At this time last year we communicated on the global economic crisis and felt that any recovery progress would be slow and erratic – how true this has turned out to be.

As we speak the Euro Zone woes have worsened – it appears that nobody has a clear vision as to the way forward.  Add to this mix that America and the UK are still in severe difficulty plus all the political turmoil in Egypt, Syria et al and you get a very uncertain and volatile scenario.

To try and predict the direction of economies, share markets and currencies is all but impossible, so let’s all have an enjoyable, peaceful and restful festive season and hope and pray that 2012 will deliver a far better outcome in all areas discussed above.

As the implications of the new companies act which became effective from 1 May 2011 are not fully understood by many people, we felt it appropriate to comment thereon in this issue and also to discuss the reporting standards that will now apply in the preparation of annual financial statements.

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Before we can discuss the reporting requirements under this new act we need to understand the concept of the Public Interest Score.  Every company and Close Corporation must calculate a public interest score each year and this score will determine, along with the ownership of the entity, its financial reporting framework and whether it requires an audit, a review, an accounting officer’s report or no report at all.

The public interest score is a function of staffing, debt, turnover and ownership.  The calculation of the score is set out in regulation 26(2)(a),(b),(c) and (d).

(2)(a)      a number of points equal to the average number of employees of the company during the financial year;

(b)     one point for every R1million (or portion thereof) in third party liability for the company, at the financial year end;

(c)     one point for every R1million (or portion thereof) in turnover during the financial year; and

(d)     one point for every individual who, at the end of the financial year, is known by the company –

(i)       in the case of a profit company, to directly or indirectly have a beneficial interest in any of the company’s issued securities;”

It should be noted that the employees referred to are as defined in the Labour Relations Act, no 66 of 1995 and shareholders/members loans are excluded from the debt figure.

If we assume by way of an example that company X has 50 employees, a bank overdraft of R50 000, trade and other creditors of R1.56million, a mortgage bond of R1million,shareholders loans of R5.3million, turnover of R10.1million and 4 shareholders.  This entity’s public interest score is calculated as follows:

A second point that needs to be considered before we discuss the financial reporting framework that will need to be used in drafting the financial statements or the audit and review is the exemption from audit and review.

This is set out in section 30(2A) of the act and allows certain companies and close corporations to be exempt from the audit and review requirements of the act.  In its basic form owner managed entities are exempt from audit, unless they fall into a category that in terms of the regulations requires an audit.

Owner managed is defined as every shareholder has to be a director.  This means that companies and close corporations that are held by trusts are not owner managed, nor are companies in groups.

This exemption does not apply to owner managed entities whose public interest score is 350 and above or between 350 and 100 if the financial statements are prepared by the entity itself or another act requires the financial statements to be audited or if the entity holds assets in a fiduciary capacity of R5million.

The public interest score is also important in the determination of the financial reporting framework that the entity has to use in preparing its financial statements., being either International Financial Reporting Standards (IFRS), International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SME) or none.

Thus all entities whose public interest score is above 100 have the choice to apply IFRS or IFRS for SME but entities whose public interest score is below 100 and whose financial statements are prepared by an independent person (external to the entity) are also required to use IFRS or IFRS for SME.

Those entities whose public interest score is below 100 and who prepare the financial statements themselves do not have any prescribed financial reporting framework.

It is important for all entities to start calculating their public interest score to assist in their planning and to help them make decisions for the coming year.

Thus should clients who are close corporations continue to have their financial statements prepared externally, there is going to be a change in the manner in which the financial statements are prepared.

So what are the implications?

There is going to have to be a restatement of the financial statements to take into account the measurement and recognition requirements of IFRS or IFRS for SME.  Effectively the financial statements for the past two years need to be re-drafted and any change in the first period will be accounted for in the retained income or loss for that period.

For most clients the biggest impact is going to be in property, plant and equipment, operating and finance leases and deferred taxation.

If we now move on to an example and only look at property plant and equipment:

The entity has a year end of 29 February 2012 with a summarised income statement and balance sheet as follows before taking into account the conversion to IFRS for SME.

In this example the entity has used the tax rates to calculate depreciation thus the tax value and the accounting values are the same therefore there is no deferred tax.

Let us now apply the requirements of the IFRS for SME.  The transition provision allows us to take the fair value of the asset at the transition date as the deemed cost.  If we assume that the entity will be presenting IFRS for SME financial statements for the first time in February 2012 the transition date is 1 March 2010.  At that date the fair value of the motor vehicle is R80 000 while the carrying value is R60 000.

If for the purpose for the example we assume that the residual value is nil and the useful life of the motor vehicle is a further 5 years, depreciation is calculated as the deemed cost less the residual value of nil divided by the useful life of 5 years – thus depreciation is calculated as R16 000.

From the above it can be seen that there is going to be an impact on the entity, as there are going to be a number of additional workings as well as additional notes.

Table B requires a company to be audited and even if, under the new Companies Act of 2008, a company is not compelled to be audited, it will have to be so audited.

In cases where a company is no longer compelled to be audited, in order to avoid this being required, the Articles of Association must be amended to remove this requirement.

Please contact your contact person or Wendy from our secretarial department about this matter.

All of us here at Wilder Lockitch wish you a very enjoyable, peaceful and restful festive season and a great 2012!

Dividends tax
The dividends tax will take effect on 1 April 2012, replacing the secondary tax on companies. The introduction of the tax should correct the impression that a tax on dividends is another tax on businesses: legally and economically, it will be a tax on individuals and non-resident shareholders.

Closure of dividend schemes
Several dividend schemes undermine the tax base. One method involves the use of dividend cessions, where taxpayers effectively purchase tax-free dividends without any stake in the underlying shares. Another scheme involves the receipt of dividends from shares in which the taxpayer has no meaningful economic risk (e.g. has an offsetting derivative position). Some arrangements make use of preference shares that generate allegedly tax free dividends, while the dividends are indirectly generated from interest yielding debt. All these schemes will be closed by treating the dividends at issue as ordinary revenue.

Internal company restructuring
The Income Tax Act (1962) provides special rules for debt cancellation and similar adjustments. Government will consider exempting otherwise taxable gains or ordinary revenue imposed on the debtor if the debt is cancelled or reduced. Relief will be limited to insolvent debtors to ensure that this does not give rise to tax avoidance.

Venture capital company
Many small and medium-sized businesses find it difficult to access equity finance. This led government to introduce the concept of a venture capital company into the Income Tax Act. The response to this vehicle has been poor and the provisions will be reviewed.

· Industrial development zones
To support the objectives of the industrial policy action plan and the New Growth Path, businesses making greenfield and/or brownfield investments qualify for tax relief. Greenfield investments in industrial development zones (IDZs) qualify for additional relief. Government will consider expanding incentives for labour-intensive projects in IDZs.

The research and development (R&D) tax incentive is intended to encourage innovation and job creation. Government proposes to streamline the current incentive, introducing an approval process by the Department of Science and Technology before a taxpayer can claim this incentive. This should limit opportunities for retrospective reclassification of spending.

· Refinement of controlled foreign company legislation
The main purpose of controlled foreign company rules is to prevent South African residents from shifting passive income offshore. Some provisions are overly complex and can interfere with normal business conduct, while others create unintended loopholes. Adjustments will focus on the rules without compromising their purpose.

· Interest earned by any natural person under 65 years of age, up to R22 800 per annum, and persons 65 and older, up to R33 000 per annum, are exempt from taxation. Foreign interest and foreign dividends are only exempt up to R3 700 out of the total exemption.

· Interest is exempt where earned by non-residents who are physically absent from
South Africa for 183 days or more per annum and who are not carrying on business in South Africa. Withholding tax of 10% on certain interest paid to non-residents to become effective 1 January 2013.

Deductions
Current pension fund contributions
The greater of―7,5% of remuneration from retirement funding employment, or R1 750. Any excess may not be carried forward to the following year of assessment.

Arrear pensions fund contributions
Maximum of R1 800 per annum. Any excess over R1 800 may be carried forward to the following year of assessment.

Current retirement annuity fund contributions
The greater of―

* 15% of taxable income other than from retirement funding employment, or
* R3 500 less current deductions to a pension fund, or
* R1 750.

Any excess may be carried forward to the following year of assessment.

Arrear retirement annuity fund contributions
Maximum of R1 800 per annum. Any excess over R1 800 may be carried forward to the following year of assessment.

Medical and disability expenses
• Taxpayers 65 and older may claim all qualifying expenditure.

• Taxpayers under 65 may claim all qualifying medical expenses where the taxpayer or the taxpayer’s spouse or child is a person with a disability.

• Other taxpayers under 65 may deduct monthly contributions to medical schemes up to R720 for each of the first two dependants on their medical scheme and R440 for each additional dependant. In addition they can claim a deduction for medical scheme contributions above the caps and any other medical expenses limited to the amount which exceeds 7,5% of taxable income (excluding retirement fund lump sums).

Donations
Deductions in respect of donations to certain public benefit organisations are limited to 10% of taxable income before deducting medical expenses (excluding retirement fund lump sums).

Allowances
Subsistence allowances and advances
Where the recipient is obliged to spend at least one night way from his/her usual place of residence on business and the accommodation to which that allowance or advance relates is in the Republic and the allowance or advance is granted to pay for—

· meals and incidental costs, an amount of R286 per day is deemed to have been expended;
· incidental costs only, an amount of R88 for each day which falls within the period is deemed to have been expended

Where the accommodation to which that allowance or advance relates is outside the Republic, a specific amount per country is deemed to have been expended. Details of these amounts are published on the SARS website under Legal & Policy / Legislation / Regulations and Government Notices / Income Tax Act, 1962.

Travelling allowance
Rates per kilometer which may be used in determining the allowable deduction for business travel, where no records of actual costs are kept.

Note:

· 80% of the travelling allowance must be included in the employee’s remuneration for the purposes of calculating PAYE. The percentage is reduced to 20% if the employer is satisfied that at least 80% of the use of the motor vehicle for the tax year will be for business purposes.

· No fuel cost may be claimed if the employee has not borne the full cost of fuel used in the vehicle and no maintenance cost may be claimed if the employee has not borne the full cost of maintaining the vehicle (e.g. if the vehicle is the subject of a maintenance plan).

· The fixed cost must be reduced on a pro-rata basis if the vehicle is used for business purposes for less than a full year.

· The actual distance travelled during a tax year and the distance travelled for business purposes substantiated by a log book are used to determine the costs which may be claimed against a travelling allowance.

Alternative to the rate table:

· Where the distance travelled for business purposes does not exceed 8 000 kilometers per annum, no tax is payable on an allowance paid by an employer to an employee up to the rate of 305 cents per kilometer, regardless of the value of the vehicle.

· This alternative is not available if other compensation in the form of an allowance or reimbursement is received from the employer in respect of the vehicle.

Fringe Benefits
Employer-owned vehicles

· The taxable value is 3,5% of the determined value (the cash cost including VAT) per month of each vehicle. Where the vehicle is the subject of a maintenance plan at the time that the employer acquired the vehicle the taxable value is 3,25% of the determined value.
· 80% of the fringe benefit must be included in the employee’s remuneration for the purposes of calculating PAYE. The percentage is reduced to 20% if the employer is satisfied that at least 80% of the use of the motor vehicle for the tax year will be for business purposes.

· On assessment the fringe benefit for the tax year is reduced by the ratio of the distance travelled for business purposes substantiated by a log book divided by the actual distance travelled during the tax year.

· On assessment further relief is available for the cost of licence, insurance, maintenance and fuel for private travel if the full cost thereof has been borne by the employee and if the distance travelled for private purposes is substantiated by a log book.

Interest-free or low-interest loans
The difference between interest charged at the official rate and the actual amount of interest charged, is to be included in gross income.