Tax Advice

tax-advice

About capital allowances

Before capital gains tax (CGT), when you made a profit, you would build up capital through repeated additions of after-tax profit and investment surpluses. The capital, represented by farm land, buildings and the other solid or paper holdings – shares, unit trusts, bonds and the like – would grow peacefully without any interventions by the taxman until the death of the owner. Then estate duty would be levied.

READ:Is tithing tax deductible?

‘Capital’, according to the Gross Income Definition within the Income Tax Act is still tax-free, but subject to the provisions of the Income Tax Act, which of course incorporates the Eighth Schedule that regulates capital gains, and Section 26A of the Income Tax Act, which adds the taxable portion of the capital gain into the taxable income of the taxpayer.

Only that portion of capital exempt from CGT, such as certain jewellery, personal use assets, furniture, and cash, is now free of tax. One of the inviolate principles of tax is that funds spent in the making of income are deductible against tax. The funds must, however, be revenue and not capital. Thus, if you were to build a dairy with cash money that was sitting in a current account, not using any loans at all, the funds spent on the building would not constitute a deduction against taxes, as such funds are capital in nature.

Built in
So we have ‘capital allowances’ built into the fabric of the Income Tax Act to encourage you to spend capital in building capital facilities for the creation of income. Factories, plants, mines and farms are examples of capital facilities that (potentially at least) give rise to income. Naturally, the revenue authorities are delighted when capital is employed in the creation of such capital facilities, because the more capital development that takes place, the more taxable income is earned and, also, the lower the amount of social spending that has to be made, because employment is stimulated by capital development.

Capital allowances vary per industry and per item of capital. A lawyer’s books, for instance, may be written-off in the year of their purchase. In other words, a 100% capital allowance is provided for. At the other end of the scale, certain industrial machines are written off over five years or more, while certain commercial buildings have a much longer write-off period.
This means the businessperson who spends their capital will obtain tax relief over the term of the write-off period of the capital item.

Loans
Savvy tax planners advise the use of bank finance or loans of capital in order to finance the capital equipment. This is because the interest on a loan made in the production of income is tax deductible. For example, a loan made in order to fund the purchase of a tractor is capital money, but the interest upon the loan is tax deductible, because the loan is made in anticipation of the production of income by the tractor. Money invested in the bank is capital, while the interest on the capital is income in the hands of the investor. The cash ‘stockpile’ is capital, the fruits – the interest – is revenue.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at
[email protected]. Please state ‘Tax’ in the subject line of your email.

Putting a price on goodwill

Goodwill is a highly desirable, intangible element that might (or might not) be present when a business is sold, The best brands that appear in the marketplace are sold for huge amounts of money because of this factor. Recognition of the
brand, its track record, the value, the quality, the availability, the freshness, the ease of use and the service that goes hand in hand with the brand could all be factors that would serve to create ‘goodwill’, a positive feeling in the minds of the general public towards the brand.

Evaluating goodwill
How to place a value on goodwill is a topic few will agree upon. Practically, however, the goodwill value is this: if a firm is sold, the value of the consideration over and above the value of the assets that a prospective purchaser would be willing to pay, and the value over and above the asset value of the firm that a seller would accept.

In Botswana, goodwill is taxed upon the sale of a company. The principle is fairly straightforward from the tax viewpoint. That is, the recognition the firm or brand has built up over time by means of advertising and marketing, all of which are tax deductible as costs to the company. Therefore, when the goodwill is sold, the value of the goodwill, attributable as it is to the marketing and advertising efforts, should be taxable.

A person
Note that goodwill is associated closely with the name of the enterprise and often actually rests in a person. Their trade workshop or professional practice might be sold and the goodwill might not accompany the sale because, in real terms, the goodwill is vested in the person, not the practice or shop. This is usually the case in smaller enterprises.

If such a businessperson does nothing about the situation, they’ll never enjoy the benefit of goodwill as such (except to the extent that clients will prefer to do business with them as a result of their reputation) and the goodwill might die with them.
However, it’s possible to incorporate structures to ‘house’ the goodwill apart from the person, during their lifetime.

The purchase of such goodwill by the new incorporation might be, quite legitimately, a tax deductible expense and the sale thereof by the professional will result in the vesting of the goodwill in the hands of the seller, who will then enjoy its benefits.
The resulting structure will be tax friendly. If planned correctly, wealth is realised for the family of the seller of the goodwill.
Peter O’Halloran is head of tax at BDO, Gaborone.

Contact Peter on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.

Your gateway to Europe

I recently attended a talk in Johannesburg. It was jointly held by the Greater Geneva Berne Area (GGBA) – a sort of chamber of commerce for the six Swiss cantons represented by the group – and Transforma Consulting, with the support of the Swiss Embassy in South Africa. The topic was “Switzerland: your gateway to Europe”. If you want to do business in Europe, Switzerland really does seem like the ideal base from which to operate.

This mountainous, landlocked federation of 26 cantons is one of the wealthiest countries in Europe, yet it has no natural commodities. Watch-making, banking and diamond trading are what the Swiss are best known for. As a base of operations for those wishing to sell goods or services into Europe, Switzerland has the following attributes:

  • It’s centrally located in Europe, surrounded by Italy, France and Germany – all regional powerhouses.
  • Swiss employees are often fluent in more than one European language, and all speak English. Thus, one staff member might be able to handle commercial transactions in France, Germany and Italy.
  • Switzerland has trade treaties with most of its European neighbours.
  • The tax rate in Switzerland varies, as each village or town basically handles its own taxes.

A firm that would like to set up operations in a certain region in Switzerland would typically, with the help of a firm such as Transforma Consulting, negotiate a tax rate that would suit both the firm and the local tax authority.

Pro-active TAX authorities
A Swiss tax lawyer I spoke to told me she’s appeared in court only a handful of times in matters regarding tax, because the tax authorities are pro-active. They seek solutions as opposed to confrontation. Top tax rates are comparable with those of Botswana at around 25%, while the lower rates are around the 11% mark.

The VAT rate is only 8%. Swiss bankers are known for their discretion, which is why the elite among the world’s most wealthy choose to conduct their banking affairs in Switzerland. Having dealt with Swiss bankers from time to time, I can testify that they’re a different breed compared to their local counterparts.

Service
The Swiss are service driven. Their attention to detail is legendary. Turnaround times are astounding. Farmers looking at international diversification of their farming operations should consider methods of incorporation in Switzerland as a platform from which to trade.

Without going into too much detail, neighbouring jurisdictions, such as Botswana, can help in assisting with international structures, as Botswana has the lowest tax rate in Africa at present, a range of special vehicles for international trade and no exchange controls.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.

Compensation for lessees

Many farmers don’t own the land upon which they farm. Also, given the current political climate, famers may be reluctant to purchase fixed property. When a land tenant or lessee vacates the property they’ve been leasing, the rights they have when it comes to improvements they have brought about will be regulated under the terms of the lease agreement.

It goes without saying that a leasehold agreement should protect a lessee’s rights as far as possible. In practice, however, such contracts often don’t cover all eventualities. For instance, it might be that improvements are brought about much later, as a result of the practical experience of farming.

A person who holds land under a lease is referred to in law as a ‘bona fide possessor’. Such a possessor has various means by which they can obtain compensation for necessary expenses incurred relating to the property. It may be that, under certain circumstances, a bona fide possessor has a right of retention, known as a ‘lien’, over the property. This should be used with caution, as there’s a danger the owner might have certain counterclaims at their disposal should the possessor refuse to vacate the property.

Action
Provided the property’s value isn’t adversely affected, the bona fide possessor will have recourse to an enrichment action against an owner unwilling to pay for improvements to the property. Useful expenses or improvements will be allowable up to the actual cost of the expenditure or the amount by which the property is enhanced.

Should any income be generated by the improvements, the value thereof won’t be deducted from the claim. Instead, the value of the crops gathered (less the costs of harvesting) prior to the close of pleadings in the enrichment action will rank as a deduction against the claim.

If a lien is exercised, the claim of the bona fide possessor won’t be subject to the deduction of use and enjoyment of the property during the term of the lien. But it’s best to seek legal advice before embarking on the enforcement of a lien. A legal slip-up here could be extremely expensive.

Crops
With regard to crops, if the lessee knew that the crops would ripen and be ready for harvest after the end of the lease term, then they would only be entitled to the costs of planting the crop, not the value of the harvest. If the crop ripened before the expiry of the term of the lease, the lessee will be entitled to harvest the crop after the term of the lease expires. 

In my opinion, it’s better to think ahead in terms of the possible late harvesting of crops and the possible bringing of improvements, and to provide for these issues in a well-thought-out lease agreement. Having a lawyer draft the agreement can potentially save you many thousands in law costs, wasted crops and improvements.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.

Privatise it!

A friend of mine was recently stopped for speeding. As is his habit when travelling through that area, he simply held two notes out of the window of his car in anticipation of a quick getaway. However, the traffic cop was offended. Not because he was offering her a bribe, but because he was doing so in front of his children, who were also in the car. My friend was made to get out of his vehicle and offer the notes in a more discreet manner.

So bribery happens and traffic offenders sometimes get off more lightly than they should. It’s a fact. And the culture of ‘road abuse’ continues. We also have widespread unemployment in South Africa, and I believe many law graduates could do with work. So why not privatise the traffic police system or add ‘private operators’? Train and licence suitable candidates as ‘traffic compliance officers’.

After all, we already have compliance officers who police insurance agents and brokers to make sure the public is protected against possible bad practices. In traffic compliance, a licensed private individual would collect their fee out of fines paid to the municipality in the area where the offence took place. The traffic compliance officer could also help solve the existing problem of many thousands of traffic fines not being paid.

The present system allows for a small contempt of court fine to be added to the main fine should an offender not bother to do anything about the summons received from the traffic official. The principal amount thus does not accrue interest, and there’s not much incentive for an offender to pay the admission of guilt fine.

Zealously guarded
The non-payment of traffic fines is a problem that is thriving in the face of municipalities that are struggling financially.
Private traffic compliance officers, however, would have an incentive to follow up on offenders, because if they don’t pay, the officer doesn’t get paid!

With fines now being stringently followed up on, the general public might possibly heed traffic rules. Another result of privatisation may be that the private operative, wanting to get ahead, would zealously guard the area allocated to them.
And municipalities might receive more money as private individuals ensure that the fines are paid. Obviously the potentially lucrative licence would be revoked in cases of corruption of any sort.

Efficient
In fact, it might be easier to terminate the services of a contractor in breach of their contractual obligations than to fire a wayward municipality employee. To sum up, then – privatisation would increase the municipality’s income, there would be more efficient compliance control and also better road safety because the rules would be enforced by people whose income depends solely upon the collection of cash.

The fees earned by private operators would be offset by not having inefficient traffic officers in the employ of the municipality concerned and by efficient gathering of cash, thereby eliminating expensive credit control staff and mechanisms.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.

Protecting your heirs

Antenuptial contracts and wills are among the most important documents any person will ever execute – that is, sign and thereby make legally valid. But I so often come across such documents that clearly do not accurately reflect the intentions of the parties who commissioned them. Part of the problem is that drafters of legal documents may use clauses unfamiliar to their clients.

They don’t do so intentionally – I think they forget most of their clients don’t use legal terminology on a daily basis. Whichever the case, it means that often, trusting in the abilities of the drafter, a client will sign a document without grasping all the words and their possible implications.

Wills
Wills are the worst documents when it comes to misunderstandings, because the client has usually passed away before other interested parties, such as heirs, legatees or spouses, become aware the document doesn’t convey the true wishes of the testator or testatrix. All too often the deserving heirs then have to share their inheritance with others or, worse, forego what would have been their birthright.

Going to court
A will can be ‘rectified’ after death, but this isn’t easy. In terms of the common law, the High Court can correct a will, either by elimination of impossible, illegal and immoral dispositions, or by rectification of a mistake, where the testator’s intentions aren’t correctly represented. In the second instance, the applicants who could possibly be the heirs the testator wanted to benefit by the will are likely to face considerable opposition from:

  • Those who the allegedly mis-drafted will benefits.
  • The intestate heirs where the will hasn’t catered for all the assets, or has been drafted in such a manner that an eventuality wasn’t catered for, leaving the assets un-bequeathed.

The court will require proof that the discrepancy between the alleged wishes of the deceased and the expression of the will was due to a mistake. Then the applicant will have to satisfy the court that the wishes of the deceased were in fact what the applicant alleges.

Prevention
The onus of proof therefore rests on the applicant. And those who wish to rectify a will in the face of stern opposition face huge costs. Courts do not lightly rectify a will. The very act of execution of a will is fairly solid ‘face value’ proof that the testator knew and understood the contents thereof. It’s better to avoid such acrimony, and I urge testators to read their wills carefully and ensure that they are in agreement with all the clauses.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.

Who is fooling who?

In his recent Budget Speech, Minister of Finance Pravin Gordhan praised the ANC and the ‘achievements’ of the past 100 years. In doing so, he snubbed those of the average hard working South African taxpayer and all the employers who put food on the table of their employees during this time. The minister then went on to mention that some of the country’s tax practitioners have outstanding taxes and returns.

However, if he was looking for errant taxpayers he surely didn’t have to look very much further than some of the honourable members right there in the house. Education isn’t a luxury, but a necessity, according to Gordhan. In practice, though, child support grants and rampant procreation result in taxpayers who plan for smaller families footing the bill for those who don’t. This doesn’t seem fair to me. If some regarded the Budget Speech as ‘upbeat’, this wasn’t a sentiment shared by rating agency Fitch.

It recently downgraded the investment outlook for SA from ‘stable’ to ‘negative’. Investors are aware that not all is as it should be, especially when it comes to mining rights. A proposed resource rental tax of 50% is enough to give them cold feet. The average taxpayer is pulling a heavy load at this time. Only government ministers have the luxury of an open chequebook when it comes to international flights and luxury accommodation. Cash is in short supply.

Footing the bill
South Africans are footing the bill for a government that cannot live within its means and this bill isn’t getting smaller. The minister mentioned budget deficits for this year and for next. The borrowed money will have to be repaid long after the pleasure of the international flights and luxury accommodation are forgotten.

A third of the tax revenue will be spent on the ‘social wage’, comprising child support grants and the like. In his speech Gordhan also forgot to thank the SA farming community for remaining on the land despite the high incidence of farm murders which, according to Genocide Watch, make farming in SA one of the most dangerous occupations, statistically, in the world. In addition, Gordhan forgot to thank farmers for contributing 2,5% to the gross domestic product of the country in an environment where state support and interventions for commercial farmers are almost non-existent by world standards.

Sidelined
I submit that Gordhan should take note that many of South Africa’s taxpayers aren’t members of the ruling party. These are the people who keep his government afloat. I think they’re getting fed up with being sidelined and taken for granted. If he wants to continue milking them with higher taxes and toll fees, he should bear in mind that once they’ve gone off to pay tax in countries that appreciate their efforts, he’ll have to find another source of income to pay for international airline tickets and social wages.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.

Registering as a VAT vendor

The rules regarding registration as a VAT vendor in SA are straightforward. The first rule concerns turnover. As soon as a business entity, be it a sole proprietor, a private company, small business corporation or regular private company (including a close corporation) reaches the R1 million mark in the course of normal trading it must register as a VAT vendor.

Similarly, if it’s clear the R1 million turnover mark is going to be achieved or exceeded within the normal 12-month trading period – then that entity must register as a VAT vendor. This is, of course, provided that the other rules relating to VAT registration are also complied with. This is in terms of Section 23 of the VAT Act.

The next rule is that the business activity has to be a ‘VAT-able’ activity. Transport of passengers and receipt of rentals of residential homes are excluded, for example, meaning even if such a business exceeds the R1 million threshold it cannot be registered for Value Added Tax. (For a full list of exempt activities, see Section 12 of the VAT Act.) There’s a perception
in the marketplace that a business which is VAT registered is more credible than one that isn’t.

In a business, VAT registration has the advantage that the VAT inputs in terms of most goods and services used by the business can be claimed. The disadvantage, however is that the addition of VAT on top of the service or goods offered by the business increases the overall cost borne by the end-user, who may not be VAT registered and so is unable to pass the cost on.

Not liable
Small professional firms that deal directly with the public have an advantage if they can remain non-vendors – they would then not be liable to charge VAT. The smaller business may well be tempted to split its operations among several entities in order to avoid VAT registration. The government, however, has put anti-avoidance rules in place to prevent this.

If you have several different lines or distinct services or goods, you might be able to avoid the VAT registration requirement by placing the different business units into different entities. Smaller operations, home businesses and the like may be able to use this technique to good effect. Another drawback of VAT registration is that it considerably increases the compliance burden in terms of tax. It costs a lot of money to keep the VAT affairs of a business up to date.

Heavy penalties
Should a business fall behind with the VAT compliance, there are heavy penalties. For this reason, in my view it is not a very good idea for a sole proprietor to be registered as a VAT vendor. Whereas you could, as a last resort, wind up a firm that has tax and VAT problems and, with luck, walk away from the mess, if the VAT registration attaches to you as an individual, that luxury isn’t there. Registration as an individual also may have ramifications in terms of estate planning and the taxes that have to be borne by the estate of the businessperson.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.

Contesting a will’s validity

Once a person has died, their last valid will becomes the law in so far as their assets are concerned. I’ve found that the winding up of a deceased person’s estate is similar in most jurisdictions around the world. Once someone has passed away, the first task of the next of kin, or person most interested in the affairs of the deceased, is to submit the will or any testamentary writing to the relevant authority. In SA this is the Master of the High Court.

To conceal, destroy or alter the will of another person is, of course, a crime. The requirements for establishing the validity of a last will and testament in SA have changed with the amendments made to the Wills Act 7 of 1953. In the past, a will had to be signed in full by the testator (male) or testatrix (female) on every page. The same two witnesses (who had to be over the age of 16) also had to sign each page.

The will had to be dated and the place where it had been signed identified. Also, the signatures on the last page had to be close enough to the end of the writing so that no further clauses could be inserted after signature by a third party. In Botswana, these requirements are still in force and I submit that if a testator or testatrix in SA were to adhere to the ‘old way’ of drafting a will, it can do no harm at all.

Burden of proof
Any person over the age of 16 may make a will. However, someone mentally incapable of appreciating the nature of their actions at the time of making the will cannot create a valid will. Such ‘mental incapacity’ may be the result of an unsound mind, disease or drunkenness.

The ability to understand the testamentary act – the drafting of the will, determining who gets what – is key to whether or not a person will be deemed mentally capable of making a valid will. The burden of proof rests upon the person who alleges that the will is invalid. As we’ll see this is very onerous. In Tregea v Godart 1939 AD 16, the court, relying upon an earlier English case, outlined some guidelines that are useful as a general test for testamentary capacity.

Guidelines
For one thing, these guidelines don’t demand a perfect memory of the testator or testatrix. A person so affected by age they’re unable to recollect names at times may still have sufficient memory and intellect for the ordinary transactions of life and thus be competent “to direct the distribution of his property by will,” to use the words of the court.

In terms of the Wills Act, a person has to have the mental capacity to make a will at the time of execution (signing) thereof. It may be a good idea to record the names and addresses of the witnesses so if the will is contested, they can be called upon.

Peter O’ Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.

Putting on a brave face

The 2012/13 budget contains several items of good news for the agricultural sector. A total of R1,9 billion will go to the department of agriculture to improve agricultural support services, Land Bank is to receive R1 billion to assist with recapitalisation, and R150 million has been allocated to agricultural colleges. As employers, farmers stand to benefit directly. Employers who provide housing units with a value of up to R300 000 will qualify for tax relief.

Finance minister Pravin Gordhan also announced that support would be provided for emerging farmers.Further good news is that micro-enterprises and small business corporations (SBCs) will now pay even less tax and be subject to less ‘red tape’. Statistics reveal that only a few SBCs have been registered. In my view, farmers should make use of these tax breaks by spreading their enterprises across their families.

An SBC will now pay 7% tax on taxable income up to R350 000, with the first R63 556 totally tax-free! If farmers’ spouses ran their own operations through an SBC, the family’s total tax liability would be reduced. Dividends declared by the SBC would be subject to dividend withholding tax, but it still makes sense to use the vehicle.

Another piece of good news is that micro-business tax administration has become much easier. Only two returns per year will now be required for VAT and employee tax. From 1 April this year, the secondary tax on a company’s (STC) dividend will be replaced by a withholding tax on dividends. The rate of withholding tax will be 15%. The old STC rate of tax on dividends was 10%.

Fuel and power
Petrol and diesel are to be taxed at an even higher rate, with an increase of 20c/l for the general fuel levy and a rise of 8c/l for the Road Accident Fund. Fortunately, farmers qualify for exemptions if their fuel is used for agricultural production. The electricity levy generated from non-renewable sources will rise by 1c/kWh from 1 July 2012. This increase will be used to help fund energy-efficiency initiatives.

Medical expenses
Deduction of medical aid contributions has been replaced by tax credits. A maximum credit of R230 per month will be allowable for the taxpayer on the scheme, R230 for the first dependant, and R154 for each additional dependant. However, medical scheme contributions in excess of four times the total credits and combined out-of-pocket medical expenses in excess of 7,5% of taxable  income can still be claimed as a deduction from taxable income.

The National Medical Plan is to be phased in over 14 years. According to Gordhan, its costs would fall outside the budget, and various methods would be explored to fund it. These include increased VAT, a payroll tax on employers and/or a surcharge on the taxable income of individuals.

Gauteng tolls
The Treasury is to foot R5,8 billion of the cost of the R20 billion Gauteng toll road system, and this might result in bigger discounts for regular users. According to Gordhan, the current toll road system allowed for increased expenditure on regional and provincial roads.

Corruption
Corruption is to be addressed by government through a series of checks to ensure that funds are properly accounted for. A National Procurement Officer will monitor procurement, the tax clearance system will be used to ensure that only tax-compliant entities receive government work, and government leases will be administered more strictly.

Trusts and savings
Gordhan criticised trusts for their poor tax compliance. In the past, when a trust had no taxable income, such a submission was not required. It is now better to register the trust for tax and use it. Capital gains tax on trusts is to be increased, but gains can be distributed among beneficiaries, thereby reducing the taxes.

Good news for savers and investors, including retirees dependent on interest payments, is the proposal that individuals should be permitted to save up to R30 000 a year free of tax on interest, with a lifetime maximum of R500 000 being exempt from taxes. Gordhan also proposed that businesses investing in Special Economic Zones would qualify for support with training and employment costs, and benefit from reduced corporate taxes.

He emphasised that with state social spending amounting to 58% of government expenditure, social spending had to be replaced by economic growth and job creation. The budget deficit will be 4,6% this year and approximately 3% next year, when South Africa’s total debt is projected to be about 38% of the GDP.

For a detailed overview, visit www.sars.gov.za

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him at [email protected] Please state ‘Tax’ in the subject line of your email.

The difference between success and failure

In 20 years as a tax consultant, I’ve seen some excellent businesses. I’ve chosen five from my files (all of whom are still in business many years later), and here’s what they all had in common:

  • They looked successful and the top people had a positive outlook.
  • They were willing to make an effort for clients.
  • They were selective about taking on new clients. A client who won’t pay is a liability.
  • They complied with regulations. Having outstanding tax or other regulatory issues saps energy and leads to worry.
  • They had good policies and procedures – every employee knew exactly what was expected of them.
  • They were careful with money and extremely serious about cash collection.
  • The top people were always looking at improvements.

Mistakes
Of the businesses I’ve seen falter, all of the downward spirals were preceded by one or more of the following errors:

  • A manufacturer at the peak of his success decided to build a larger facility. The new factory took a few months longer to build than expected. By the time it opened, the market share was gone.
  • A purchaser of businesses who didn’t do proper due diligence (investigate and evaluate a business opportunity). One purchaser believed a certain system would produce so many vegetables that he would have been able to supply the market. The system didn’t work despite his best efforts and so he lost his retirement savings. Such tales are common.
  • A trader entered into a very expensive lease on the assumption that turnover in the exclusive shopping centre would carry the overheads. The trade turned out to be seasonal and the landlord unsympathetic. Leases and sureties are often the cause of personal insolvency.
  • A small businessperson who’s very good at what they do, but has a bad habit. They are so confident in their own ability that they often promise more than they can deliver. This angers clients and the business suffers.
    Be honest with your clients, so that they have the correct expectations regarding service delivery. Regular communication is key to customer satisfaction.
  • In another case, a successful businesswoman traded on her name and reputation, assuming that the government would continue to support her efforts. She ran a company that had every chance of success, but a change in management in the department that had supported her previously left her without her sole client and resulted in the liquidation of her company. She had no ‘Plan B’ in place.

It’s never good practice to rely on one customer or supplier, because the loss of this support can break a business.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected] Please state ‘Tax’ in the subject line of your email.

Creating a successful partnership

Insurance people, bookkeepers and other professional advisors all warn against operating a business in partnership. But partners who work well together are a blessing to each other. It’s a tough world out there, business-wise, and two people who have complementing strengths and abilities are better able to withstand the trials and tribulations.

What are the advantages of a partnership?
• Partners arrive at better decisions more quickly. When two people discuss issues, the other perspective helps to bring focus to the matter.
• There’s more time available so that administrative tasks can be shared.
• Each partner brings certain skills to the partnership.
It is difficult, however, to find that perfect partner. Partnerships that go wrong usually do so because of a lack of trust, greed or spouses who disagree. And, yes, it’s true that one partner’s financial situation can affect the other one. A good partnership should be well-balanced from the start, with both partners being either as wealthy or as poor as the other.

Another benefit of a partnership is that no formalities are required. Broadly speaking, as soon as two people with contractual ability agree to operate together for profit, the partnership is born. There’s a lot to be said for not being too formal in business. Of course, a written agreement, professionally drafted by a canny lawyer, is a must, but an additional, informal arrangement may be more flexible, with the partners more open to change in business circumstances. Partners might also pay less tax, depending on the turnover of the business, because taxable income is split between them. Although not a formal legal entity like a company, a partnership can even be registered as a VAT vendor.

RISKS
Is a small private company not a better idea? Well, it might be under certain circumstances. One very pleasing feature of the SA Income Tax Act is the set of “corporate rules”, which makes provision for the conversion of a partnership to a private company without any tax, VAT or transfer duty repercussions. Companies, though, have many new onerous requirements under the new Companies Act. Without going into too much detail, there’s a lot of red tape surrounding companies and especially around the office of “director”. A company director, it seems, is at risk of personal liability should they take decisions which place the company finances at risk. In business, there is risk in any event and this is one reason why it might be better to be a partner and not a director, an unavoidable position in a small private company.

VERSATILE
Partners loath to incorporate their business might do well to compartmentalise the risks in the business and in their personal capacities by making use of trusts to house assets. However, partnerships are versatile as well. Even companies may operate in partnership with other companies, or a person might wish to operate in partnership with other entities such as small business corporations, to maximise the tax benefits associated with such arrangements.

• Peter O’Halloran is head of tax at BDO, Gaborone. Contact him at [email protected] Please state “Tax” in the subject line of your email.

 

WHAT TO READ NEXT

Theft of beehives spikes as demand for pollinators increases

Beekeeping has offered a lifeline to many rural communities, as this essential service allowed them to generate an income during the COVID-19-related lockdown.

The good farmers do

Send this to a friend