Directors: Be Careful, You Will Be Held More Accountable In 2020
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
“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.
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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:
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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.
Lying About Qualifications – Prison Time for Employees on the Horizon
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.
