AW NEWSLETTER Incorporating Anderson Whittle, AW Kinekt & Outsource Consult January 2007 THE BUDGET Again benefits were disbursed to taxpayers in the Budget. Tax thresholds for persons under 65 start at R 43000, and for these Taxpayers the first R18000 of interest is tax free as well. Interestingly there is a proposal for R 300000 tax free payment, by the employer, to the employee, upon the employees death. This will make Group Life a really worthwhile employee benefit. Donation tax is now levied above R100000 pa, and death duty starts above R 3,5 Mil. Tax free medical aid employer contributions are now R530 for the first two members, and R 320 for dependents. And tax deductible donations to PBO’s are now allowed up to 10% of taxable income. This will really make your favourite charity happy! AMNESTY The small business tax amnesty is still available until end March. USUFRUCTS & BARE DOMINIUMS Various commentators have expressed the view that there can be unpleasant Capital Gain consequences in usufructs, and some VAT effects in certain circumstances in dominiums. Are these now past their sell by date? STAFF INCENTIVES Interested (if you are a start up co) in retaining, incentivising and attracting top quality management? We have developed a simple reverse option scheme which does not need a share trust, can be used on the service contract platform, and provides excellent CG possibilities for top managers - locks them in securely, the best golden handcuffs that there are. GET TO US EARLY! We have never been great advocates of orthodox share options; changes in Tax law have meant that about half of the schemes have been still born, thus have damaged morale, and we don’t think that they provide great incentive to senior management, other than the handful of very Top Managers, as middle manager efforts can hardly be seen in the share price. And when the options are out of the money, they have been actively damaging in retaining these managers. Rewarding high performance employees regularly with cash has been the way that we have seen is best practice to encourage performance, using a risk adjudged reward measure. EROSION OF RETIREMENT CAPITAL Pension funds are looking more and more suspect as Employee Benefit vehicles. The Press, the Adjudicator, the FSB, the members, the courts, and the SAPS are regularly attacking actuaries, Trustees, Administrators and the investment bodies. It seems like it will get worse. In fact, Pension Funds may even be seen as political whipping boys.We can’t really see it getting better. Trustees are now starting to be held liable. Is a pension fund an asset or a liability? Where will it end up? We are sure that much more is to come out before the issue dies down. The Cash based compensation schemes that we implement are flexible and do not enter into cul de sac long term promises, that may end up damning The employer by politicians and other persons\institutions, even though the Employer acted in utmost good faith in their obligations. Many of our tax clients, payroll client’s employees, and contractors are not saving enough for retirement. We note the ineffectiveness of Pension Funds to provide the solution for this, and no doubt you have read in the press of the big problems in this arena. Indeed the Government is addressing the issue as well, and in the Budget 2010 will see the introduction of a state compulsory retirement saving scheme for people who have no structure in place. Unfortunately history has shown internationally that Government is particularly poor in looking after your retirement funds - I don't think that politicians should be in charge of your hard earned money! We believe, outside the coming state retirement scheme, we have developed a tax deductible, socially responsible scheme - wholly owned by you! This will be based on unit trust Retirement Annuities, and we plan to get all our clients’ employees and contractors to contribute to their own fund from 1 March 2007. It has been shown that costs are the biggest determinate in your retirement fund performance – so we have chosen the lowest cost vehicle to provide this to you – unit trusts - and you will also get the full tax deduction monthly as well. This scheme has the massive advantage too, of no penalties due if you stop contributing to it, and you can obviously take it on to any new employer in the future as well. So it's flexible, low cost, and not subject to penalties - it's clearly the way forward. And in the 2007 Budget the Minister cancelled taxes on retirement funds, which could lead to almost a full percentage increase in net returns ( this could therefore increase returns by a factor of more than 12% - which makes a big difference over the longer term ). Employers need now to becoming prescriptive in their strategy of requiring employees to adequately provide for retirement. OUR SOLUTION Unit trust RA's to ring fence their propensity to erode their own retirement asset. The single biggest factor other than spending Pension/Provident lump sums in this erosion is cost, and these Retirement Annuity policies are the lowest cost, when they are not linked to Unit Trusts. These Unit Trusts RA's are included in Cost to Company. That the employees are incentivised by a use it or lose it policy. It is interesting to note that the USA had a similar problem. Only a generation ago, most Americans could not afford to retire, and defined benefit pensions were the norm. Then the IRS introduced Sec 401 (K) pretax retirement savings, empowering individuals to actively provide for their own retirement. Now 51% of American 401 (k) plans are invested in mutual funds. And 72% of US mutual fund investors are using mutual funds as their primary financial retirement tool. More than half the assets in IRA’s (Individual Retirement Accounts, (like our RA’s) have come from employer sponsored plans (i.e. pension Schemes). It appears that the future for South Africans is: Use Sec 14 of the Pension Funds Act to exit from expensive and poor performing SA pensions and provident funds and invest in a tax-free individual unit trust RA’s. As a matter of record Anderson Whittle has never instituted a pension or provident fund for any of our clients. However, we are certain that Individual Unit Trust RA’s are the way forward for employees who wish to retire comfortably. Please speak to Ivy at 021 5576438 to ensure that you can retire. People are living longer these days – the US Bureau of the Census (International Programs) notes: In 1997 6,2% of Southern Africa were over 60 years old. In 2025 10,8% of Southern Africa will be over 60 years old. Will you be able to afford to sustain a good lifestyle after this age? A unit trust RA will be the primary weapon to enable this. AW Recruitment With our Contract House solution, we are regularly now asked for Recruitment services. As such we have registered Anderson Whittle cc with APSO, and two AW employees recently wrote the APSO exam, both being placed in the top five, with one receiving the top mark. We are at your service to provide efficient and really top class recruitment services directly to you. COMPENSATION – THE HOLY GRAIL After 20 years of developing compensation for our clients we are Now certain of the best practices to leverage and deliver best quality compensation. We have led compensation in South Africa now for close on 20 years. And our clients are most successful. Two things are certain, that the vast majority of companies have inefficient compensation and management spends little time in addressing the resource. It’s interesting to note that even if compensation may be 50% of a company’s turnover and marketing say 5% of a company’s turnover, management typically spends much more time on managing the marketing rather than the compensation. And they typically don’t understand the compensation function, and throw grading, evaluation, banding, remuneration committees, and HR insourced and outsourced solutions at the resource. Our experience is that by narrow focusing on the application of the massive compensation spend, with top quality CTC application, tax structuring, excellent service contracts and incentives is where excellent retention, top quality candidate attraction, and employee satisfaction and performance comes from. And this leads directly to increased company profitability. And we further believe that employee share schemes are wasteful and are of little value, as are employee compensation schemes based on pension, and that BEE share for share, Sec 42 and other empowerment schemes dilute equity at the expense of shareholders. All the above are very very difficult to reverse out of – they are inherently weak strategic tools because of this. Management are severely constrained in amending employer strategy change using their most powerful resource, compensation, in entering into these long term inflexible schemes, which are based on ideas of life long employment and employer long term responsibility for the employee. We believe our Cash Based Compensation schemes are easy to move into or out of. Flexibility is tremendous. Increases are performance linked. Packages are individually structured. Employees are happy and perform. And with our outsourced solution – we ask for only one hour a year of client top management time in providing new CTC ( per annum )- but we do ask for more management time though, spent on incentives. It’s should be getting very clear to management – if you have old style compensation – you are fast becoming uncompetitive. Our clients will have a 5-10% advantage in the biggest spend area of their business over old style inflexible and wasteful compensation regimes. And employees are starting to realize it. CONTRACTORS VS EMPLOYEES By 2015 contractors and freelancers could make up as much as 50% of the white-collar workforce. This trend is in place due to the continued attractiveness of outsourcing non-key activities, therefore freeing up management to concentrate on their core focus, as well as the advantage of being able to manage by project, which provides definite result orientated work planning and completion. This is clearly the way forward for companies who are intent in success, and remaining competitive. AWKinekt Contract House, started in 1997, is SA’s only Contract House, and provides the inputs necessary to operate management by project on a controlled and low cost basis. Perhaps one should examine some core aspects of the system: - the client controls and directs the project, that is the very expensive total outsource of the risk –reward of the project is not undertaken - the ownership of the project means that the client has control in changing and amending it, without the massive costs associated with a solution package change - AWKinekt is involved with the scoping, specifying, skilling and operating the Project to finalization. - We skill your project with non-LRA contractors which reduces cost and increases flexibility. - The result is a low cost solution – reducing the costs of managing by project. Our Contracting resources enjoy the unique and proprietary AWKinekt Contract House structures, and increased cash rewards of our contracting system. Our Cape Town and Johannesburg clients are hugely impressed with the quality of our Service Delivery Management – widely regarded as the best service delivery system for contracted service delivery, and AWKinekt compliance with Oracle system is regarded as top quality. The AWKinekt Contract House recruitment, uniquely effective service delivery, disciplinary record (of all AWKinekt contractors - in seven years there has only been one CCMA case which was thrown out of this court), quality of work, and level of skills brought to bear, contractor satisfaction level, and contractor compensation regime has been regarded as top quality by our clients. The Kinekt business was purchased by ourselves in late 2005 and was restructured, upgraded and re-launched as AWKinekt Contract House in early 2006, this has led to higher levels of service and quality in our service delivery. We have also introduced a novel learnership Program, which provide the platform for BEE candidates to be trained on a fast track basis, on a “ no reward” basis, which we calculate to be 60% cheaper than corporate training programs, so leveraging the ROI advantage even more. We reiterate that we are the only contract house in South Africa, and this socially responsible and value adding service to existing clients is only available through us. The AWKinekt Contract House solution is a unique cost based solution, and the most advanced method of delivering high Skills into companies at reasonable rates. We are getting quite a substantial number of SARS attacks on our individual taxpayer compliance business (we have 600 clients). SARS is stating that individual taxpayers who are independent contractors, who have IRP5's (i.e. PAYE is deducted) are actually employees, and SARS is attempting to disallow deductions. This does not bode well for labour brokers, as their contractors are deemed employees. Our AWKinekt Contract House system will not be subject to this attack. AWKinekt is the only way forward for independent contractors. Contact us as (021) 5576438 STC In the Budget the minister reduced STC to 10% from 1 October 2007, And noted STC would be replaced with a tax on dividends at company Level in the future. CAPITAL GAIN – SHARES In the budget the Minister proposed that Shares held for three years Will be regarded as capital. TAX RETURNS and your Car Allowance Please note that Logbooks, as per our format, are very effective indeed. When having your compensation structured through us, and where you have told us you will be keeping a logbook, you must do so, otherwise you will be making a very large payment to SARS at assessment time as opposed to receiving a very large refund from them. OFFSORE Overseas investment allowances have now been increased to R2 000 000 per person. Permission for this must be applied for, which we can do for you. TRENDS IN COMPANY TAX Historical trends in Organisational Economic Corporate Development statutory company tax rates and company tax revenue(a) Rates are top federal statutory company tax rates. Averages are un-weighted. Executive Payroll We offer really effective compensation and have a unique top management tax effective payroll at very competitive rates. Our outsourced payroll includes Mmonthly reports relating to Payroll; Leave, Sick Leave, Payslips, Annual IRP 5's, Annual EMP201, and we handle the onerous dealings with the Receiver. We can also offer Cost to Company compensation, and for Management, Service Contracts and Annual Re-Structures which include Car Allowances (two variances); Rental FBV; Transfer; Reimbursed amounts; Medical Aid; Retirement Annuity; Pension / Provident Funds. We are able to apply and help with cost centres, budget variances, help with incentives, advice on new employee packages, and generally provide high level inputs to making your business really competitive. Our payroll system is flexible; we operate off your Pension schemes, Medical schemes and other EB structures. These days though, cutting edge employers are moving to Cost to Company for obvious reasons (Consultancy on this is included in our costs). It's best to let each employee buy what he/she thinks is best for himself/herself We were amongst the pioneers of this Cash based Compensation in the early 90's, and today our clients certainly have the best compensation, so attracting and retaining best quality employees. You'll find that your compensation regime will move up to the cutting edge! We also handle SARS PAYE audits, up to and including the ADR and Tax Court. I am sure that by now you must be interested to know how much value we can add to your HR function - the biggest Investment that you have. Nov 2006 Draft Amendment – Income Tax Act – Personal Service Companies (PSC) AND Bomb proofing the deemed PSC: The Amendment includes proposed changes to PSC’s. These include a new subparagraph (b) which includes a deeming provision where the PSC renders services mainly at the premises of the client. However the onerous deeming provision making an entity a PSC when in receipt of regular earnings will be deleted. Do you have a PSC or think you may be caught in the quicksand of the deeming provisions? If you do - you should really speak to us. UK Trusts The present British Chancellor of the Exchequer Gordon Brown is proposing that UK Trusts will have a capital tax levied on them every decade or so. This will make a UK Trust less attractive as a Tax delaying vehicle. One might expect that a similar effort could come to pass in SA. Non-resident trusts of course would not be affected. Outsource Consult Our Outsource business, designed for high calibre – high earning consultants to work through free of the LRA, UIF, Skills and PAYE is available as a platform for independent persons to provide their services through. For eight years we have provided top level consulting through this neat and powerfully structured environment, in which Sec 8(1) areas are hybridised with sole trader benefits to maximise net cash. Examples of recent consulting work have been implementing the integration of two large bank home loan books, operating in tandem the old and new payroll systems of a large SA corporate, and the implementation of an integrated MIS and Financial Control system for a new Cape Town company. The costs of Outsource are a net 4,2%, making it massively effective for users. New -More Beneficial Lump Sum Retirement Tax: From 1 October the tax free lump sum will increase from R120 000 to R 300 000,with the next R 300 000 being taxed at 18%, and anything in excess of R600 000 at 36%. This means there will be no use in reducing income in the last two years to ameliorate the taxon the lump sum, and certainly makes the playing fields and goals a lot clearer for people planning for retirement.