Directors: Be Careful, You Will Be Held More Accountable In 2020

/0 Comments/in /by

The past few years have seen scandals emerging in both the private and public sectors. Steinhoff, State Capture, Eskom, the Guptas and Bosasa, to name a few, have revealed how endemic corruption has become in South Africa.

The National Prosecuting Authority (NPA) is now beginning to charge those who have been involved in these scandals. This has been greeted with relief by the public, who have become increasingly frustrated that perpetrators have appeared to have escaped from accountability for their actions.

Clearly, the directors and senior managers of these affected entities are being scrutinised and face potential prosecution.

Your obligations and your risks

The Companies Act places onerous obligations on directors and senior managers who are to perform their duties:

  • Having the necessary skills and experience to make informed, independent decisions,
  • Keeping themselves up to date on the plans and activities of the company,
  • Having sufficient data to make carefully considered and impartial recommendations to all issues raised at directors’ meetings, and
  • With no conflicts of interest. If a director has a conflict or potential conflict, then that director(s) shall make full disclosure of the conflict to fellow board members.

Failure to adhere to these standards opens directors to the possibility of being liable for any damages or losses incurred. In certain instances they face the potential to be held criminally liable and directors who transgress by failing to meet their obligations can also be disbarred as directors either permanently or on a short-term basis.

Additionally stakeholders, such as unions, may undertake class action against directors personally.

Other danger areas

Now that all directors are under increasing scrutiny, you also need to bear in mind issues such as your company causing environmental damage, trading in insolvent circumstances (for example SAA directors face potential litigation here), failing to ensure your business is protected against hackers, poor accounting policies and being party to the company suffering reputational damage which leads to a collapse in the share price (Tongaat directors risk exposure to this).

As a director, remember you are in the public’s and the NPA’s sights. Be extra careful that you execute your duties in line with the dictates of the Companies Act.

If in doubt, use your accountant as a sounding board and advisor.

Take Advantage of the Venture Capital Company Allowance While You Can

/0 Comments/in /by

“There are two systems of taxation in our country: one for the informed and one for the uninformed” (U.S. Judge Learned Hand)

Small and medium-sized enterprises (SMEs) have limited access to capital markets. As SMEs are considered to be the cheapest and most cost-effective sector in creating jobs, the Revenue authorities sought to address this by creating an attractive allowance for Venture Capital Companies (VCC) in 2009.

The VCC allowance gave a massive boost to venture capital in South Africa, and also to SMEs who have received R6 billion in investment since 2009. Venture capital now accounts for 2% of GDP (in the USA this is 4%).

For you the taxpayer it offers an attractive way to reduce your tax as you are allowed to deduct R2.5 million from your taxable income if you invest in a VCC. This is in your own capacity or via a trust; if you use a company to make the investment, it can deduct R5 million.

How it works initially

 

Note: The examples below relate to an investment in your own personal name, and different tax rates and net returns will apply if you invest through a trust or company.

 

Assume you have R2.5 million in taxable income. It is 20 February, you have little more than a week before you will have to pay provisional tax and you want to reduce your tax liability and make a good investment.

You have researched the VCCs and decide to invest R2.5 million in a VCC which invests in solar power.

You have saved yourself R1.125 million in tax.

To avoid having this tax deduction of R1.125 million reversed, you will need to be invested with the VCC for five years.

How it works in subsequent years

The VCC onward invests the R2.5 million in a qualifying SME (the SMEs need to be registered with SARS) which then installs solar power in, say, a block of flats. Of interest here is that the SME also gets a 100% deduction on the R2.5 million.

If you cash in on the investment after 5 years, this will be the position:

In summary, you received a tax deduction of R1.125 million and 5 years later paid R450 000 in capital gains tax. Your investment of R2.5 million has been refunded to you. If you discount these cash flows, this equates to an after-tax return of just over 10% over five years which is pretty good as inflation is currently just below 4%, i.e. a real return of 6%. As a comparative the stock market delivered a return of just below 6% in the last decade.

This excludes any costs you may be charged.

Beware of costs

There are many VCCs out there and they charge varying fees, so be very careful of these costs as they come in many guises such as performance fees, administration costs, annual charge etc.

It is worth getting your accountant to check these costs.

Look for the gems

As we saw above, the qualifying SME (the entity that installs the solar power), gets a 100% upfront write-off of the investment (R2.5 million in this example for a tax saving of R700 000). Some creative VCCs have used this tax saving to return income to you the investor. Take the example of a residential complex where the qualifying company installs solar power in the complex and then charges the owners of the complex for the electricity they consume using solar power (this charge is at a substantial discount to Eskom’s rate). The qualifying company returns this charge to the VCC which then pays these amounts as dividends to you, the investor.

Thus, everybody scores:

  • Residents of the complex don’t pay for the installation of the solar power and get cheap electricity,
  • The qualifying company takes its profit out of the R2 500 000 investment and tax saving of R700 000,
  • The VCC makes money from charging you fees, and
  • You, the investor, get a return (after-tax and net of all costs) of over 20% over the 5 year period, which is excellent.

Don’t delay, the clock is ticking!

The only downside to this is that the allowances will fall away in June 2021. VCC companies are lobbying government to extend this program past June 2021, but even if they are unsuccessful, you have just under 18 months to take advantage of this scheme.

Of course this sort of investment isn’t for everyone; ask your accountant whether it might suit you.

Small Businesses: How to Survive and Thrive

/0 Comments/in /by

“Why do approximately 70% – 80% of small businesses fail within five years? Why are certain entrepreneurs more successful than others?” (Extract from UWC article below)

Recent research by the University of the Western Cape on the rate of failure of small businesses makes for interesting reading and provides insights that we all really need to take on board, particularly in these hard economic times.

SMMEs, their importance and their failure rates

Globally 60 to 70% of jobs are found in SMMEs (Small, Medium and Micro-Enterprises) but in South Africa this figure is only just over 28% despite more than 95% of businesses in South Africa being SMMEs.

South Africa has a higher failure rate of SMMEs than elsewhere in the world (70% – 80% of our small businesses fail within 5 years). In previously disadvantaged communities only 1% of businesses progress from employing less than 5 people to having staff of 10 or more.

6 factors that can make or break an SMME business

The research indicates that in terms of success factors, 40% can be attributed to the entrepreneur. The characteristics of this person are crucial and they need to show:

  1. Persistence, being proactive and being a self-starter,
  2. That they do not react to events but are continually planning (good planning is an important success indicator), innovating, having an ability to learn and apply this learning and having a culture of achievement.

The factors contributing to failure are ones we are aware of:

  1. Lack of skills – government and large corporates snap up almost all of South Africa’s limited skills,
  2. Difficulty in accessing finance – lending institutions require a track record before providing funding to businesses,
  3. Poor accounting records and limited information systems,
  4. Late payment by state institutions and large corporates (Kenya is considering passing legislation that compels paying SMMEs on time).

There are others too like corruption crowding out legitimate SMMEs and low bargaining power.

Entrepreneurs – what can you do?

Have a look at the 6 factors listed above. Maximise the positives, and do something about the problem areas. Remember, your accountant is there to help you succeed so don’t be shy to ask for advice.

What can government do?

Clearly the country is missing a sizeable opportunity to grow the economy and to reduce our 27% unemployment rate.

One way to get this going is through mentoring and training. Government programs are having a limited impact and there is space for business to also play its part. Why not interview some SMME owners and determine if they have the characteristics as shown above? Those that have the attributes can be successfully mentored to get good accounting records and systems, skills can be addressed as well as access to finance.

Lying About Qualifications – Prison Time for Employees on the Horizon

/0 Comments/in /by

An issue that has been around for a while has been employees misrepresenting their qualifications to their employer. This has adverse consequences for the employer as the employee often proves incapable of doing the required job – this leads to wasted time in disciplinary hearings, dismissal and then a new recruiting cycle begins. That’s in addition to all the damage that an under-qualified employee can do the employer’s business before his or her duplicity is exposed.

This has been worsened by fake institutions which offer people fraudulent qualifications.

The statutory amendment and its wide reach

In a move to address the situation, a statutory amendment makes employees who mislead employers and fraudulent academic institutions liable for up to five years’ imprisonment and/or a fine. The amending Act has been signed into law but will only come into effect on a date or dates still to be determined.

The changes when in effect will provide employees and fake learning institutions with a strong incentive to be honest in the future.

So broad is the legislation that anyone can report to SAQA (The South African Qualifications Authority) any employee or any institution peddling false qualifications.

For example, if X learns from Twitter that Y has faked his or her credentials, then SAQA is bound to investigate if X reports Y to them. This can result in Y being prosecuted and facing prison time.

This all heralds good news for employers with its potential to both reduce their risk of under-qualified employees damaging their businesses, and to save them considerable administration time.

Travelling Abroad – Do You Have To Declare Your Personal Possessions On Re-Entry?

/0 Comments/in /by

There is some confusion over whether to declare your laptops, golf clubs, iPads and other such valuables that you travel out of the country with.

The answer is no you don’t have to declare these items, but you do have to carry with you proof of purchase in South Africa of these goods and show it to Customs officials on request. Invoices or insurance policies are usually adequate proof for Customs.

Alternatively, you may, when exiting South Africa, complete a TC-01 which digitally captures the relevant assets. On completion, the Customs official will get you to sign the form and will give you a copy. This form is valid for six months and if you are a frequent traveller, it is bound to make your life easier.

How To Detect and Dodge Financial Scams

/0 Comments/in /by

“If it sounds too good to be true, it probably is” (wise old adage)

In the USA, $40 billion is lost every year to scammers. When you consider statistics suggesting that 65% of scam victims don’t report their losses (usually they are too embarrassed to admit they have been conned), as much as $120 billion could annually be skimmed from gullible people.

Scammers normally target people who are financially vulnerable (they have lost their jobs or their business has folded) or they take advantage of economic downturns where a large percentage of people experience financial hardship.

The quick con

Typically, it is difficult to fully get to grips with the scheme they sell you as the scheme’s workings are hard to fully understand. But the conmen tell you that the real issue is you will get astronomical returns and they will show you for example pictures of yachts cruising in the Mediterranean – messaging you “this is the life you will lead once you have made your quick fortune”.

Because they prey on the financially vulnerable, the conmen spin conspiracy theories – the reason you have fallen on hard times is the system has crushed you and this scheme bypasses all the financial regulation “nonsense” – and the like.

Conmen are also hard salesmen and they will pressurise you into making this “investment”.

The long con

You need to be really careful of these as you are up against some sophisticated operators. The main principle is to get assurance from people in your social circle that the scammer or the scheme is credible and achieves high returns (these people are wittingly or unwittingly part of the con). In addition, the scammers can point you to well-known financial experts who will vouch for the scheme (they typically are part of the con).

It is usually a Ponzi scheme which will operate successfully until no new funds come into the scheme. It then unravels very quickly, and the vast bulk of investors lose their investments.

Another type of scam is “pump and dump” where salesmen extol a little-known share, and this drives the price up. These salesmen make aggressive pitches to unsuspecting victims who get carried away by the upward momentum of the share. Once the share has gone way over its value, the conmen sell it short (the dump of the scheme) and the share price collapses.

Who is vulnerable to these scammers?

Strangely enough it is often well-to-do people (usually men) who are experiencing financial stress and are happy to take on risk. These people are well educated and financially literate.

The combination of factors that makes them gullible is (apart from being under financial stress):

  • Being put under pressure by the conmen (they need to get in “before it’s too late” and their friends “are making a killing”)
  • The scheme can be complex or opaque and so they rely on their intuition
  • Most of these people are decent and trusting, so they tend to believe the conmen and they don’t want to let the conmen down (no doubt the scammers are aware of this vulnerability)
  • Emotional. Greed is a very powerful emotion and can lead to impulsive decisions which you will regret later.

Sir Isaac Newton was a great genius, but he lost all his money in the South Sea Bubble scam in the 1720’s.

So before you get caught up in a scam step back and think rationally. You should also analyse yourself and if you have any of the above traits, then be very careful of any investments that are “too good to be true”.

Employers Take Note – We Can Still Learn From the Peter Principle

/0 Comments/in /by

“Leadership is nature’s way of removing morons from the productive flow” (Dilbert)

The ‘Peter Principle’ has been around for nearly fifty years. Recent research has underlined that it is still valid today.

It has implications for how we promote staff and the effects this has on our business.

What is it?

 

“Peter Principle, n. – The theory that employees within an organisation will advance to their highest level of competence and then be promoted to and remain at a level at which they are incompetent.” (The Free Dictionary)

 

It is usual in business that people get promoted when they are successful at their jobs. They get promoted despite the fact that very often the skills required for their new position are different from their old position. If they are successful in this position, they get promoted again and again until they lack the skills for the new position and then they experience failure. Once this has happened, they get stuck in their new role – as they are no longer successful, no more promotions are available for them. They have risen to the level of their incompetence. Most organisations are bedevilled with unhappy managers who spend years and years in the same job.

Some researchers have even facetiously suggested that, as the skills required for one stratum of an organisation are completely different to those required for the next stratum of the business, why not promote the worst performing employees?  This in Dilbert’s terminology shows that “leadership is nature’s way of removing morons from the productive flow”.

New studies prove the Peter Principle

Recent research of 214 companies reviewed 1,500 promotions in sales organisations. The research also looked at the characteristics of people promoted – whether they worked collaboratively or on their own (people who work collaboratively usually make effective managers).

It showed that people were most likely to advance in the business when they were successful in their sales jobs although they were poor managers – in fact sales declined under these promoted managers. Conversely, those who worked collaboratively were usually not promoted.

The lessons today

The new research shows that the Peter Principle is alive and well. Whilst many businesses accept the trade-off of promoting successful employees at the expense of having less effective managers, it is appropriate to reconsider how staff should be promoted in an organisation. In the long run it almost certainly pays to promote those who have the potential skills to be good managers. To the high flyers who don’t have the skills to manage, recognise them and give them hefty bonuses.

Finally, is it not better to move people who are not performing in a particular position either to another position where they can do a good job, or move them out of the company? This leaves the company with good managers and motivated staff as opposed to having frustrated blocked managers and lower performing employees.

What Will The Next Decade Bring Us?

/0 Comments/in /by

“If we can win the Rugby World Cup three times, surely it is not asking too much of this country to take the High Road twice when its future is on the line? When push comes to shove, ordinary South Africans can do extraordinary things!” (Clem Sunter)

The major global trends that have recently emerged and are widely predicted to continue to dominate the world are:

  • A rising tide of nationalism and anger at the status quo which manifests itself in trying to stop immigration into Western Europe and the United States, an increasing move away from free trade and more and more civil unrest. If you put all this together, it will result in slower global economic growth and rising tensions within countries and conflicts between nations (India and Pakistan, Turkey and the Kurds/Syrians, the USA and Iran to name a few).

    For South Africa, which is dependent on growing trade, this will put more pressure on an already struggling economy. Civic unrest is also a significant trend here and hopefully we can recreate the 1990s when we stunned the world by negotiating a peaceful transition to democracy.

  • Superpower tensions as China vies to overtake the USA both economically and militarily. Russia is also showing global ambitions. So far this has played itself out in US tariffs against China and sanctions on Russia, but you can expect this to hot up.

    South Africa is a long way from these battle grounds and should be spared any conflicts that arise. In fact, we will probably benefit as the superpowers vie for influence which should translate into investment into our declining infrastructure.

  • The last decade has been characterised by easy money and low interest rates, which opens the distinct possibility that there will be another economic crash similar to the one in 2008.

    This would not be good news for South Africa as our economy is already stretched by rising debt. We survived the last crash well as we had strong economic fundamentals and were able to fight the effects of the crash with an economic stimulus program but now we have no leeway to counteract a global recession, should there be a crash.

    Another factor is whether we will drop to full junk status which will be detrimental to the economy.

  • Shadowing and shading everything is climate change which has arrived and is making itself increasingly felt. Already we have seen how a disastrous drought was one of the causes of the Syrian civil war and we know how dry parts of South Africa are. Rising levels of carbon dioxide are making the world hotter (already temperatures have risen by 1 degree centigrade and continue to rise) – if temperatures rise half a degree, it will cost the world $56 trillion to deal with the effects.

    The problem with climate change is that it compounds all the above problems like rising numbers of refugees, less food etc. Desertification will drive more people into crowded cities along with more extreme weather events.

    More and more climate change specialists are saying we are getting closer to a tipping point whereby climate change becomes irreversible. Why don’t we all commit in our own small ways to reduce the carbon emissions we cause and to look to ways to conserve water?

None of our problems are insurmountable!

Although we are clearly going through increasingly risky global and local times, none of our problems are insurmountable. With will and a spirit of compromise we can achieve surprising things – nobody realistically expected South Africa to win the Rugby World Cup, but we did.