IFRS - there's nowhere to hide - Grant Thornton

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6 Volume 2. November 2005 Although not specifically mentioned, don't forget that there are some exclusions from CGT where business assets are disposed of by natural persons. CGT implications The portion subject to STC will be the difference between the The sale of a business implies the sale of a group of assets and proceeds arising from the disposal of capital assets and their liabilities comprising the business. To the extent that a business is market value at 1 October 2001.Unlike the CGT provisions there worth more than its net assets, an intangible asset in the form of is no requirement that this valuation must be done prior to 30 goodwill arises. (For the purpose of this illustration we will September 2004 or that any valuation had to have been assume that the assets other than goodwill are sold at cost and submitted. From a tax-planning perspective it may be worthwhile therefore no gain or loss is realised on these assets). to value the assets now as, the further you get from the valuation date, the more difficult it is to source accurate data on which to The disposal of goodwill amounts to the disposal of an asset and base a valuation. is also subject to Capital Gains Tax. Once again, from a tax planning perspective, maximising the base cost of goodwill reduces your capital gain. Avoiding additional STC In addition, to ensure that at least the pre 1 October 2001 capital There are some pitfalls surrounding the determination of the growth is not subject to STC, steps need to be taken to have the valuation date value of goodwill. It is SARS' view that the Time company liquidated or deregistered within 6 months (the Income Apportionment Base Cost (TABC) method is not available for Tax Act prescribes these steps). determining the base cost of goodwill (although, in our view, this is debatable). Because goodwill is an intangible asset, a valuation Assuming that the business is sold the calculation of the tax certificate needs to be submitted if its value thereof at valuation liability will be as follows: date exceeds R1m (not R10m as is the case of tangible assets). Remember that a business is not considered to be a separate asset for CGT purposes and therefore the valuation of the business as a whole may be inadequate. Because the taxpayer in this case is the company, the capital gain will be taxed at an effective rate of 14.5% (as opposed to 10% in the case of a natural person). Proceeds on sale of goodwill * Base cost on sale of goodwill Capital gain Portion included in taxable income (50%) Taxed at 29% R 15 000 000.00 (5 000 000.00) 10 000 000.00 5 000 000.00 1 450 000.00 STC implications * remember the other assets are sold at their base so no CGT arises. If the Generally, STC is imposed on the net dividend declared by a company at a rate of 12.5%. Therefore, assuming that the company has no revenue reserves at the date of sale and the full proceeds arising from the sale of the business are distributed to shareholders, the full amount will be subject to STC at a rate of 12.5%. In the past it was possible for a company to distribute capital profits STC free if the distribution was made in the course of, or in anticipation of, the liquidation or deregistration of the company. With the introduction of CGT, only that portion of the capital profits that represent capital growth that occurred prior to valuation date will be exempt from STC under these circumstances (i.e. liquidation or deregistration). company subsequently deregisters/liquidates STC: R Total capital profit subject to STC 10 000 000.00 Less CGT paid (1 450 000.00) Capital profits available for distribution 8 550 000.00 STC @12.5% 1 068 750.00 Total tax (CGT&STC) 2 518 750.00 There are some important actions that can be taken to limit the CGT and STC costs of selling your business. For the reasons set out above it is generally always better to sell your shares rather than the business (the difference in our example is R1 519 750). These costs should be considered when negotiating with a potential purchaser.
Volume 2. November 2005 7 3 2© B E - how does it all add up By Lee-Anne Bac, Director, Grant Thornton Strategic Solutions, Johannesburg & Marc Edelberg, Partner, Cape Town Grant Thornton's annual International Business Owners Survey (IBOS) indicates that Black Economic Empowerment (BEE) is one of the biggest issues keeping owners of medium sized businesses employing between 50 and 250 people awake at night - a trend that is definitely on the rise. In fact, 61% of business owners believe that BEE is a key issue for them in winning business, up from 51% in 2003. 3 2© BEE vs B E Throughout South Africa there is a lot of confusion about the 3 2© difference between BEE and B E . Essentially BEE refers to a narrow form of empowerment, focused primarily on ownership, where more than 50% of an enterprise's equity is managed and controlled by a black person or group. 3 2© B E goes beyond just ownership (with a target of 25%) and encourages the economic empowerment of all black people through integrated socio-economic strategies incorporating 3 2© human resources and skills development. B E requires equitable representation in all occupational categories and levels in the workforce and beyond. Interestingly, during the focus group research conducted for IBOS it was determined that although BEE is a business imperative, many of these medium sized businesses are grappling with the issue of how best to implement Broad Based Black 3 2© Economic Empowerment (B E ) in their organisation. Charters vs codes In particular business owners are confused by: 3 2© the range and extent of the various B E charters that are 3 2© To date, around 29 different industry sector B E charters have impacting on their businesses been finalised or are in the pipeline. These charters outline the range, extent and complexity of the forms that they have 3 2© specific B E targets that organisations within that sector should to complete for their clients or for tenders achieve by a certain date. While none of these charters have been the inconsistencies in interpretation of terms, data and gazetted as Sector Codes, they have been endorsed by the sector requirements in different charters and by rating agencies and and in some cases are referred to in various Acts of legislation. consultants the perception that there is a need to “give away shares in 3 2© Over and above these B E charters, the their business” 3 2© Department of Trade and Industry (DTI) the fact that government is punting B E but tender and has released a draft of the Codes of procurement documents focus on BEE ownership only, 3 2© Good Practice for B E . These driven in some cases by charters 3 2© codes set out what B E is and how it should be measured. A Background generic scorecard has been developed that embodies the In the early 1990's businesses embarked upon a number of principles and stated objectives initiatives to incorporate BEE, primarily through equity of the act and is applicable to partnerships. In many instances, the parties were accused of all industry sectors. fronting and tokenism as these partnerships appeared to lack real substance. This resulted in a formalised government strategy through the Broad Based Black Economic Empowerment Act of 2003. The Government Gazette states the main objectives of 3 2© this Act are to facilitate B E by promoting economic transformation in order to enable meaningful participation of black people in the economy, to achieve a substantial change in the racial composition of ownership, management structures and in the skilled occupations of existing and new enterprises. In the future, sector charters will remain a mission statement until the charter is gazetted as a Sector Code. Until such time, the Codes of Good Practice will outweigh the industry charter in terms of the application scorecard. Marc Edelberg
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