Category Archives: Finance

MSI wins ‘Rising Star Association’ and ‘Communications Campaign’ awards

MSI Global Alliance, one of the world’s leading international associations of independent legal and accounting firms, has won two awards in the prestigious International Accounting Bulletin Forum & Awards.

MSI Global Alliance is delighted to have received the two awards: ‘Rising Star Association of the Year’ and ‘Communications Campaign of the Year’ at the annual International Accounting Bulletin Forum & Awards judged by an independent panel of accounting experts.

The ‘Rising Star Association’ award recognises MSI’s highly effective Strategy for 2015-2018 and its successful implementation across the four priorities of growth, marketing, member services and member engagement. Separately, MSI’s innovative and engaging internal marketing campaign ‘MSI Month’ was selected as the ‘Communications Campaign of the year’.

Tim Wilson, chief executive of MSI, comments, “I am absolutely delighted to have received these two awards, which represent the hard work of our entire team and the engagement of our members worldwide. I am proud of MSI’s continued development and the strength of our association and I am excited by the future as we move forward into our next chapter.”

The International Accounting Bulletin is the leading authority of the global accounting industry and regularly analyses firm performance and best practices.

MSI was presented with the ‘Rising Star Association’ and ‘Communications Campaign’ awards during the gala dinner of The Digital Accountancy Forum & Awards 2017 in London on 4th October 2017.

For further information please contact

MSI Global Alliance
Pauline Rottstock, Marketing and Business Development Manager
Tel: +44 20 7583 7000
Email: prottstock@msiglobal.org

About MSI Global Alliance

MSI is one of the world’s leading international associations of independent legal and accounting firms with over 250 carefully selected member firms in more than 100 countries. MSI was formed in 1990 in response to the growing need for cross-border co-operation between professional services firms.

MSI members worldwide work closely together to provide integrated, multidisciplinary services to meet each client’s legal and regulatory obligations and growth ambitions. MSI is ranked among the Top 20 international accounting and legal networks, associations & alliances.

Visit our website: www.msiglobal.org

The importance of having a good accounting system

If your business doesn’t have an effective accounting system in place, you run the risk of making serious errors in your finances. Furthermore, a good accounting system simply makes life easier and allows you to focus more on growing your business. 

  • It helps you evaluate the performance of your business: A good accounting system gives you a thorough overview of the financial performance of your business. If you don’t have an accounting record, how will you know if your business is growing or shrinking? So, your account records help you know if your business is growing, stagnant or slowing down.
  • It helps you manage cash flow and meet deadlines: Cash flow management means knowing what you do with the cash that comes into the organisation. Your accounting system helps you know areas that need cash. For instance, cash may be needed to finance your debts, or make major renovations or order for new stocks, and it is your accounting system that will help you know this. In short, no business will growth further without a good cash management system. Also, your accounting books help you know when bills like your rent needs to be paid.
  • It’s needed for business goal setting: Cash flow management means knowing what you do with the cash that comes into the organisation. Your accounting system helps you know areas that need cash. For instance, cash may be needed to finance your debts, or make major renovations or order for new stocks, and it is your accounting system that will help you know this. In short, no business will growth further without a good cash management system. Also, your accounting books help you know when bills like your rent needs to be paid.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

MSI Global Alliance appoints new accounting members in South Korea and Australia

MSI Global Alliance, one of the world’s leading international associations of independent legal and accounting firms, is delighted to announce the appointment of two new accounting members SEJUNG LLC in South Korea and Oreon Partners in Australia.

Headquartered in Seoul, with two further branches in Suwon and Daejeon, SEJUNG LLC is a leading CPA firm which provides comprehensive accounting and tax services as well as audit, assurance and financial advisory services. The firm’s team of 19 partners and over 30 professionals serves national and international clients from a wide range of industries and has particular expertise in advising foreign investment companies in Korea.

Sean Kang, managing partner of SEJUNG LLC, comments, ”It is my pleasure to join MSI, a great international accounting & legal association. Like other countries, Korea’s accounting market is very competitive and I would like to secure our competitive strength and pursue our business expansion through our membership with MSI.”

Accounting firm Oreon Partners, based in Adelaide (South Australia), joins MSI with five partners and 32 professionals. The firm provides accounting, taxation and financial planning services to businesses and private individuals. Oreon Partners prides itself on personalised advice and service as well as its advantageous use of technology to help achieve clients’ goals.

Ben Reynolds, partner at Oreon Partners, comments, “We are excited to be joining MSI Global Alliance and look forward to the opportunities that being a member of one of the world’s leading accounting and legal associations will bring to both our business and to our clients.”

The appointment of Oreon Partners adds to MSI’s representation in Australia and New Zealand, which now brings together 16 leading independent legal and accounting firms that provide specialist services to local and overseas businesses.

Tim Wilson, chief executive of MSI, comments, “I am very pleased that we have two strong firms joining our group in Asia Pacific. I know they will make a great contribution to our Asian and Australian representation and I welcome them to MSI very warmly.”

For further information please contact

MSI Global Alliance
Pauline Rottstock, Marketing and Business Development Manager
Tel: +44 20 7583 7000
Email: prottstock@msiglobal.org

About MSI Global Alliance

MSI is one of the world’s leading international associations of independent legal and accounting firms with over 250 carefully selected member firms in more than 100 countries. MSI was formed in 1990 in response to the growing need for cross-border co-operation between professional services firms.

MSI members worldwide work closely together to provide integrated, multidisciplinary services to meet each client’s legal and regulatory obligations and growth ambitions. MSI is ranked among the Top 20 international accounting and legal networks, associations & alliances.

Visit our website: www.msiglobal.org

MSI Global Alliance adds two new members

MSI Global Alliance, one of the world’s leading international associations of independent legal and accounting firms, is pleased to announce the appointment of two new member firms Bowditch & Dewey, LLP in Massachusetts, USA and Dixcart Management (Cyprus) Limited in Cyprus.

With nearly 60 lawyers in three Massachusetts locations, Bowditch & Dewey, LLP offers a depth of practice in several areas of practice, including business and finance, real estate and environmental law, litigation, employment and labour (including immigration), tax controversy and estate and tax planning. Fortune 500 companies, start-ups, institutions and individuals rely on the firm to craft their business and legal strategy.

James D. Hanrahan, managing partner of Bowditch & Company, LLP, comments, “Our partners view the global reach provided by membership in MSI as both a client service and competitive advantage. The network has already proven to be a valuable resource to our clients with international needs. We look forward to a rewarding and effective partnership with all member firms.”

Corporate services provider, Dixcart Management (Cyprus) Limited, joins MSI in Limassol, Cyprus. The two partner firm advises corporate and private clients on creating and using structures in Cyprus and offers comprehensive corporate provider services including company formation and incorporation, management of companies, family office services and relocation advice.

Dixcart Management (Cyprus) Limited is the fourth office of the independent group Dixcart to join MSI, which has been providing professional expertise to organisations and individuals for over 40 years.

Robert Homem, managing director of Dixcart Management (Cyprus) Limited, comments, ”It is a pleasure joining the MSI Global Alliance, and we look forward to meeting and working with other MSI members.”

Tim Wilson, chief executive of MSI, comments, “I am delighted to welcome these two new additions to the MSI family.  Bowditch & Dewey is a well-established and highly respected law firm with a strong reputation throughout New England. I know they will contribute greatly to MSI, both within North America and internationally.  MSI has had a long association with Dixcart in a number of jurisdictions and I am very pleased to strengthen this further with their office in Cyprus joining us and adding to our existing member firms there.”

View the press release online

Kind regards,

Pauline

MSI Global Alliance appoints two new member firms in Brazil and Denmark

MSI Global Alliance, one of the world’s leading international associations of independent legal and accounting firms, is delighted to announce the appointment of two new member firms to its international membership as of 1 July 2017.

MSI’s presence in Brazil will be strengthened by the addition of DDSA – De Luca, Derenusson, Schuttoff e Azevedo Advogados (DDSA) in Brazil. Based in Sao Paulo, DDSA is a full service law firm which provides comprehensive services in areas such as corporate law, tax law, M&A and contracts, compliance, aviation, infrastructure, real estate, insurance law, litigation, bankruptcy and reorganization, as well as employment, social security and environment law.Established in 2011, the 11 partner-firm and its highly experienced team of 45 staff advises and acts for national and international clients from a wide range of industries.Also joining MSI is accounting firm Piaster located in Copenhagen, Denmark. Founded in 2005, the four partner firm provides a wide range of services within audit, assurance, tax, vat, compilation and compliance as well as advisory services to an international client base.

Piaster will be replacing MSI’s existing Danish accounting member Wyrwik – Statsautoriseret Revisionsanpartsselskab (Wyrwik). Both firms have enjoyed a long-standing business relationship over the years. Wyrwik’s managing partner, Lisbeth Wyrwik, introduced Piaster to MSI and will continue to work closely with both Piaster and MSI in her role as one of the international contact partners for Piaster.

Tim Wilson, chief executive of MSI, comments, “I am very pleased to welcome our new members to MSI. DDSA is a strong, established law firm, which will complement our existing presence in Brazil and further strengthen MSI in Latin America. I am also very pleased to welcome Piaster, a dynamic and ambitious accounting firm, which will maintain strong links with Wyrwik thereby enabling us to build on MSI’s strength in Denmark.”

MSI Global Alliance
Pauline Rottstock, Marketing and Business Development Manager
Tel: +44 20 7583 7000
Email: prottstock@msiglobal.org

About MSI Global Alliance
MSI is one of the world’s leading international associations of independent legal and accounting firms. With over 250 carefully selected member firms in more than 100 countries, MSI is one of the world’s leading associations of independent legal and accounting firms. MSI was formed in 1990 in response to the growing need for cross-border co-operation between professional services firms.
www.msiglobal.org

Interest free loans to directors

It is very often the case that a company extends an interest free or low interest loan to a director. This manifests either as a true incentive or benefit to that director (mostly the case in larger corporate environments) or in a small business environment in lieu of salaries paid. The latter is especially the case for example where a spouse or family trust would hold the shares in the company running the family business, but which business is conducted through the efforts of the individual to whom a loan is granted from time to time.

In terms of the Seventh Schedule to the Income Tax Act[1] a director of a company is also considered an “employee”.[2] This is significant, since directors can therefore also be bound by the fringe benefit tax regime applicable to employees generally.

Paragraph (i) of the definition of “gross income” in the Income Tax Act[3] specifically includes as an amount subject to income tax “the cash equivalent, as determined under the provisions of the Seventh Schedule, of the value during the year of assessment of any benefit … granted in respect of employment or to the holder of any office…”

Clearly, benefits received by a director of a company would therefore rank for taxation in terms of this provision. The question remains therefore whether loans provided to such directors by the companies where they serve in this capacity would amount to such a taxable benefit, and further how such benefit should be quantified.

Paragraph 2(f) of the Seventh Schedule is unequivocal in its approach that a taxable fringe benefit exists where “… a debt … has been incurred by the employee [read director], whether in favour of the employer or in favour of any other person by arrangement with the employer or any associated institution in relation to the employer, and either-

(i)            no interest is payable by the employee in respect of such debt; or

(ii)           interest is payable by the employee in respect thereof at a rate of lower than the official rate                of interest…”

Paragraph 11 in turn seeks to quantify the amount of the taxable fringe benefit to be included in the gross income of the director. Essentially, the taxable fringe benefit would be equal to so much of interest that would have been payable on the loan at the prime interest rate less 2.5%, less any interest actually paid on the loan. The benefit therefore does not only arise on interest-free loans, but also on loans carrying interest at less than the prescribed interest rate.

It is necessary to note that a fringe benefit otherwise arising will not be a taxable benefit if the loan amount is less than R3,000, or if it is provided to the director to further his/her studies.

[1] 58 of 1962
[2] Paragraph 1 of the Seventh Schedule, paragraph (g) of the definition of “employee”
[3] See section 1

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

Interest free loans cross border

A consideration of the tax consequences of interest free loans will be incomplete if not also considered in the context of interest free debt funding being provided cross-border. Typically, when “cheap debt” is encountered it is in the form of low interest or interest free loans being provided to related parties (or “connected persons” as defined) due to the non-commercial nature of such an arrangement. This is especially the case for the lender, who could typically receive far greater returns on investment if utilising excess cash in another manner. However, due to group efficiencies, it may be preferable for one group company to provide low interest or interest free financing to a fellow group company, especially if this also has the potential to unlock certain tax benefits.

One such manner in which a corporate group may save on its ultimate tax bill is to ensure that funding is provided by a company situated in a low tax jurisdiction, such as Mauritius for example (which levies a corporate tax rate of effectively 3%). Were the Mauritius company to lend cash to a South African group company, the group would prefer it to do so at a very high rate. This would ensure that the South African company is able to deduct interest in a corporate tax environment where it would create a deduction of effectively 28%, whereas the tax cost would only be 3% in Mauritius.

Where the South African company however is in the position that it sits on the group’s cash resources, it would want to lend money to the Mauritius company at as low rate as possible. Interest, to the extent charged, will now only be deductible at an effective 3% in Mauritius (where the borrower is situated), whereas interest received will be taxed at 28% in South Africa. Such a loan would therefore be most tax efficiently structured as an interest free loan.

The transfer pricing regime, contained in section 31 of the Income Tax Act,[1] seeks to legislate against this tax avoidance behaviour. The provision, which covers all cross border transactions entered into by connected persons, but specifically also cross border debt financing, determines that in such instances “… the taxable income or tax payable by any person contemplated … that derives a tax benefit … must be calculated as if that transaction, operation, scheme, agreement or understanding had been entered into on the terms and conditions that would have existed had those persons been independent persons dealing at arm’s length.”

In other words, the tax consequences of cross border debt funding with connected persons will be calculated as though arm’s length interest rates would have been attached thereto. Therefore, even though the loan extended by the South African company above to the Mauritian company would have been interest free in terms of the financing agreement, the South African company will still be taxed in South Africa as though it has received interest on arm’s length terms. The same is true for the exaggerated rates that may have been charged had the South African company been the lender: SARS would adjust these rates downward to ensure that the South African company does not claim inflated interest costs.

Using interest free or low interest loans as a tool to increase tax efficiency, especially in a cross border context, much be approached with circumspection. It may very often amount to a blunt and clumsy tax planning tool at best.

[1] 58 of 1962

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

Interest free loans with companies

The latest annual nation budget presented in Parliament proposed the dividends tax rate to be increased with almost immediate effect from 15% to 20%. The increased rate brings into renewed focus what anti-avoidance measures exist in the Income Tax Act[1] that seeks to ensure that the dividends tax is not avoided.

Most commonly, the dividends tax is levied on dividends paid by a company to individuals or trusts that are shareholders of that company. To the extent that the shareholder is a South African tax resident company, no dividends tax is levied on payments to such shareholders.[2] In other words, non-corporate shareholders (such as trusts or individuals) may want to structure their affairs in such a manner so as to avoid the dividends tax being levied, yet still have access to the cash and profit reserves contained in the company for their own use.

Getting access to these funds by way of a dividend declaration will give rise to such dividends being taxed (now) at 20%. An alternative scenario would be for the shareholder to rather borrow the cash from the company on interest free loan account. In this manner factually no dividend would be declared (and which would suffer dividends tax), no interest accrues to the company on the loan account created (and which would have been taxable in the company) and most importantly, the shareholder is able to access the cash of the company commercially. Moreover, since the shareholder is in a controlling position in relation to the company, it can ensure that the company will in future never call upon the loan to be repaid.

Treasury has for long been aware of the use of interest free loans to shareholders (or “connected persons”)[3] as a means first to avoid the erstwhile STC, and now the dividends tax. There exists anti-avoidance legislation; in place exactly to ensure that shareholders do not extract a company’s resources in the guise of something else (such as an interest free loan account) without incurring some tax cost as a result.

Section 64E(4) of the Income Tax Act provides that any loan provided by a company to a non-company tax resident that is:

  1. a connected person in relation to that company; or
  2. a connected person of the above person

“… will be deemed to have paid a dividend if that debt arises by virtue of any share held in that company by a person contemplated in subparagraph (i).” (own emphasis)

The amount of such a deemed dividend (that will be subject to dividends tax) is considered to be effectively equal to the amount of interest that would have been charged at prime less 2.5%, less so much of interest that has been actually charged on the loan account.

It is important to also appreciate that the interest free loan capital is not subject to tax, but which would also have amounted to a once-off tax only. By taxing the interest component not charged, the very real possibility exists for the deemed dividend to arise annually, and for as long as the loan remains in place on an interest free basis.

[1] 58 of 1962
[2] Section 64F(1)(a)
[3] Defined in section 1 of the Income Tax Act

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

 

Interest free loans and trusts

The recent introduction of section 7C to the Income Tax Act[1] brought the taxation of trusts, and the funding thereof specifically, under the spotlight again. Briefly, section 7C seeks to levy donations tax on loans owing by trusts to connected parties (typically beneficiaries or the companies they control). To the extent that interest is not charged, a donation is deemed to be made by the creditor annually amounting to the difference between the interest actually charged (if at all), and interest that would have been charged had a rate of prime – 2.5% applied.

What many lose focus of is that interest free (or low interest) loans have income tax consequences too, over and above the potential donations tax consequence arising by virtue of section 7C. Section 7 of the Income Tax Act is specifically relevant. This section aims to ensure that taxpayers are not able to donate assets away and which would rid themselves of a taxable income stream.

In broad terms, section 7 deems any income that accrues to a trust or beneficiary to be the income of the donor if the income accrues from an asset previously the subject of a “donation, settlement or other disposition”. In other words, where a person donates a property to a trust, the rental income generated will not be taxed in the hands of the beneficiary or the trust, but in the hands of the donor. Section 7 therefore acts as an anti-avoidance provision to ensure that taxpayers do not “shift” tax onto persons subject to less tax through donating income producing assets out of their own estates.

It is interesting to now consider what an “other disposition” would amount to. Various cases have confirmed that an interest free loan would be treated as such and that, to the extent that interest is not charged, this would amount to a continuing donation.[2] The implication thereof is this: assume the funder of a discretionary trust sells a property to that trust on interest free loan account. Any rental earned would ordinarily have been taxed in the hands of the trust or the beneficiary, depending on whether distributions will have been made. However, since section 7 will apply to the extent that no interest was charged on the loan account, a portion of the rental income will now be taxable in the hands of the trust funder.

The take-away is that donations to trusts have income tax implications for the donor too, over and above a donations tax consequence. This will also be the case where interest free loans are involved.

[1] 58 of 1962

[2] Honiball and Olivier, The Taxation of Trusts (2009) at p. 84 and following

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

 

Capital gains and cancelled sales

Many transactions in terms in which assets are sold are subject to suspensive conditions. In terms of such agreements, the sales transaction will only take place once all the suspensive conditions have been met.[1] Many other agreements may however be subject to a resolutive condition. A resolutive condition involves one whereby an agreement is cancelled if that condition is subsequently met. For example, where a person (A) sells a vehicle to B, subject to the condition that the agreement be cancelled if B is unable to obtain a driving license within a year, such a condition could be described as a resolutive condition. From a legal perspective, it is important to understand though that a valid agreement of sale had already been entered into between A and B, irrespective thereof that a year has not yet passed within which B is afforded the opportunity to obtain the contemplated driving license. This is also the case for capital gains tax (CGT) purposes. Only later, if the resolutive condition is met, is the agreement cancelled with retrospective effect.

Where a resolutive condition becomes operational, and a historic sale cancelled, this may give rise to practical problems for the seller from a CGT perspective. A CGT cost may already have been suffered in a previous year of assessment in relation to the asset disposed of. Now that the sale is cancelled, a taxpayer cannot revisit previous returns already submitted. The Income Tax Act only makes provision for a capital loss to be created in those instances,[2] but which in and of itself does not necessarily carry any value. Consider for example where future capital gains will not be realised again by the taxpayer and against which it can set-off the loss now created. It is possible therefore for a person to pay CGT on a transaction that was cancelled subsequently.

Such a scenario recently played itself out in the Supreme Court of Appeal judgment in New Adventure Shelf 122 (Pty) Ltd v CSARS.[3] There the taxpayer had sold a property near Stilbaai in September 2006 and declared a capital gain of R9,746,875 to SARS. On this amount, a CGT cost of R1,413,007 arose. Due to financial problems on the side of the purchaser however, the agreement was cancelled in November 2011 and the property returned to the seller. The seller now sought to reopen its past assessments to correct the declaration of the capital gains declared that no longer could be said to have arisen for those years of assessment. SARS would not allow this, and the taxpayer unsuccessfully sought to initiate review proceedings against SARS in the High Court. On appeal to the Supreme Court of Appeal, the taxpayer was again unsuccessful.

The Court confirmed that tax was an annual event. “In summary, the cancellation of the sale did not entitle the appellant to have his tax liability for the 2007 year re-assessed.” And elsewhere the Court reminded again that “… even if in certain instances it may seem ‘unfair’ for a taxpayer to pay a tax which is payable under a statutory obligation to do so, there is nothing unjust about it. Payment of tax is what the law prescribes, and tax laws are not always regarded as ‘fair’. The tax statute must be applied even if in certain circumstances a taxpayer may feel aggrieved at the outcome.”

[1] Paragraph 13(1)(a) of the Eighth Schedule to the Income Tax Act, 58 of 1962

[2] Paragraph 3 and 4 of the Eighth Schedule

[3] (310/2016) [2017] ZASCA 29 (28 March 2017)

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)