King, who is fighting a marathon R2.3-billion claim against SARS.
The claim was sparked by a senior SARS investigator who noticed an Irma Stern painting in King’s mansion in Hyde Park, Johannesburg.
King, who stated that he earned R80000 a year in his tax returns, had snapped up the painting for a record R1.76-million at an auction.
Investigators this week said a lot of the information had been drawn up from lifestyle surveys carried out by Sars, while other information was based on public information on salaries, bonuses, share options and the sale and purchase of shares by directors of listed companies.
Notices of company takeovers, new appointments or the retirement of top management also provided information.
Sars has also been probing HNWI making use of resident and offshore trusts as conduts to redirect revenue in order to reduce their taxable income.
Sars has also collected and compiled information on complex structures used such as trusts, close corporations, syndicates and family companies.
Other information tools used for risk identification and detection purposes, said Lackay, include data accessed from other agencies and government departments, such as the Masters Office, the Deeds office, the Home Affairs Department, the Transport Department.
Also monitored by Sars are the sales and purchases of personal assets such as private jets, wine farms, racehorses and luxury homes and cars.
The public pursuit by tax officials of billionaire Dave King, embroiled in one of SA’s biggest tax claims, is one of the examples of this approach, targeting individuals who lead lavish lifestyles that seem to be at odds with their declared earnings.
A senior Sars investigator, reading a business magazine, noticed as an Irma Stern painting hanging in King’s Hyde Park mansion, north of Johannesburg.
King, who reportedly stated that he earned R80 000 a year in his tax returns, had snapped up the painting for record R1.76-million at an auction.
Realising that King had also applied to be deregistered as a taxpayer, investigator Charles Chipps, wrote to King asking him, among other questions, why it was that with only R80 000 a year “declared income”, he had bought the Irma Stern painting and wine farms in the Western Cape.
King, who is facing a tax claim of R2.3-billion (comprising of R913-million in personal tax and R1.4-billion for his trust, Ben Nevis) was arrested in May 2002 and faced 322 criminal charges.
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