IFRS - there's nowhere to hide - Grant Thornton

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4 Volume 2. November 2005 Selling a business Have you considered the tax implications Corporate law should therefore be simple, accessible and not impede the activities of the small business sector. Even the less sophisticated businessman should be empowered to establish a company in a fairly simple and inexpensive manner, without having to go through unnecessary red tape, onerous reporting requirements and cumbersome registration processes. These are the two objectives on which we should hang our corporate law hat. Once this is in place, it becomes easy to answer the questions. Thus: Should all companies be subjected to an audit Not necessarily, but if stakeholders require an audit, they should have the option to have one done. If the public interest is at stake (that is, external stakeholders are involved), an audit is a must. Do smaller companies only need an accounting officer's report Only if an accounting officer's report adds value; if not, don't even do that. However, again, if public interest is at stake or stakeholders require assurance, an accounting officer's report will not be enough; an audit must be done. Should close corporations be abolished The question should, rather, be: Does the Close Corporations Act meet its defined objectives, or is it complicating the issue; what is the difference between a close corporation and a private company If this difference is purely arbitrary and superficial, the Close Corporation Act is an obstacle rather than an aid, and should be abolished. By Justin Liebenberg, Senior Tax Manager, Johannesburg The radical changes in tax legislation over the past couple of years have had an impact on traditionally straightforward business transactions. In the past you could have sold a business with relatively minor tax consequences but today, by ignoring the impact of Capital Gains Tax (CGT) and amendments to the Secondary Tax on Companies (STC) the effect of legislation on these transactions can be costly. In this article we highlight some of the pitfalls when selling your business, focusing specifically on the different tax consequences between selling the shares in a company and selling the business of a company. The use of a case study will best demonstrate the issues. For this purpose, assume the following facts: you own shares in the company, which were valued at R10m on 1 October 2001 (the commencement date of CGT) the purchaser is willing to pay a purchase price of R20m the net asset value of the business is R5m at 1 October 2001 the net asset value at date of sale is unchanged at R5m the goodwill at 1 October 2001 is valued at R5m (R10m - R5m) the goodwill at the date of sale is R15m (R20m - R5m) Must every company comply with International Financial Reporting Standards (IFRS) including small companies Yes if it enhances the credibility of our market. But no for small companies that do not operate at a higher, public interest level where IFRS is an operational obstacle. Ultimately, public interest should dictate. In this context, the notion of a public interest company is important. Public interest companies should be subjected to the highest standards, including accounting, auditing and corporate governance, reporting requirements and other checks and balances. The challenge however, is to accurately set the parameters so that the appropriate companies with external public interest are included in this definition. Justin Liebenberg
Volume 2. November 2005 5 Tax implications if you sell your shares in the business The sale of a share amounts to the disposal of an asset and is consequently subject to CGT. Essentially, a capital gain or loss is determined by deducting the base cost of an asset from the proceeds realised on its disposal. Most CGT planning revolves around minimising your capital gains by maximising your base cost. The base cost of an asset would normally be enhanced by certain expenditure incurred in relation to the asset (the types of expenditure are specifically provided for in the legislation). CGT only became effective from 1 October 2001 and therefore special rules apply to the determination of the base cost of an asset acquired before this date so as to ensure that only post 1 October 2001 growth is subject to CGT. The effect of these rules is that the value of the asset had to be determined at 1 October 2001, the so-called 'valuation date value'. This value is included in the asset's base cost together with any allowable expenditure incurred after 1 October. The base cost can therefore be maximised by ensuring the highest possible valuation date value is applied and that all allowable expenditure after valuation date is included in the base cost. The legislation essentially allows for different methods of calculating your valuation date value: the time apportionment base cost (TABC) method, (which effectively apportions the gain between the period before and after 1 October 2001 on a time basis) 20% of proceeds; the market value at valuation date The determination of the valuation date value is not as simple as it appears - there are some complex rules that apply to limit capital losses by determining what valuation date value is used. The first step to take in maximising your base cost is (where the option is available) to determine which method will provide you with the highest valuation date value. If the market value is the best method, then keep in mind that this method can only be applied where you have determined such value before 30 September 2004. In addition, if the total value of your shares exceeded R10m then a valuation certificate (in the form prescribed by SARS) has to be submitted with your first tax return submitted after 30 September 2004. As previously mentioned, the base cost of your shares will consist of the valuation date value as well as certain expenditure incurred in respect of the shares after 1 October 2001. The following types of expenditure can be included in the base cost of your shares (thereby limiting the tax payable): expenditure actually incurred in respect of the valuation of the asset for purpose of determining the capital gain or capital loss in respect of the asset expenditure actually incurred that directly relates to the disposal of the asset including: remuneration paid to your accountant or legal adviser for services rendered stamp duty arising from the transfer of the shares any expenditure that may have been incurred in maintaining or defending your legal rights to the shares A further important planning aspect to keep in mind is that you will need to maintain proper records providing evidence of the amounts that you wish to include in your base cost. Therefore you should ensure that you safeguard any valuations that you performed as at 1 October 2001 as well as any invoices, etc which serve as proof of other costs incurred that can be taken into account in the determination of the base cost. The effective rate at which the CGT will be taxed in your hands, as an individual, is 10%. Therefore, assuming that the market value gives the highest valuation date value, your gain would be R20m - R10m = R10m and (assuming other expenditure incurred in respect of the shares are ignored) your CGT liability will be R1m. If the shares in our example are sold, the tax liability is calculated as follows: R Proceeds 20 000 000.00 Base cost (10 000 000.00) Capital gain 10 000 000.00 Less individual's annual exclusion (10 000.00) 9 990 000.00 Portion included in taxable income (25%) 2 497 500.00 Taxed at 40% 999 000.00 Consequences if you sell the business The sale of a business, as opposed to the sale of the shares, has tax implications at both the company level and shareholder level. At the company level, there are two main types of tax arising on the sale of the shares, CGT and STC.
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IFRS - there's nowhere to hide - Grant Thornton

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