PROPOSED TAX RELIEF FOR OVER 65’S
The National Treasury has proposed that the Pay as You Earn (PAYE) and Provisional Tax calculations be amended so as to provide some relief to taxpayers who are 65years and over. The proposal is that taxpayers over 65, who make contributions to medical schemes will be able to use their medical tax credit amounts to reduce both their monthly PAYE and the calculation of their provisional tax.
Currently these tax credits are not taken into account when monthly PAYE deductions and provisional tax is calculated – they are only allowed to be claimed on assessment at the end of the tax year. For the 2015/2016 year of assessment, over 65’s who contribute to a medical scheme are entitled to a tax credit of up to R270 a month for the main member and first dependant on the scheme, and another R181 per month for any additional dependant.
Over 65’s are also entitled to a tax credit of 33.3% of their qualifying medical expenses, and a tax credit of 33.3% of the amount by which their contributions exceed three times the medical scheme contribution tax credit. Should the proposal be implemented, it will take effect as from the 1st March 2016. These changes aim to bring about relief for over 65’s, in that their monthly cash flow will improve during the course of the year.
DAVIS TAX COMMITTEE PROPOSALS –TAX ON TRUSTS
On 13 July 2015, the Davis Tax Committee (DTC) issued an Estate Duty Report, which is open to public comment until the end of September 2015. Even though the proposals contained in the report will take a while before potentially being implemented, taxpayers should begin reviewing their estate and tax plans to begin making provision for the possible impending changes.
The Report makes recommendations relating to estate duty, as well as in respect of trusts. In regard to trusts, the Report recommends that taxpayers be allowed to make use of trusts when it makes sound sense to do so in the pursuit of a commercial benefit, as opposed to an estate duty benefit. In this regard a number of recommendations have been made, which, if passed into law, will have far reaching implications from an estate planning perspective.
In order to prevent the use of trusts to avoid or defer estate duty, the DTC has recommended the following in its report:
- Taxing trusts as separate taxpayers
- Maintaining the flat tax rate on trusts (currently 41%)
- Repealing the deeming provisions of Sections 7, and Section 25B in so far as they relate to South African resident trusts. Section 25B allows trust income to vest and be taxed in the hands of a beneficiary. Section 7 is aimed at countering the abuse of Section25B
- Retain the deeming provisions of Section 7 and 25B insofar as they relate to nonresident trusts
- The only relief to the rules should be for a “special trust” as defined in the Income Tax Act (solely created for the benefit of one or more persons with a disability). The Report proposes that the definition of a special trust should be revisited by National Treasury so as to make provision for the inclusion of selected trusts used in Broad Based Black Economic Empowerment Structures
- Not attempting to implement transfer pricing adjustments in instances where financial assistance or interest-free loans are advanced to trusts
- All distributions from foreign trusts should be taxed as income in the hands of beneficiaries
From an estate duty point of view, taxpayers will still be able to use trusts to postpone estate duty, but on the sale of trust assets, the gain will be taxed in the hands of the trust at a higher tax rate – the intention behind the proposal is to compensate for the estate duty loss. A South African resident trust’s taxable income will be taxed in the hands of the trust at the higher effective rate of tax. This is a complex area, which is still under review and consultation process.
Please consult with us for any further detail or assistance on these proposals.
FAMILY BUSINESS SUCCESSION PLANNING
Family business succession planning is frequently predicated on the assumption that the parents will be passing on the baton to their own children. What better way of crowning their lifelong efforts and hard won success than to pass on the legacy to their own kin so they too can continue to enjoy and prosper from it. However, children are never clones of a parent. Changes in educational opportunity, in affluence, and especially in technology have created a different life style and set of expectations from that of the business’ founder. This may translate as a lack of any particular commitment to the family business or a desire to take a different career path altogether.
Where there is absolutely no interest in the business demonstrated by the next generation, then selling it to a third party could well be the best decision – for the business and the heirs. Though commitment towards the family business itself has been identified as a key desirable attribute in potential successors, the situation can be more subtle than simply a committed/uncommitted divide. When you think about it, different people may be committed to a situation for different underlying reasons. So while successors may deliver on ‘commitment’ ‘but not necessarily on another vital contributor to business success – passion.
That can only come from a person whose commitment is based on a strong belief in, acceptance of, and an excitement about the business’ goals combined with a desire to contribute to furthering them and confidence in their own ability to do so. The ideal successor ‘wants to’ pursue a career in the family business. Before attempting to develop a business succession plan based on passing it to the next generation you must ask yourself this key question: do the proposed successors have the necessary passion for the business that will see them through the long hours and tough times that are part of managing and growing a business?
If a child doesn’t want a role in the family business, then it’s best to consider options. Better to arrange an alternative succession strategy that recognises the fact. This may not necessarily involve selling to a third party though. It may be possible to hedge bets by bringing in external managers or transferring ownership to a trust to delay the need for a decision, at least for a period.
SAFEGUARDING YOUR COMPANY’S HEALTH
China is South Africa’s largest trading partner and a slowing Chinese economy will lead to a reduction in purchases of our key minerals. This coupled with a weak currency and declining commodity prices does not paint a rosy picture for the short to medium term. Business confidence is at an all-time low and little is being done by government to address growth issues. We have the National Development Plan conceptually but little is being done to drive this forward. So what can we as entrepreneurs do to safe guard our business as well as contribute to the growth of our economy.
One of the best ways to monitor your companies health is to keep a finger on its pulse by using financial ratios to determine just where you stand in relation to liquidity, debt levels and profitability. By having key financial ratios form part of your monthly management accounts you can quickly pick up variance month on month as well as year on year. Even better when industry data is available so as to compare how you are doing compared to your competitors.
Some key ratios to consider:
The current ratio measures a company’s ability to meet its short-term obligations.
The quick ratio is similar to the current ratio but it doesn’t include inventory.
The debt ratio measures the proportion of a firm’s total assets that are financed by its creditors.
Times interest earned ratio
This ratio measures a company’s ability to make contractual interest payments.
Gross profit margin
The gross profit margin measures the percentage of profit remaining after the cost of goods sold have been paid. This ratio gives an indication on whether the average mark up on goods and services is sufficient.
Net profit margin
The net profit margin measures the percentage of sales remaining after the all expenses, including the cost of goods sold.