Tax Freedom Day: How Many Days Did You Work for The Taxman in 2020?
“I Have Bad News and – No, Actually I Just Have Bad News” (Rick Riordan)
In the current year it has taken the average South African 126 days to pay off their taxes and only from the next day did the taxpayer then work for him or herself. This date fell on 6 May this year and is globally known as Tax Freedom Day (TFD).
So, what does this tell us?
This should be good news as last year TFD took 11 days longer to achieve than in 2020. However, this 11 day drop reflects the calamitous fall-off in the economy due to the COVID-19 crisis. Peoples’ incomes are dropping in 2020 which means less tax will be paid – this is the main reason for the 11 day improvement over last year.
This is not good news as the impact of lower taxes on government finances will push South Africa into a worse debt crisis. Some economists are predicting that our budget deficit to GDP will be 17% versus the 6.8% in the Budget presented by the Finance Minister in February – this shows just how fast our economy is tumbling. At least we are in good company – the USA shed 36 million jobs in the first seven weeks of their lockdown. Across the world, virtually every economy has slipped into recession.
The problem is it will take, depending on how long the pandemic lasts, some years for South Africa and the global economy to recover. This will not be good news for TFD, as taxpayers will probably be required to shoulder a higher burden of taxes to pay off the debt incurred due to the pandemic.
COVID-19 and Directors: Your Duties and Liabilities in the Coronavirus Crisis
There are significant obligations placed on directors by the Companies Act and personal and criminal liabilities if they fail to meet these obligations.
As a director you will no doubt be focusing on critical issues like keeping your business afloat and solvent (the CIPC has waived its right to intervene when a company becomes temporarily insolvent due to the lockdown and other restrictions imposed. This concession will be withdrawn 60 days after the lifting of the National Disaster regulations), don’t forget that the Companies Act is still in force.
The coronavirus has created an unprecedented situation which demands swift, decisive action by directors – for example, the President only gave the country 72 hours’ notice before the lockdown came into effect, which gave little time for directors to react to the new reality.
No change in your duties or liabilities
Despite the coronavirus there is no change to the duties or liabilities of directors. They must perform their role:
- “in good faith…,
- in the best interests of the company
- with the degree of care, skill and diligence that may reasonably be expected of a person –
- carrying out the same functions in relation to the company as those carried out by that director; and
- having the general knowledge, skill and experience of that director.”
“Good faith”, “best interests” and “care, skill and diligence” are onerous terms. For a director to be protected against falling foul of these provisions that director needs to show that he/she took diligent steps to be informed of the issue and made a rational decision in the best interests of the company. This is known as the Business Judgment Rule and courts look to this when considering a director’s personal liability.
The impact of the King IV Report
When considering the Business Judgment Rule, the courts have relied on whether a director followed the King IV Code of Good Governance when reaching their decision.
One issue that will arise with the coronavirus is that King IV mandates that a company be a good corporate citizen and part of this is to look after the health and safety of employees (following the requirements of the Occupational Health and Safety Act and now government’s Disaster Management Act Regulations) – for example, were adequate steps taken in terms of the National State of Disaster declared by the President such as social distancing (working from home where feasible) and ensuring employees had access to masks, hand sanitisers and so on at work?
Failure to comply with King IV in this scenario means directors will not be able to rely on the Business Judgment Rule and can be held personally liable for losses incurred.
Will your indemnity insurance cover you?
Directors can take out indemnity insurance, covering claims awarded, in their personal capacity, when they commit “wrongful acts”. However, the insurance will not apply if there is “wilful misconduct or wilful breach of trust” by the director (check your policy’s exact wording). An example might be the director being convicted under the Occupational Health and Safety Act.
As a director you could find yourself being held personally liable for your decisions and being denied access to your indemnity insurance cover.
Dealing with the pandemic increases the pressure on directors but doesn’t absolve them of their liabilities.
How Different Will Our Landscape Be Post-Coronavirus?
“Prediction is very difficult, especially if it’s about the future” (Niels Bohr)
Pandemics kill more people than wars – the introduction of the Black Death plague led to 14th Century Europe losing 40% of its population within two years. What will our world look like when normal life begins to return?
Predicting the future can never be an exact science, but the consensus seems to be that the following four main trends are, in line with historical precedent (except perhaps the 1918 Flu Pandemic which was dwarfed by the effects of the First World War) likely to await us –
- Labour is stronger, capital is weaker
A recurring feature of pandemics is that workers get higher wages for up to four decades after the end of the pandemic. Already, a strike at Amazon has led to better benefits for workers. In South Africa, we have seen health workers demanding better protective equipment.Research shows that this increase comes at the expense of capital which means lower returns for shareholders.
- Globalisation will be weakened
Coronavirus has exposed the flaws within global supply chains, such as an overreliance on China supplying key medical ingredients. Governments are reducing this risk by turning to local manufacture and services for such ingredients. Thus, globalisation will be clipped in favour of local production and services – creating opportunities for South African companies. - Slow recovery
The end of a war is accompanied by massive investment as businesses and infrastructure are rebuilt. This usually quickens economic growth. Pandemics result in no or anaemic growth – there is no scope for massive investment and economic recovery takes a while to reboot.
This is exacerbated by people feeling down and exhausted after the pandemic. They are cautious and save money, contributing further to the economic malaise. This reduction in economic activity leads to low interest rates.
- Victimisation
Another thread running through post-pandemic times is people looking for someone to blame for the virus – often foreigners become the targets. Here with our record of xenophobia, this is something we need to guard against.
Whilst the historical evidence of events after a pandemic points to difficult times, there may be opportunities for your business in, for example, the reduced global supply chain. You will also need to keep an eye on your staff to keep their morale up.
