Be Ready for a SARS Lifestyle Audit

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We read about Eskom staff having to undergo lifestyle audits so that corruption can be identified and stamped out.

SARS have been conducting lifestyle audits since 2007. These audits are conducted when SARS suspects that the taxpayer is not declaring all his or her income and thus is underpaying tax due.

SARS have access to many sources of information 

Data can be accessed from:

  • Your banks
  • The Deeds Office for property transactions
  • Financial institutions for mortgage loans or motor vehicle finance
  • Vehicle registrations
  • Social and other media where your lifestyle can be ascertained
  • Perhaps most significantly jealous neighbours or “friends” who tip off SARS that your lifestyle exceeds the purported income you earn (SARS actively encourage people to tip them off when they think people they know are living beyond their means).

How do SARS select people for lifestyle audits? 

SARS does not disclose the criteria it uses to start probing taxpayer’s affairs or how it selects those who have to complete a lifestyle audit. If you are selected, you have to complete the audit in the time set out by SARS.

One individual selected demanded to know the reasons why he was picked, and refused to complete the 26 page “lifestyle questionnaire” sent to him by SARS (seemingly after a ‘third party’ tip off). He had never registered as a taxpayer, nor had he ever submitted tax returns. The matter went to the High Court which rejected the individual’s right to demand “SARS confidential information” and ordered him to provide the information required by SARS, on pain of committal to prison for contempt of court until he submitted the lifestyle questionnaire.

What to expect if you are selected

You will need to provide details of day to day living expenses including rent or bond payments, groceries, entertainment, vehicle expenses, holidays – in fact every item of cost you and people related to you incur. These will be reconciled to bank statements. In addition, SARS will probe all sources of your income.
In doing this process SARS can request information going back five years. If you don’t have the necessary documentation to justify income or expenditure, then SARS can levy taxes on these amounts. Keep good records.

It pays to be honest and as thorough as possible when completing this process. As noted above SARS have many sources of information to check the data provided by you.

The bad news

If a taxpayer has been under-declaring income or cannot justify expenses that have been claimed, then SARS will issue assessments for these amounts. Penalties of up to 200%, plus interest may be levied by SARS who can also report the taxpayer to the National Prosecuting Authority for potential criminal proceedings. The only bit of good news is that SARS do not use search and seizure operations when conducting lifestyle audits – these are for criminal cases that SARS pursues.

Lifestyle audits are nerve racking and risky for taxpayers. Keep good records and consult your accountant before submitting information to SARS. 

Businesses: How to Survive the Coronavirus Panic

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“Never let a good crisis go to waste” (Winston Churchill)

Globally, the COVID-19 coronavirus has spread panic amongst societies and markets. Businesses are suffering their most challenging times since the 2008 Global Financial Crisis.

This is the time for urgently reviewing how events have affected your business and how you can respond to the seeming chaos.

Cash is king

When faced with great uncertainty, conserve cash and shore up all your credit lines. This will give you greater flexibility when strategizing a response to the coronavirus. You may, for example, be able to buy a crucial stock item for a discount from one of your suppliers, thus ensuring that you can continue operating. Apart from strengthening your position with your competitors, this could help the supplier to remain in business – relationships are important, and this supplier will be grateful to you.

Trim costs wherever you can – some of this is being done for you as many companies are cancelling travel, resulting in many meetings and conferences being called off. Capital expenditure is being pruned globally and there may be opportunities to delay some of your current capex.

Keep your staff healthy

Apple has already told staff to work from home to reduce the risk of catching or spreading the coronavirus. Desks are being spaced to reduce the possibility of catching the virus and meetings are being cancelled or are taking place electronically.

Make sure the risk of staff catching the virus is minimised and have a succession plan if some key members are incapacitated by the coronavirus. Take particular care of staff members who have health issues, as they could become seriously ill or die if they catch the virus. As health authorities are advising people to frequently wash their hands, ensure that you have enough hand washing dispensers.

As many of your staff will be working from home using smart phones and their own desktops, have your IT department mitigate the risks of hacking or computer viruses getting into your IT platform.

Perhaps, most importantly, communicate often with your employees and managers. Regularly follow updates from the World Health Organisation and the local Department of Health. This is a time of uncertainty, as there is no definitive knowledge on how the coronavirus will evolve and thus sharing the information you gather on the disease, will improve the health and morale of staff in your business.

The Occupational Health and Safety Act imposes obligations on employers to provide a healthy environment for their staff. Much of the above is in line with ensuring that you comply with that Act’s requirements, but you need to ensure your organisation is compliant with the legislation.

Your supply chain

This is clearly a key area and working out the risks of suppliers and contractors being unable to supply you is a key task. Some of the important areas will be changing your safety stock holdings, reviewing your contracts with stakeholders and assessing the risks and the consequences of default. This is where it really pays to have cash.

As we said above, keep in mind the long term relationships with suppliers.

You also need to review your insurance policies – will they pay out if certain scenarios unfold? Do you need to take out different policies?

Reacting, planning and preparing strategies will ensure you have the agility to ride out this crisis and may even strengthen your position with competitors.

Is Passwordless Authentication the Next Big Step?

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Consider these facts:

  • Over 80% of hacking is password related.
  • In the first world the average cost of fixing a successful hack is $3.9 million.
  • The average person spends 11 hours a year changing or resetting his or her passwords. For a company with approximately 15,000 employees, the cost of this is $5.2 million per annum, including a cost of $1 million for password resets alone.
  • This average person has between 25 to 85 passwords for the various applications he or she uses.
  • In online retail, 90% of attempts to get into the website are by hackers who have a success rate of about 1%.

The implications for world economic growth and for business

These statistics adversely impact customers who find using the internet a stressful experience and thus often limit the time they spend on the Web. Research indicates that most consumers will pay a premium to have a pleasant online experience – no passwords expired, no one time pins etc.

For businesses the main issue is the time spent in ensuring their internet gateways are safe from hackers to avoid the reputational and other damage they will suffer if they are hacked. Invariably, this leads to more complexity which scares off customers, encourages hackers to find flaws and so the spiral continues.

Nor is this only dragging down businesses, it also has a sizeable effect on the global economy. Just look at the world’s ten largest companies:


Source: Bloomberg, Google

The seven companies shown in blue above are based on a “platform model”, highlighting the importance of this issue to the world’s economy. With seven of the companies in the tech sector and two in financial services (Berkshire Hathaway, J.P. Morgan), it is obvious just how important their internet platforms are to their success.


The solution

A good solution will need to have the following elements:

  1. Security, for obvious reasons.
  2. Privacy – with the pending full commencement of the Protection of Personal Information Act this will become an even more important element.
  3. Sustainability – it needs to be robust, flexible and long lasting.
  4. Inclusive – with the rapid breakout of people into distinct groupings (LGBT, #Metoo etc), the solution must cater for all these needs.
  5. Scalability – as the world is making greater use of the internet, any new system must be able to rapidly scale up.
  6. Pleasant user experience – it needs to be easy to use.

This solution should move away from passwords towards alternatives like biometrics (facial recognition, fingerprint authentication and the like), QR code authentication and even to the system recognising unique habits you have like how you toggle a mouse.

These solutions are becoming more available and in the US companies which have moved away from passwords are finding their sales line growing, costs being reduced, productivity rising and happy customers.

Make sure you don’t lag behind your competitors in this important developing field.

Do You Need Business Interruption Insurance?

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Catastrophes like floods and fires do occur and there is insurance to cater for these types of events. There are two different types of insurance cover for these events – one to repair or replace the assets damaged (your normal insurance policy) and one to compensate you for the losses incurred during the time it takes to get the business going again. This latter one is known as ‘Business Interruption’ or ‘Loss of Profits’ insurance.

Statistics show that nearly three out of four businesses never recover from a catastrophic event and it is therefore important to ensure that your Business Interruption insurance has been carefully thought through.

What to insure for

You need to have a good grasp of your costs and expected sales and gross profit. You don’t want to underinsure so if your business is growing reflect that fact – for example if you expect 10% growth (and trends in your business justify this) show this to insurers or you won’t get paid out this additional amount.

It is important to make sure that all your projections are well grounded and can be defended as they will be closely scrutinised by loss adjustors in the event of a claim. Thus, the better you understand your costs, the less chance of having a claim either rejected or adjusted downwards.

Another critical factor is the indemnity period. This is the time you will be covered for whilst out of business. For example, if you put a six-month indemnity period in your policy, you will only get paid out for six months even if it takes twelve months to get the business back on its feet again.

Let’s look at an example… 

Bernie has a cosmetics factory and his year end is 31 December.

Bernie’s Cosmetics Factory
Budget for Year R
Sales 120,000
Cost of Sales (45,000)
Purchases (10,000) **
Wages (35,000)
= GROSS PROFIT 75,000
COSTS (46,000)
Salaries (20,000)
Distribution (6,000) **
Maintenance (5,000) **
Rent (15,000)
= PROFIT 29,000


On January 2, the factory burns down. It will take 12 months to get the factory up and running again.

Business Interruption Claim R
ADJUSTED GROSS PROFIT 65,000
Gross Profit 75,000
Less Purchases (10,000)
COSTS INCURRED 40,000
Salaries 20,000
Rent 15,000
Preparation Cost 5,000 ***
= CLAIM 105,000 *
*Adjusted gross profit plus your incurred costs.
**Variable costs which will not be incurred in the 12-month period of re-establishing the factory.

  
  ***Putting together claims is a time-consuming task, so include it in your policy.

  
  NB! Include VAT in the assured amount as insurance pay outs include VAT.


You can see from this simple example that this is a very complex process – spend time with your accountant getting to grips with your revenues and costs. Also use a reliable insurance broker.

Remember that 43% of businesses that suffer a catastrophe never trade again and a further 29% go out of business within two years.

Your Selection of Budget 2020 Tax Calculators

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  • How long will you work for the taxman today?

    Input your salary into the 2020 Tax Clock calculator and find out how many hours you will spend today working for the taxman, and at what time precisely you will finally start working for yourself (warning – it’s not pretty!).

  • How will your income tax change? 

    Put your monthly taxable income into Fin24’s Budget 2020 Income Tax Calculator to find out.

  • How much extra will your sin taxes cost you this year?   

    Work out how much more you will be shelling out for spirits, wine, beer and cigarettes (or how much you will be saving if you don’t indulge!) with Fin24’s Budget 2020 Sin Tax Calculator.

Directors: “Knowing” Is A Potentially Career-Threatening Word for You

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“An investment in knowledge pays the best interest” (Benjamin Franklin)

The Companies Act 2008 places onerous duties on directors and if you do not meet these obligations, you risk personal liability for any damages flowing from these actions.


“Knowing” in the company law context

A director gets “knowing” (actual knowledge) of the company by remaining apprised of the conditions of the relevant industry, what is revealed by the media of the business or its competitors and from the “pack” of data received before a directors’ meeting.

The Companies Act goes further and says a director “reasonably ought” to know important matters in the company. In other words, a director should look beyond what is presented to him and be on the lookout for any other issues that could impact the company.

To gain “reasonably ought” to know information, a director should investigate pertinent matters or may take “other measures” which would result in gaining valuable data – for example, the director may contact an executive director to clarify a matter.

An example to clarify – how to protect yourself from personal liability

  • Let’s take “Bill”, a non-executive director of a company which has a subsidiary that imports equipment from China. Bill knows that the subsidiary has purchased a building and owes a R20 million bond on it. The company has guaranteed the R20 million liability.
  • Bill has a board meeting in a week’s time and finds that there is no mention of the subsidiary’s bond in his management pack.
  • He has read about the new COVID-19 coronavirus and realises that the factory that supplies the equipment to the subsidiary has been temporarily closed and it will take more than a month to get the factory back in production when it reopens. It will then take one month for it to build up stock. Shipping time to South Africa is six weeks. Bill finds out that the subsidiary has only one month’s stock and thus faces potentially about three months of trading without stock. The subsidiary is highly geared, and Bill is concerned that it could stop trading which would mean the R20 million guarantee will be called up and this could affect the company’s solvency.
  • Naturally, Bill carefully documents all of this and raises his concerns at the board meeting.
  • A majority of the board are reassured by the executive directors that Bill’s concerns are not valid. Four months later, the subsidiary ceases trading, and it and the company end up in liquidation.
  • An investigation is carried out and one of its findings is that the company “reasonably ought” to have anticipated that the coronavirus would create solvency problems for the subsidiary and their failure to act has caused both companies substantial losses. Consequently, the directors are personally liable for these losses.
  • Not all directors of course, as Bill shows the investigators the work he did and how he was outvoted at the board meeting. He avoids being held liable for the losses.

Directors be wary of this – don’t just rely on management packs etc but also look for the matters you “ought to know” about. This applies also to alternate directors and senior managers who are deemed by the Companies Act to effectively have the powers of directors.

Budget 2020: Some Tax Relief!

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Taxpayers were preparing for once again being squeezed in 2020, but we have been pleasantly surprised as we have been given a myriad of tax concessions in this budget. In fact, the average taxpayer will be over 5% better off than in 2019/2020.

The Finance Minister has decided that taxpayers have borne the brunt of austerity for too long. Instead he has opted for R261 billion in cost reduction over the next three years – the bulk of which (R160 billion) will come from slashing remuneration of government and State Owned Enterprises (SOEs) staff.

Thus, Tito Mboweni surprised the market by taking on a holy cow – public servants’ remuneration. The real issue now is how the unions (remember they are key government allies) will respond. They have already rejected the Budget proposals, so some tough bargaining lies ahead.

The following proposed tax changes were announced 

  • Income tax rates are left unchanged. Tax brackets (and tax rebates) were favourably adjusted by R14 billion. This results in a net gain of R2 billion for taxpayers, as fiscal drag will amount to R12 billion (the amount that inflation would have pushed taxpayers into higher tax brackets).

    A person earning R460 000 a year will now pay R3 400 less in taxes in 2020/21. The average saving per taxpayer is 5.2%.

    This R2 billion loss to the government will be covered by R1.75 billion from Carbon taxes and R250 million from an increase in the plastic bag levy.

  • “Sin” taxes have mainly had inflation-linked increases with beer, wine, spirits and cigarettes going up on 1 April (see tables below). Of interest here is that heated tobacco products (such as hubbly bubbly) will now be taxed at 75% of the excise rate on cigarettes and a vaping tax (E-cigarettes) will be introduced in 2021.
  • Carbon Tax will increase by 5.6% from R120 per ton to R127 of carbon dioxide equivalent. Another “green tax”, the plastic bag levy has been increased to 25 cents per bag.
  • The fuel levy will increase by 25 cents a litre on 1 April (16 cents for the general fuel levy and 9 cents for the Road Accident Fund).
  • Medical tax credits will rise by R9 to R319 for the first two beneficiaries and by R6 to R215 for each additional beneficiary. This is also unexpectedly good news as the thrust of recent budgets has been to limit medical tax credits ahead of the introduction of National Health Insurance (there was very little in the Budget about NHI).
  • Expat Tax – the amount of remuneration earned outside South Africa, that qualifies for exemption from normal tax will be increased from R1 million to R1,25 million. This is also a positive development.
  • Micro Business Turnover Tax. There is a marginal decrease in the Micro Business Turnover Tax, whilst Small Business Corporation Tax remains unchanged.
  • The Transfer Duty Exemption has been increased to R1 million from R900 000, which means you will pay zero transfer duty on any property valued up to R1m.
  • The Business Travel Tax Free Allowance has increased to R3.98 per kilometre (R3.61 last year).
  • The annual limit on contributions to a Tax-Free Investment has been increased by R3 000 to R36 000.

The following tax rates are unchanged

  • Value Added Tax at 15%.
  • Dividend tax at 20%.
  • Company Tax at 28% and Trusts at 45%. The Minister said amendments will be made to reduce certain exemptions, review and put end dates on incentives, limit the deduction of assessed losses to 80% of taxable income, ahead of announcing a drop in company tax rates to make South Africa a globally-competitive corporate workplace.
  • All withholding taxes.

The following also remained the same 

  • The Interest Exemption on Income Tax – R23 800 if you are under 65 and over 65 R34 800.
  • Retirement savings contribution limit remains at 27.5% of income.
  • The inclusion rate applying to Capital Gains – the maximum rate at which normal tax on capital gains will be levied remains at 18% for individuals, 22.4% for companies and 36% for trusts.

Tax Tables – Budget 2020

 Source: National Treasury

2020 Budget Summary

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

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

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

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

Your obligations and your risks

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

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

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

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

Other danger areas

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

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

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

Take Advantage of the Venture Capital Company Allowance While You Can

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

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

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

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

How it works initially

 

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

 

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

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

You have saved yourself R1.125 million in tax.

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

How it works in subsequent years

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

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

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

This excludes any costs you may be charged.

Beware of costs

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

It is worth getting your accountant to check these costs.

Look for the gems

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

Thus, everybody scores:

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

Don’t delay, the clock is ticking!

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

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