Dear Reader,

Traditionally, 1 April is set aside for April Fool’s jokes. This time it will also coincide with the date when the new Companies Act will come into effect - and this is no joke. Directors of companies will become substantially more exposed to be held liable in their personal capacity.

Now directors will become liable personally for the following breaches – and these are just a few of the breaches on government’s list:

-    Not acting with the required care, skill and diligence that is required at your level being a director;
-    Not disclosing of personal financial interest;
-    Misusing the position as director to gain personal advantage;
-    Not acting in good faith and for proper purpose;
-    Not acting in the best interest of the company;
-    Trading under insolvent conditions;
-    An act calculated to defraud a creditor, employee or shareholder of the company;
-    Approving financial statements that are false and misleading in a material respect.

Here’s my advice: Reconsider your appointment as a director, because the risks are huge.
And there are a lot of grey areas, as you can see on the list above. Everyone’s got a different take on what exactly “good faith” is, and how you go about acting in it...

For the family-controlled companies out there, rather appoint only one family member to act in the capacity as a director than exposing the whole family.

Of course, sometimes stepping into the role of director is unavoidable. And then the big question is: Should the company take out insurance cover on the director, or not? Especially because a director is always at risk of claims against him personally – more so from 1 April 2011!

My opinion: Protect your wealth in a trust. Now there are a number of consultants out there advising their clients against a trust. Their major argument against revolves around taxes and cost. They argue that a trust is taxed at 40%, compared with individual tax on a sliding scale – only the guys at the top end of the scale will pay 40% tax. But what these consultants are forgetting is that a trust can transfer the tax liability to the individual – to be taxed at individual rates – until the 40% threshold is reached.  This is a much better option in the long run, and one I am more in favour of, even though the Capital Gains Tax (CGT) rate for trusts is double that of individuals, at 20%. After all, using the same tax law structures as above, you can reduce the CGT by leaving any gains in the trust, and letting the 20% estate duty saving for trusts, make up the difference over time.
Ultimately it’s about the protection of your assets in a trust. A correctly structured trust is the answer. And the best time to form a trust is when you have nothing – so as you build your wealth, it’s built into a protected trust structure. But it’s never too late to transfer your assets to a trust...
A correctly structured cost shouldn’t cost you more than R5 000 to form. There’s no requirement for a trust to be audited, so the annual cost to maintain the trust should also be a maximum of R3 000 (that’s just R250 a month). I call this the cost of insurance on protection of your assets.
To get more information on trusts, refer to chapter T08 in your Practical Tax Loose Leaf. In it you’ll find:

•    All trusts have the same financial year-end
•    The tax rate of your trust depends on whether it’s special or just ordinary
•    If either the donor or the beneficiary is not taxed your trust WILL be taxed
•    The beneficiary is taxed once his right to the income has vested
•    Deductions and allowances can only be claimed by your trust before income of the trust is distributed
•    Your trust can only use losses to offset tax if it’s a resident trust
•    If your trust is a foreigner, it’s only liable on its South African income
•    If your trust sells an asset, the trustees can decide who will pay CGT
•    Five frequently asked trust questions.

A word of warning about the SARS property tax break...

Those of you who did move their primary residence from a trust structure, which is encouraged by SARS as part of their amnesty program, you’ve now exposed your most valuable asset. Yes, you are saving on CGT, but you’ve completely forgotten about the impact of estate duty. In that instance you are saving capital gains tax, but have you forgotten about the impact of estate duty?

The moral of the story is: Think this decision through very carefully. Do your homework – consider the impact of each scenario in the long term, to understand the impact to you.

We’ll keep you posted on the changes to the Companies Act, where they’re relevant to you.
 

Marius Maritz
Editor-in-Chief, Practical Tax Loose Leaf
P.S. To order a risk-free trial of the Practical Tax Loose Leaf – in which you get 14 days to use and review the Loose Leaf at no cost – click here and fill in your details.

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