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5 Lessons from history on AI, automation and employment

The urgency of shaping the Fourth Industrial Revolution

Cloud technology and SME success

Operating your business in the cloud

5 Lessons from history on AI, automation and employment

History tells us that in the long run, technology is a net creator of jobs. Is this time different? Technology adoption can, and often does, cause significant short-term labour displacement, but history shows that in the longer run, it leads to the creation of a multitude of new jobs and unleashes demand for existing ones, more than offsetting the number of jobs it destroys, even as it raises labour productivity. An examination of the historical record highlights several lessons. Here are five

1 Employment in some sectors can decline sharply, but new jobs created elsewhere absorb those that have been displaced

All advanced economies have experienced profound sectoral shifts in employment, first in agriculture and more recently in manufacturing, even as overall employment has grown. In the United States the agricultural share of total employment declined from 60% in 1850 to less than 5% by 1970, while manufacturing fell from 26% of total US employment in 1960 to below 10% today.

Other countries have experienced even faster declines: one-third of China’s workforce moved out of agriculture between 1990 and 2015.

Throughout these large shifts of workers across occupations and sectors, overall employment as a share of the population has continued to grow. New industries and occupations have emerged to absorb workers displaced by technology.

History shows that technology has created large employment and sector shifts, but also creates new jobs.

2 Employment shifts can be painful

Even if enough new jobs have been created to offset those displaced by technology, the shifts can have painful consequences for some workers. During the Industrial Revolution in England, average real wages stagnated for decades, even as productivity rose. Eventually, wage growth caught up to and then surpassed productivity growth. But the transition period was difficult for individual workers and eased only after substantial policy reforms.

3 Technology creates more jobs than it destroys, including some you can’t imagine at the outset

New technologies have spurred the creation of many more jobs than they destroyed, and some of the new jobs will be in occupations that cannot be envisioned at the outset. One study found that 0,56% of new jobs in the United States each year are in new occupations.

Most jobs created by technology are outside the technology-producing sector itself. It is estimated that the introduction of the personal computer, for instance, has enabled the creation of 15,8 million net new jobs in the United States since 1980, even after accounting for jobs displaced. About 90% of these are in occupations that use the PC in other industries, such as call-centre representatives, financial analysts and inventory managers.

History shows that technology has creates new jobs

4 Technology raises productivity growth, which in turn boosts demand and creates jobs

Robust aggregate demand and economic growth are essential for job creation. New technologies have raised productivity growth, enabling companies to lower prices for consumers, pay higher wages and distribute profits to shareholders. This stimulates demand across the economy, boosting job creation. Rising productivity is usually accompanied by employment growth: it raises incomes, which are then spent, creating demand for goods and services across the economy.

5 We all work less and play more thanks to technology

Over the long term, productivity growth enabled by technology has reduced the average hours worked per week and allowed people to enjoy more leisure time. Across advanced economies, the length of the average workweek has fallen by nearly 50% since the early 1900s, reflecting shorter working hours, more paid days off for personal time and vacations, and the recent rise of part-time work. This growth in leisure has led to the creation of new industries, from golf to video games to home improvement.

Although the historical record is largely comforting, some people worry that automation today will be more disruptive than in the past. Could it be different? Or will the historical precedent hold? The current view is that the answer depends on the time horizon considered (decades or centuries) and on the pace of future technological progress and adoption.

On many dimensions, we find similarities between the scope and effects of automation today compared with earlier waves of technology disruption, going back to the Industrial Revolution. However, automation going forward might prove to be more disruptive than in recent decades – and on par with the most rapid changes in the past – in two ways. First, if technological advances continue apace and are adopted rapidly, the rate of worker displacement could be faster. Second, if many sectors adopt automation simultaneously, the percentage of the workforce affected by it could be higher.

In short, history is quite reassuring about the impact of technology on employment. While for some workers new technology can be highly disruptive, in the long run, if the past is any indication, creation will triumph over destruction.

AUTHORS l Susan Lund is a partner of the McKinsey Global Institute, where James Manyika is chairman and a director

The urgency of shaping the Fourth Industrial Revolution

In the 47 years since I founded the World Economic Forum, I have witnessed first-hand that when we change the way we talk, we begin to think differently too. Likewise, changing the way we think leads to changes in the way we act. This is true for all of us – whether you are a private citizen at home or making consequential decisions as a head of government, the language we use and the way we think about the world shapes our subsequent behavior

The shift in attitudes and approaches toward shaping the environment agenda over the last decade is quite a good example of this. When, in 2005, the World Economic Forum began to advance cross-sector dialogue and highlight the potential for public-private cooperation to help meet pressing global environmental challenges, such as climate change and water security, there was an absence of substantive collaboration among influential stakeholders on these sorts of issues. People tended to talk about and act on environmental challenges in quite separate ways, depending if they were working in government, business or civil society organisations, for example.

Today, though much work remains to be done, a decade of significant public-private engagement involving all types of stakeholders, has shaped a new, more collaborative agenda for action, such that business leaders, civil society heads and policy-makers talk, think and act about the need to protect Earth’s biosphere in quite a different way than 10 years ago. Indeed, in 2015, nations of the world – after a collaborative design process − agreed that the 17th Sustainable Development Goal itself be entirely focused on advancing global partnerships for the environment and sustainable development.

It’s therefore extremely gratifying to see that, since the publication of my 2016 book The Fourth Industrial Revolution, we have started to change the way we talk about technology and its impact on the world. More and more people are becoming aware of the power of emerging technologies to transform our economies, our societies and even who we are as human beings. Discussions in the media are now often concerned with questions of ethics, values and the social impact of new technologies. It’s common now to ask how artificial intelligence might be used to influence us, whether cryptocurrencies are more effective for promoting social inclusion or criminal activity or to worry about what kind of skills we need to develop in order to thrive in an era where technologies are both more pervasive and more powerful. The term ‘The Fourth Industrial Revolution’ has become common parlance, conveying the magnitude of the changes underway.

The challenge, however, is that we don’t have a decade to slowly shift mindsets before moving to act on the challenges surfaced by the Fourth Industrial Revolution. The speed, scale and scope of change that is underway today, coupled with the fact that entrepreneurs, companies and policy-makers are already creating rules, norms, techniques and infrastructure around new technologies, means that in 10 years it will be too late. The structure of new technologies will be more or less set, and the perspectives and values of those who created them will be firmly embedded within the many technologies that surround us and which have become part of us.

Our understanding of previous industrial revolutions is that, while they create huge wealth and opportunity, they also create significant harm: many people miss out on the benefits entirely, and it is most often those populations with the least voice or power who bear the negative consequences. It is therefore not good enough for us to leave the evolution of our technological future to chance, or to trust that market forces will create the future we want. Instead, we need to talk, think and act today.

That’s the motivation behind my new book, Shaping the Fourth Industrial Revolution. It seeks to expedite the way we understand, discuss and make decisions around emerging technologies. It outlines the most important dynamics of today’s technological revolution, highlights important stakeholders that are often overlooked in our discussion of the latest scientific breakthroughs, and draws upon more than 200 leading global thinkers to explore 12 different technology areas crucial to the future of humanity.

Thinking and acting round the Fourth Industrial Revolution demands a new type of leadership – an approach we call ‘systems leadership’. Systems leadership in this context doesn’t just mean leading on the design of the technologies themselves but also acting as a leader on how they are governed and the values they exhibit in how they affect people from all backgrounds.

New ways of thinking and acting are required from all stakeholders, including individuals, business executives, social influencers and policy-makers. But the different power and roles of stakeholders means there are different opportunities for governments, businesses and individuals to grasp today.

The most urgent task facing governments is to open the space for new approaches to technology governance. In particular, governments need to adopt the concept of ‘agile governance’ of technologies, matching the nimbleness, fluidity, flexibility and adaptiveness of the technologies themselves and the private-sector actors adopting them. This means thinking not just about what new rules might be needed but finding entirely new ways to create and update rules over time in collaboration with other sectors.

For businesses, the most important strategy is to experiment more, while simultaneously investing in people. The Fourth Industrial Revolution is still in its early stages, and the potential of new technologies is far from fully understood. However, we can anticipate some of the revolution’s dynamics, including the fact that disruption more and more often emanates from the periphery of industries and organisations. Only by directly experimenting with technologies can organisations see for themselves what they can do. Given that experimentation is best done by those closest to a business, this also means making concerted efforts to upskill employees and embracing an entrepreneurial mindset.

Finally, for citizens, the most important action is to be engaged on these issues, making their voices heard as voters, consumers, employees, members of civil society organisations and community leaders. Those of us lucky enough to be alive today have a responsibility to future generations to ensure they can live and find meaning in a sustainable, inclusive, technologically-driven future.

We should, therefore, all be part of building aspirational visions of the future, influencing how technologies are developed and adopted. As we change the way we talk, we change the way we think and create new opportunities to act. Let’s act, together, now, to make those aspirational visions of the future real for as many people as possible, all around the world.

AUTHOR l Klaus Schwab is the founder and Executive Chairman of the World Economic Forum, Geneva

Cloud technology and SME success

In South Africa, small businesses employ the most workers and contribute the most to GDP. Their prosperity directly corresponds to the country’s. But they are only as good as their tools – and cloud technology is an increasingly important tool. Here’s why

Chances are the rise of cloud computing probably hasn’t escaped your notice. Software as a Service application allows you to sign in from any connected device with no data loss and superior scalability; Platform as a Service tools enable you to develop applications easily; Infrastructure as a Service removes the need to invest in hardware – freeing up resources and space for the business. We’re entering an age where cloud technology is no longer optional, but essential.

Xero’s 2018 Technology Adoption Report highlights this. It reveals that 44% are already using cloud tools and enjoying a great number of benefits. Some 70% say they’re using this technology to save time – claiming that overall, they claw back more than 10 hours a week. When you have 10 hours a week more than your competitors, you have more time to prepare, focus on important tasks, and develop your strategy across crucial areas.

A further 52% go even further, claiming that cloud technology helps them save money. This obviously makes a serious difference to businesses in terms of having a deeper pool of resources, but it also puts a company in a better position when it comes to scaling up – and allows it to demonstrate a healthier cash flow to investors, partners, and shareholders.

Indeed, cloud technology has a prominent part to play in the future of South African small business economy: overall, 58% of businesses say it features in their business plans for 2018.

Enhancing efficiency

Small businesses are particularly attracted by the opportunity to improve or eliminate time-consuming administrative tasks and processes. Overall, 49% have said that cloud automation has boosted their overall efficiency – particularly when it comes to tasks such as pursuing invoices and getting paid on time. The advent of apps such as GoCardless, eWay and Stripe has brought concepts such as ‘smart payments’ (triggered when money arrives in your customer’s account) to the fore. These tools require far less involvement from the business, and facilitate faster transactions, greater security, and healthy, reliable cash flow.

But the availability of real-time data has been especially important for these respondents. Being able to access business-critical information from anywhere, and on any device, has made collaborating with colleagues and extracting insights much easier: some 38% have even suggested that it improves business continuity.

Democratising data in the worldwide workplace

In 2018, you don’t have to be big to benefit from big data. The information that was once the exclusive domain of larger providers are now available to a much wider corporate audience. Thanks to cloud technology, quality, breadth, depth, and availability of data are improving quickly, and costs are falling at the same time – democratising insights in an affordable, easy-to-consume way.

For instance, Spotlight Reporting allows CFOs and accountants to supply truly globalised reports, forecasts, and more to business owners in whatever regions an organisation operates in. This means that wherever your team is, it’s singing from the same hymn book.

Indeed, a crucial benefit of cloud technology is the way it transcends geographical borders. The early days of a business – where finding office space to lease or buy – can be the most challenging. Every penny you spend is a penny that could be spent elsewhere, but it’s equally important that your office is in a location that’s accessible to your employees, attractive to your clientele, and conducive to effective collaboration.

While you’re searching for your perfect workplace, many employees will prefer to work remotely – and indeed, consultants such as accountants (who work across multiple clients) may prefer to do so long after you’ve settled into your new space. Some 33% of survey respondents are especially pleased that cloud technology has facilitated remote working – allowing anyone, from anywhere, to access the information they need to discharge their job duties.

Connectivity issues

That said, the onward march of cloud technology is not quite as fast as it could be. Many small businesses concede that their existing setup isn’t quite up to scratch. Overall, 63% believe that reviewing their IT infrastructure is a high or medium priority, and 45% acknowledge that they could be doing more in terms of tech adoption. Of our respondents, 52% claim they’re just keeping up.

Though many have made great efforts to integrate cloud tools into their everyday working experience, there is clearly still work to do. Certainly, there are barriers that they can’t overcome on their own: the lack of connectivity is a problem for 41% of South African businesses, and if you’re outside a major city, poor Internet service can hamper even the most determined attempts to introduce new technology to your company. The Government needs to provide incentives to drive adoption in 2018 to improve economic performance.

Nonetheless, one of the principal advantages of the cloud is that it extends connectivity beyond the workplace. The faster you adopt, the faster you’ll benefit.

Reluctance to embrace new technologies is understandable. Upgrading processes, software, and infrastructure can take time, effort, and money – and in a struggling economy, all three are precious resources. But clinging on to the systems and tools of yesteryear is worse. The longer it takes to make technology a priority, the wider the competitive gap between you and your nearest rivals. To embrace the cloud is to embrace profit, productivity, and growth.

AUTHOR l Colin Timmis, Head of Accounting South Africa, Xero

Operating your business in the cloud

As ethereal as cloud computing sounds, it simply refers to an external server where you store data. It’s essentially a hard drive on which you lease space. Cloud computing has improved over the past several years and has extended to storage space, software as a service (SaaS) and infrastructure as a service (IaaS)

Deciphering cloud services

With some of the world’s most prominent tech companies rolling out cloud services, cloud computing has become all the rage. Yet confusion about what the cloud is and how it works seems to be growing, not diminishing. It is not just consumers who are puzzled; many business owners, corporate professionals and even some IT people do not fully comprehend this nebulous concept. So, what exactly do companies and techies mean when they refer to the cloud? Let’s shed some light on the cloud and cloud services to help you navigate the bewildering tech talk.

Tackling the cloud

The cloud is nothing more than a metaphor for the Internet, or more literally, the vast array of storage servers around the globe that comprise it. When a file is stored in the cloud, this simply means the file resides on one of those servers and can be accessed through an Internet connection. Cloud applications, such as web-based email, work in the same way; you access the application through a web browser or app on an internet-connected device. Applications and files in the cloud differ from local ones, which are saved locally on a computer hard drive.

What is a cloud-based service?

In the broadest sense, cloud-based services can be any type of web service or application that lives in the cloud and is accessed online. For instance, Google’s Gmail is a cloud-based service, as is Facebook. Both sites are vastly different in purpose but are cloud-based services because of how they operate: you access the service, and the files you save through them, via the Internet.

Differentiating cloud services and service providers

It seems that everyone has a slightly different definition of what a cloud service is and what it should provide. While not all cloud services are created equal, they do provide the same basic functionality. Cloud services provide computing as a service rather than a product, essentially giving you your own personal hard drive in the cloud, or online. You can upload and store your files on the provider’s servers, via an Internet connection, rather than locally on your own computer or another storage device.

There are numerous advantages to using a cloud service. Most appealing is the fact that you can access any of your stored files, photos, music, Word documents and more from any Internet connection on a computer or handheld device. This gives you convenient access to your files no matter where you are. It also ensures you’ll never lose your files if your local hard drive is damaged or stolen.

Truth be told, the cloud is simple and there’s a good chance you are already using some type of cloud-based service. How you utilise the cloud moving forward is highly dependent on your habits and the types of digital content you most frequently use. Regardless, a solid understanding of what the cloud is and how it works will help you stay ahead of the curve when it comes to this revolutionary technology.

An increasing number of businesses are using business intelligence (BI) solutions to spot trends, identify risks and find new opportunities. Using such tools enables your business to transform dense company data into easily digestible insights and make informed decisions to help you maintain a competitive edge. According to a study by IBM and MIT Sloan Management Review, organisations that achieve a competitive advantage with data analytics and business intelligence are 2,2 times more likely to substantially outperform those industry peers who do not use these technologies.

It is rare to find a business today that sticks to strict 9:00 to 5:00 operations. The most successful businesses have become much more fluid, using cloud and mobile technology to broaden their reach and compete within the market. These businesses often need to communicate and share information with customers, partners and suppliers in different time zones and different countries and continents. Cloud storage synchronises information across different devices, allowing you and your colleagues or business partners to view the latest version of a file no matter where you are working or what device you are using. When you use cloud-based productivity and collaboration tools, you can stay on the same page with distant partners and offsite employees, as all can see the most up-to-date content. The cloud also provides high-level security and privacy while ensuring the access control you need.

From an IT professional’s perspective, operating a data centre in the cloud has important benefits as well. For one, all the hardware management tasks are performed by the cloud provider. Your servers, switches and storage arrays all become virtual versions of themselves running on pooled hardware managed by a third party. If a server in a provider’s data centre tips over, for example, it is the responsibility of the cloud service provider to seamlessly move your workloads to other hardware – without downtime on your end. That is the goal and, while they’re not perfect at it, reputable providers all boast upwards of 99% uptime.

AUTHOR l Adrian Vaglietti, AV Management Consulting

Industry ripe for disruption

The purpose of insurance – to protect people from financial loss – remains, but the latest technology innovations are set to change the way the market works for the benefit of customers. Incumbent insurers need to embrace change and transform, or they may not be in business for much longer

Th first insurance company was established in the year following the Great Fire of London in 1667. It’s a business model that has changed little since then, but a variety of breakthrough technologies are set to spur a fundamental transformation of the insurance industry. That’s according to a report by The Institute of International Finance, Innovation in insurance: how technology is changing the industry.

According to the report, cloud computing, the Internet of Things (IoT), advanced analytics, telematics, the global positioning system (GPS), mobile phones, digital platforms, drones, blockchain, smart contracts, and artificial intelligence (AI) are providing new ways to measure, control, and price risk, engage with customers, reduce cost, improve efficiency, and expand insurability.

Jaqueline van Eeden, insurance head of IT services company Wipro in South Africa, says a change of internal structure and mindset is required to effect digital change in an industry that is typically process driven and caught up in legacy infrastructure, siloed data, process-oriented red-tape, and a traditional mindset.

‘New technologies are enabling the creation of new insurance products, services, and business models,’ Van Eeden says. ‘These emerging technologies present opportunities for traditional insurers to modernise and reinvent themselves. Importantly, it is also forcing traditional players to respond to new sources of competition from well-funded and agile software companies. As fast as entrepreneurs have been coming up with ideas for insurance technology, investors have been rushing to fund them.’

It’s not hard to see why. Traditional venture capitalists see insurance – with its large, well-established incumbents and well-worn products – as fertile territory for disruption. As a result, disruptors are beginning to make inroads in the market by focusing on unmet consumer demand, bringing down cost, and providing new products and services.

Research by Accenture indicates that rather than viewing these emerging players as threats, innovative insurers recognise exciting new opportunities to work with insurtech start-ups to reach into new markets. With their expertise in technologies, such as AI, IoT, blockchain, big data and analytics, insurtechs represent potential solutions for the kinds of challenges insurers are facing in this increasingly digitised and competitive space.

‘The challenge for traditional insurers lies in how to best take advantage of the opportunity that insurtechs offer to leverage cutting-edge technologies to reach their customers online, through mobile, and 24/7,’ Van Eeden says. ‘The other advantage is that partnering with smaller, nimble start-ups helps to foster a culture of innovation for existing insurers. The partnership set-up enables insurance companies to focus on what they do best, insurance, and insurance technology companies to empower insurance companies to drive digital disruption.’

The rise of the Consumer Age has introduced new insurance requirements from customers who are looking for improved service, lower cost and faster processing times, Van Eeden adds. ‘Today’s customer also demands multiple interaction options, flexible insurance products and far more transparency than ever before. Customers are less concerned about products and more interested in “what’s in it for me?” Millennial consumers in particular demand less human interaction, ease of transacting, the flexibility of transacting how they choose to, and everything instant.’

Van Eeden cautions that an ‘adapt or die approach to innovation is essential and extends well beyond tweaking existing systems. ‘Decades-old legacy IT systems the biggest obstacle to digital transformation. Not only are these systems expensive to maintain, but they have also become more and more complex as newer solutions have been bolted on over time, layer upon layer. In the South African context, insurance companies that are keen to innovate have been hamstrung by what they see as the costs of innovation, but the reality is that it’s becoming more expensive to service and maintain legacy systems than it is to innovate. In fact, the industry as a whole is lagging as a result of the focus on keeping systems running instead of replacing them with newer and better technology.’

Digital technology, which has been successfully embraced by the retail banking industry, offers endless possibilities to engage with customers regularly and sell more policies. Among the most interesting new developments is wearable technology which can be used in health insurance, with fitness bands monitoring policyholders’ health. Vehicle insurers meanwhile can embed devices in cars to reward drivers for safe driving. However, these digital technologies require systems that are linked from the front, through the middle to the back offices, and that’s where the barriers lie.

AUTHOR l Monique Verduyn

Illustrations Liézel Els

]]> IntegriTAX https://www.accountancysa.org.za/integritax-2/ Thu, 05 Apr 2018 21:55:38 +0000 https://www.accountancysa.org.za/?p=10071

Tax morality and the CA(SA)

The IT14SD process can be a huge headache for the unsuspecting taxpayer

Tackling the tax morality challenge

Tax morality and the CA(SA)

Everyone who has studied tax should be familiar with the famous ruling in the Duke of Westminster Case,1 which is often cited in defence of (usually) aggressive tax ‘planning’. In this case Lord Tomlin ruled as follows:

‘Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax.

More simply stated, the principle espoused is that taxpayers may arrange their affairs in such a way that they will incur the least tax liability, provided this is done within the confines of the law.

Many other court cases have tested this principle and tax legislation has changed to address what tax authorities saw as tax avoidance rather than ‘efficient’ tax planning. The Duke of Westminster principle is therefore becoming less relevant in our changing times, both locally and globally.

TAX PLANNING OR TAX AVOIDANCE?

During the recent global economic crisis, governments were faced with addressing large budget deficits and finding someone to pick up the bill. Who better than the taxpayer – both large corporates and high net worth individuals alike? Now, with ongoing global corporate scandals, to which South Africa is no stranger, the focus is on addressing corporate responsibility and accountability by corporates and individuals. Globally, tax is making headlines with an increasing focus on tax avoidance or aggressive tax planning, to increase the revenue collection by governments.

While specific anti-avoidance rules are already available, general anti-avoidance rules (GAARs) were adopted in South Africa and elsewhere, coupled with a greater focus on addressing base erosion and profit shifting. The application of GAARs, given their general nature, depends on the facts and circumstances of each case, and is considered subjectively by the relevant tax authority. When our GAARs were promulgated, the then Minister of Finance, Trevor Manuel, commented in Parliament that the new anti-avoidance rules empowered SARS to bring to book all the anti-avoidance schemes that had escaped the tax net for a number of years.

From a tax authority perspective, the effectiveness of the GAARs is grounded in their uncertainty, as more cautious taxpayers and their advisors may hesitate to create new structures when their tax implications were uncertain. Alternatively, there are those taxpayers who could be of the view that the uncertainty provides a tax planning opportunity – that is, structuring the facts to fall outside the scope of the ‘general’ law.2

It is therefore contentious whether, in structuring such transactions, decisions should be based on the letter of the law, that is, a strict interpretation of the actual words, or by taking into consideration the spirit of the law. Therefore the question is: does one choose between what is legally correct or what is morally correct?

When addressing blatant tax avoidance, tax authorities are cognisant of the impact that tax policies, tax administration and levels of corruption in a country have on the tax morality of the taxpaying nation. In his 2017 mid-term Budget Speech the then Minister of Finance, Malusi Gigaba, acknowledged that tax morality was declining, given the extensive administrative and tax policy challenges and noting the focus on misspending. Earlier that year, Pravin Gordhan, then Minister of Finance, noted in his Budget Speech that an effective tax system demanded an effective tax administration and a willingness of (corporate) taxpayers to comply.

THE CONCEPT OF TAX MORALITY AND A FAIR SHARE OF TAX

This is where the concept of ethics, or in a tax context, tax morality, comes in – currently a much talked about term globally.

Keeping it local, at his speech at the 2016 Tax Indaba, then SARS Commissioner Tom Moyane called for tax morality. Shortly after that, at the 46th annual International Association of Financial Executives World Congress held in Cape Town, Mr Moyane again raised this concept when addressing business executives he stated that the tax morality of an organisation followed that of its leader and its board.

Just what is tax morality and what does it mean to different people/entities? The concept of morality speaks of behavioural standards of ‘right’ or ‘wrong’. Considering a taxpayer’s tax morality, this is an assessment of the taxpayer’s behaviour as right or wrong in the circumstances.

At the 2017 IFA Congress held in Brazil, one of the panel discussions considered tax morality to some extent. It was submitted that the most common measure for determining whether a taxpayer’s behaviour was right or wrong, was ‘fairness’ – more specifically, whether a taxpayer (individual or corporate) was paying a ‘fair share’ of tax.

Most would say that the answer depends on who is asking, because the problem with this concept is that ‘fairness’ is a subjective measure – and who determines what is fair and in what context? The IFA Congress explored a number of concepts relevant in a South African context, including the following:

What sort of deficit is the country piling up?
How much personal tax is each taxpayer paying?
How dependent is government on personal tax versus other taxes?
How graduated are a country’s personal tax rates?

What are the average tax rates for the top 1% (contributing the bulk of personal income tax) versus the 99% and how do these compare?

How do average rates compare to the highest marginal rate?

In South Africa, taxpayers in the top 1% will argue that they pay more than their fair share of tax, yet from a government perspective even more should be demanded of them to achieve equity or fairness amongst all citizens.

Possibly a more important question is how are the taxes used? This leads to the question of the tax morality of those charged with distributing the taxes collected for the benefit of society at large. And the question becomes: what is a fair share in relation to the benefit enjoyed as a result of the taxes paid?

When tax authorities refer to tax morality, they mean taxpayers must pay their taxes responsibly and ‘morally’, even if it resulted in paying more taxes than legally required. That is, if there is an unintended ‘loophole’, it should not be used!

TAX MORALITY AND THE CA(SA)

All of this being said, what does it mean for the CA(SA)?

Well, as was the case at the inception of the profession more than 100 years ago, integrity remains the cornerstone of the CA(SA) profession. Integrity equates to ethics and morality.

The opening lines of the SAICA Code of Conduct state: ‘A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest.’ That is, CAs(SA) have a duty to protect the public interest and not only the interest of an individual client or employer.

It is these qualities and characteristics that sets the CA(SA) apart. These qualities must always be considered when determining whether a transaction or structure, and related disclosure in the tax return, is legally and morally correct.

Given the number of recent media reports that have drawn public attention to individual CAs(SA) who allegedly conducted themselves in a manner not reflecting the characteristics of what a CA(SA) should stand for, there are many who question the level of integrity and ethics of CAs(SA), based on the alleged actions of a handful. On the other hand, the rest of the CAs(SA) are asking what is SAICA doing to address these allegations? (This is being addressed by the SAICA leadership and while it is not the focus of this article, it obviously cannot be ignored.)

However, the bigger question is what are the rest of our 42 000+ members doing to demonstrate the true qualities of the CA(SA)? Because ultimately, each and every CA(SA) has the power to bring about the positive changes that we want to see in our society and in the reputation attached to our brand.

AUTHOR l Somaya Khaki CA(SA) is Project Director: Tax at SAICA

The IT14SD process can be a huge headache for the unsuspecting taxpayer

SARS may randomly select taxpayers for risk profiling, and a useful tool for SARS over the past few years has been the IT14SD reconciliation which is in effect a supplementary declaration for companies to reconcile income tax, VAT, PAYE and customs declarations after a corporate income tax return has been submitted. While the reasoning behind requiring these reconciliations is accepted, what is of concern is that SARS officials can easily draw the wrong conclusions about the reasons for discrepancies and that they have even issued assessments based on these discrepancies.

It is important to understand that the Tax Administration Act 2011 (TAA) does not currently make provision for the IT14SD process, which means that it is arguably not a return (that is, not something on which a self-assessment or liability for tax is based). Nor is it a record or relevant information (that is, it is not something held by the taxpayer but is created under instruction from SARS). The concern is the manner in which this process and its outcomes are applied by SARS officials, as there are instances where this has been inconsistent and to the prejudice of taxpayers, leading to significant tax disputes that are costly and ineffective for both SARS and the taxpayer.

The critical issue is that where a discrepancy appears in the reconciliation in terms of the IT14SD, this does not mean that there is prejudice to the fiscus. The discrepancy may be caused by a number of underlying reasons and may be as simple as inadvertently omitting an expenditure or income item from the tax calculation. It is therefore important that, once a discrepancy is identified in the disclosure to SARS, the cause of the specific discrepancy is explored and that SARS is mindful of the fact that it may potentially be resolved with ease.

Of concern is cases where the SARS officials simply assume that a discrepancy in the IT14SD reconciliation is a basis for issuing an assessment. By way of example, the taxpayer would submit an IT14SD showing a VAT reconciling item of say R14 million. The SARS official would, without further ado, issue a letter of audit findings to the taxpayer indicating that an assessment will be issued for the ‘grossed up’ income tax amount of R114 million, unless proof of the discrepancy is provided. On the basis that there is no statutory prescribed process governing the IT14SD process, the taxpayer is given very little time to respond and the assessment is issued.

The only manner in which the taxpayer can properly deal with the matter to protect his/her rights as a taxpayer, is to initiate a dispute process by lodging an objection and subsequently noting an appeal. Needless to say this is a costly and time-consuming process, in circumstances where there is clearly no proper legal basis for the assessment.

Proposals have been submitted to National Treasury and SARS for the TAA to specifically include a legislative provision aimed at governing the IT14SD process and setting out specific timelines and the duties and obligations of the SARS officials responsible for this process. However, this must be tabled for inclusion in the budget proposals and after that could take a significant amount of time to be legislated.

In the meantime, taxpayers should continue to avail themselves of the objection and appeal process and make sure that the procedural time frames are carefully observed.

A word of caution

Taxpayers should also remember to manage the outstanding tax debt and therefore submit a suspension of payment request. This will avoid surprises where SARS may legally enforce the tax debt in terms of the pay-now-argue-later principle. A possible alternative would of course be to rely on the specific provision in the TAA, which allows SARS to overturn a decision in certain specific circumstances.

AUTHOR l Christel van Wyk is a Project Director: Tax at SAICA

Tackling the tax morality challenge

The issue of ‘tax morality’ has become quite topical in South Africa. However, it is not a topic which is open for debate, since paying your tax is not debatable; it is mandatory

I have found myself having to make this point far too often lately. At least, the then Minister of Finance has acknowledged that ‘tax morality is a crucial component of a healthy democracy’. He added: ‘In recent years, corruption and wasteful expenditure in the public sector have eroded taxpayer morality.’

However, simply acknowledging a problem is insufficient; it takes specific remedial action targeted at the root cause to eradicate it. It is encouraging to note that two causes were openly admitted in the 2018 national budget speech, the first being potential avoidance in response to personal income tax (PIT) increases coupled with poor public governance, both in the tax administration system itself, and the second being wasteful expenditure by government and state-owned entities. The question is whether government has offered any meaningful remedial action?

First, there has been a halt in further PIT rate hikes, which may go some way toward addressing the potential avoidance issue. However, the dampened inflationary adjustments to the bottom three tax brackets, together with the suspension of any inflationary tax relief for the top four brackets, will mean that the PIT taxpayers will not benefit from inflationary salary increases since they will end up handing over their hard-earned salary increases to SARS in the form of increased tax payments.

Even though many potential disadvantageous tax rate increases were predicted across various tax types for PIT taxpayers, apart from income tax, the only ones which materialised were increases in estate duty to 25% on estates above R30 million, as well as an increase in donations tax to 25% (but only for donations exceeding R30 million in a tax year). While we are all immensely grateful that the top PIT rate of 45% and the inclusion rate for CGT were not increased (and the estate duty and donations tax increases are quite progressive, since they hit only the top end of PIT taxpayers), the amount of tax already payable by PIT taxpayers, across all tax types, is still quite staggering.

This means that the measures to be implemented by government to address poor governance need to be implemented effectively and without delay, otherwise the disillusionment potentially felt by PIT taxpayers may not be quelled. The specific measures in relation to SARS’s governance and improved administration include a commission of enquiry into the functioning and governance of SARS, implementing measures to strengthen the operational independence of the Tax Ombud, the introduction of a supervisory board, and making SARS accountable to the Minister of Finance, all of which are welcomed. The measures targeted at tackling governance issues within government and state-owned entities, such as denying a tax deduction for fruitless and wasteful expenditure, are in line with the President’s remarks in his inaugural State of the Nation address last week.

There are numerous other initiatives, such as the continued focus on replacing ineffective boards and executive managers at various state-owned entities with appropriately skilled teams, provision for contingencies related to the commission into state capture (which may also require funding for critical Chapter 9 institutions such as the Auditor-General and prosecuting authorities), strengthening the controls within the Office of the Chief Procurement Officer (so that deviations from normal procurement processes will only be allowed in rare, well-justified cases) and the containment of baseline spending across the public sector with a specific focus on capital investment via infrastructure spending (which may require the assistance of development finance institutions and the private sector in the longer term).

In the final analysis, the budget was described as ‘tough, but hopeful’. One can only agree that an increase in the VAT rate to 15%, together with an increase in the fuel levy of 52 cents per litre, will be tough on all South Africans. However, we have cause to be hopeful that the measured selection of PIT taxpayer rate hikes, together with government’s commitment to combating wasteful expenditure and corruption, will be sufficient to eradicate the tax morality debate – because then real change will be achieved resulting in PIT taxpayers receiving value for the immense contribution they make to the fiscus.

AUTHOR l Tracy Brophy CA(SA) is Chairperson: SAICA National Tax Committee

]]> VIEWPOINT: Understanding trusts: Providing for your dependants https://www.accountancysa.org.za/viewpoint-understanding-trusts-providing-for-your-dependants/ Fri, 01 Dec 2017 10:00:48 +0000 https://www.accountancysa.org.za/?p=7032 Despite pursuing a financial career, chartered accountants seldom obtain proper advice when it comes to managing their own personal finances. This includes dealing with their last will and testament. One of the best ways of protecting any money or assets left behind for your children or other dependants when you pass away is by creating a trust.

A trust is generally created for a specific purpose, the primary goal being the protection of the funds invested into the trust as well as the beneficiaries thereof. There are two types of trust, namely inter-vivos trusts and testamentary trusts. An inter-vivos trust is created between living persons and a testamentary trust derives from a valid will of a deceased.

Trusts are relatively easy to set up and may be used for many purposes. However, one needs to ensure that the trust is being created for the right reasons. It is also important to understand that there is a cost attached to the founding of a trust and that it is subject to minimum accounting and disclosure requirements. As a result, it is better to seek the advice of a financial planner when creating a trust to ensure that it complies with all the legislative requirements and is set up correctly.

There are many benefits to creating a trust:

A trust can either last in perpetuity, or can be set up for a specific timeframe. An example of the latter is when a beneficiary reaches a specific age. Funds are managed in the trust on behalf of the dependants or children until they attain the age of majority or a specified age.
A trust prevents the dependant’s funds from being paid into the Master of the High Court’s Guardian’s Fund, where they would have no control over how funds are to be invested.
A trust can offer financial protection to dependants who might be disabled or have special needs.
Assets in a trust are protected against risks such as creditors, insolvency, marriage, divorce, or accrual claims.
Trust funds are managed on behalf of children who may lack financial and legal skills.
Special trusts for minor heirs and disabled persons have a number of tax benefits.

Why a trust fund?

A trust fund can last indefinitely, offering wealth protection and wealth creation benefits to future generations.

There are numerous examples of situations where a trust fund could have benefited a family or family member. However, many complexities and factors need to be taken into consideration when setting up a trust. In addition, trustees are subject to the Trust Property Control Act, the Master and our courts, as well as common law.

Your financial planner will be able to guide you through the process of determining the need for a trust, as well setting it up.

Author: Tiffany Boesch CA(SA) is group financial director of PPS

]]> VIEWPOINT: Trusts and B-BBEE https://www.accountancysa.org.za/viewpoint-trusts-and-b-bbee/ Fri, 01 Dec 2017 10:00:42 +0000 https://www.accountancysa.org.za/?p=7022 Family trusts, business trusts, property trusts, employee share trusts and even unit trusts – a trust is an age-old vehicle used for various purposes around the world. So why the large-scale speculation whether a trust can be used as an investment vehicle in B-BBEE equity transactions? The reason, in my opinion, is that trusts are often misunderstood as to their legal status and trustees are often not ‘trusted’ (excuse the pun) as being genuinely independent and acting in the best interests of the trust beneficiaries and not themselves.

Let’s remind ourselves of the following definition in the Trust Property Control Act 57 of 1998:

[Trust] means the arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed –

to another person, the trustee, in whole or in part, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument; or
to the beneficiaries designated in the trust instrument, which property is placed under the control of another person, the trustee, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument, but does not include the case where the property of another is to be administered by any person as executor, tutor or curator in terms of the provisions of the Administration of Estates Act 1965 (Act 66 of 1965) …

The Amended Tourism B-BBEE Sector Codes, gazetted by the DTI on 20 November 2015 (Gazette 39430), clarifies this aspect as follows:

The discretion to the fiduciaries referred to in 7.3.1. above, must be exercised in accordance with the terms of the constitution, MOI or trust deed. Subject to compliance with the remainder of the rules and additional rules as embodied in Annexe TSC100 B, C and D, such discretion will not disqualify the juristic person from qualifying for recognition under the Ownership Scorecard …

Yes, if we all respect the legislation governing trusts, a properly drafted and implemented trust deed has the power the result in genuine broad-based empowerment.

B-BBEE PERSPECTIVE

Author: ManagingIt is vital to note that, from a B-BBEE perspective, most trusts will have to meet the rules for broad-based based ownership schemes and employee share ownership programmes outlined in the B-BBEE Codes of Good Practice to be recognised as a qualifying black shareholder in a company. For this reason, it is important that the objectives of the trust be properly considered and the wording in the trust deed fully meet these rules. Implementation of the provisions of the trust deed is obviously the most important!

Director of NetValue Equity Partners

]]> VIEWPOINT: Sustain business by sustaining society https://www.accountancysa.org.za/viewpoint-sustain-business-by-sustaining-society/ Fri, 01 Dec 2017 10:00:41 +0000 https://www.accountancysa.org.za/?p=7026 Today, global society demands that organisations do well by doing good – make profits while sustaining society. It’s an expectation driven by global financial crises, savvy millennials, the effect of digital technologies on freeing the flow of information and more.

Today’s healthcare insurers have a powerful social role to play. Alongside government, they can directly monetise better health, aligning commercial interests with bettering society – so creating shared-value. Discovery pioneered shared-value insurance 25 years ago. This business model has changed the face of global insurance.

Applied to health insurance, shared-value allows for early identification of the behavioural nature of risk. Our products have shifted client behaviour towards healthier, safer choices. As our clients are encouraged to behave in a sustainable way, this impacts risk reduction and creates actuarial surplus and profits. This surplus is both used to fuel further innovation for sustainability and shared with clients, rewarding their efforts and loyalty and feeding a healthier society.

The model is as powerful when applied to insurance. South African roads are some of world’s most dangerous. Accidents result in a staggering 10% cost to our GDP. Our road accident death rate – at 31/9 per 100 000 people – is higher than that of the other Brics countries.

Much of the risk on our roads is behavioural in origin. Using cutting-edge telematics technology, Discovery Insure measures and rewards good driving behaviour so incentivising drivers to reduce their risk, translating into decreased frequency and severity of claims, reduced driver fatalities and safer roads.

Another compelling process is set to impact sustainability. After extensive industry engagement, SAICA, under the guidance of project director for integrated reporting, Loshni Naidoo, has established the Health and Wellness Advisory Group (HWAG) to champion incorporating Health and Wellness Reporting into integrated reporting. SAICA will sponsor the initiative which aims to identify advocacy platforms for voluntary adoption of health and wellness reporting amongst corporates. A similar approach was followed by the Carbon Disclosure Project (CDP) with good results.

Reporting on the health and wellness in the workforce will mean the integration of health metrics into traditional corporate reporting, aligning with and expanding on existing reporting frameworks like the International Integrated Reporting Framework and Global Reporting Initiative (GRI) G4 guidelines. Health metrics add to a more comprehensive interpretation of Human Capital, one of the six capitals included in the Integrated Reporting Framework, so enhancing the ideal of sustainability.

Sustaining society means sustaining business

Society at large wants to see businesses and their leaders commit to a deeper purpose, one that removes perceptions of short-term profit for a few, won at long-term cost to the many.

Sustainability isn’t just the right thing to do from a marketing, brand-love and compliance perspective. We all benefit when we align business strategy to the longevity and sustainability of society. I have shared two powerful, scalable examples of ways in which to contribute to sustainability in our businesses, examples that prove that bettering society as a whole makes business sense on every level.

Author: Brett Tromp CA(SA) is CFO of Discovery Health

]]> FEATURE: Plan ahead: 12 month financial guide https://www.accountancysa.org.za/plan-ahead-12-month-financial-guide/ Fri, 01 Dec 2017 10:00:37 +0000 https://www.accountancysa.org.za/?p=6997 While it may be daunting to plan your finances a whole year in advance, it is possible to break it up into more manageable chunks by dealing with one area per each month.

January: Create a budget

Develop a budget template by recording both expenses and income so that you can easily identify areas of overspending and act on this before it gets out of hand.

February: Tax season

With the end of the tax year looming, you should use this month as an opportunity to maximise the tax benefits provided by products, such as retirement annuities and tax-free investment accounts.

March: Pay debts

Identify any accounts or loans with high interest rates and try to pay as much money per month as possible toward these.

April: Draft your will

Estate planning will ensure that you have enough liquidity in your estate to avoid a situation where beneficiaries end up having to sell off assets to pay estate duty or capital gains tax.

May: Income protection

Ensure that you have income protection cover in place to protect yourself against the financial risks associated with sickness or disability, which could result in you losing your ability to earn a monthly income.

June: Home maintenance

Most standard short-term insurance policies will only cover damage that is unforeseen, so if it is determined that damage is caused by lack of maintenance, the claim could be rejected. As a result, it is important to conduct basic maintenance checks and repairs to your property.

July: Savings month

July is National Savings Month and provides a timely reminder of the importance of setting specific goals for a long-term savings plan. Consider setting up a monthly a debit order that will automatically transfer funds into a savings account.

August: Check your investments

If you have an investment portfolio, you must assess it at least once a year to ensure that you are still on track to achieve your goals.

September: Retirement planning

It is imperative that you begin to set aside a sufficient monthly contribution towards your retirement to allow the investment to grow as much as possible over the years to come.

October: Medical Aid

As your medical needs may change during the course of the year, a review now will allow you to determine whether you need to upgrade or downgrade your medical benefits.

November: Saving for education

The cost of education in South Africa has soared over the past few years and parents need to start saving for their children’s education as soon as possible.

December: Changing careers?

Avoid the temptation to spend your accumulated retirement funds on Christmas presents or a holiday, this money should only be used for its original intended purpose – retirement.

The good news is that you do not have to undertake this journey alone. A lifestyle financial planner can help you to make the right decision for you throughout your life. A good planner will coach you to do the things you do not necessarily want to do, in order to live the life you want to live. You should not wait until you are contacted by a planner before you start working on your financial plan, but rather collaborate with a planner who understands your personal needs in order to achieve financial independence.

Author: Tiffany Boesch CA(SA) is Group Financial Director of PPS

]]> VIEWPOINT: Trials and tribulations dismantling trusts https://www.accountancysa.org.za/viewpoint-trials-and-tribulations-dismantling-trusts/ Fri, 01 Dec 2017 10:00:32 +0000 https://www.accountancysa.org.za/?p=7028 I chaired the session on this topic at the 2017 Tax Indaba. The experts on the panel that provided valuable input into the discussions on stage and also reflected below were Cheryl Howard CA(SA) from Talaria Wealth, Johann Jacobs from CDH Legal, and Louis Venter from Wealth Succession.

There are various reasons for creating a trust. If, however, a trust was created solely for tax planning purposes then the primary reason for establishing a trust is missed. Taxpayers should not terminate a structure that may have sound reasons for establishment in the first place. A trust ensures continuity of family and transfer of legacy to future generations. Assets are protected and the founder has limited liability. A trust offers protection for minors, the aged, mentally and physically challenged. From a tax perspective, a trust aids in estate planning by pegging the estate for the founder.

Game-changing tax legislation/protocol have been introduced that affects trusts. SARS previously introduced a comprehensive trust tax return which was coupled with cross referencing. In addition, the capital gains tax inclusion rate for normal trusts was increased effective 1 March 2016 to 80%. This brings the effective inclusion rate for normal trusts to 36%. Section 7C applies with effect from 1 March 2017 and is applicable on a loan or credit provided to a trust by a natural person, on or after that date. Where interest is charged less than the official rate, a donation takes place on the difference between interest that is charged and the official interest rate.

Further changes are currently proposed to section 7C – that is, new anti-avoidance in respect of loans made to companies, new anti-avoidance on the transfer of loan accounts to current or future beneficiaries, and the exclusion of employee share incentive trusts from the application of section 7C.

Tax consequences are triggered on terminating a trust. There will most likely be capital gains on the disposal of assets held by the trust. The capital gains will be either be attributed to the donor, taxed in the trust or in the in the hands of the beneficiaries. Transfer duty could be applicable for properties being repaid as loan account repayments. The exemption applicable to trust distributions will not apply as the distribution is not in terms of a will or written instrument but rather an instruction payment. Securities transfer tax will be levied on the transfer of shares held by the trust.

Value-Added Tax (VAT) output will also be triggered when a trust that is registered as a VAT vendor ceases to be a vendor. Income stemming from the assets as well as the assets previously held in the trust are back in the tax net of the beneficiaries.

Some advice

Taxpayers should be careful of knee-jerk reactions. In terms of the Estate Duty Act, the Finance Minister can increase the estate duty rate at his discretion. A review of the worldwide comparative estate duty rates indicate that South Africa is behind in this regard. To increase the rate by a percentage is easy and would also be a quick and simple method of collecting additional revenue. Structures that have been put in place to achieve certain estate planning objectives could then unnecessarily be terminated and the tax consequence could be far greater.

Professional costs for maintaining a trust structure is relatively low in comparison to investment advisor fees.

Muneer Hassan CA(SA) is a Tax Consultant, Senior Lecturer in Taxation at UJ and Lecturer on the Gauteng Board Course

]]> VIEWPOINT: Sustainable Lifestyles https://www.accountancysa.org.za/viewpoint-sustainable-lifestyles/ Fri, 01 Dec 2017 10:00:27 +0000 https://www.accountancysa.org.za/?p=7030 So much has changed since the start of the Industrial Revolution. If you were to compare what the media, advertising and the world have been selling you for a so-called happier life, it is almost contradictory. What has the opportunity costs been for these lies? Today you know that true fulfilment comes from within.

Happiness is the new rich, with inner peace being the new success and health the ultimate wealth.

You have no control as disruption innovation is changing the way you live and work. In an age of radical transparency, you have more information readily available to make better decisions. What about creating your own sustainable lifestyle?

Sustainability is the ability to be sustained, supported, upheld and confirmed.Further definitions state sustainable lifestyles as attempts to reduce your use of natural and personal resources in equilibrium. Avid followers will tell you the key is holistic natural balance. This aligns with where true fulfilment comes from.

The Grand Canyon is a good example to illustrate balance. Life isn’t perfect and you will always have some canyon. The narrower the canyon, the closer to your balance you are. The wider the further. To get from one side to the other might mean a small jump or maybe building a bridge. For self-sustainability you want to need less resources and depend on yourself – and the narrow canyon should therefore be your aim!

The most important decision you can make is to find your balance, guard it with everything you have, and live it daily. And a good start is the five foundations defining you:

Spirit: Your compass, purpose and source of strength. What do you need to do to have your spirit aligned to create a sustainable lifestyle that honours you?
Body: Your engine room that gets fuel through the food you feed it. Health can’t be bought. When your body isn’t working optimally, everything else will be affected. How much thought is going into the fuel you put in your body based on your exact needs?
Self: Your unique blueprint. Apart from your own loss of enjoyment in living your true self, what will the world lose out on if you don’t honour your gifts, talents, interests and experiences?
Relationships: Your main source of happiness. You are the average of the five people you spend the most time with. What do you need to do sustainably to be the highest average that honours you?
Career: The vehicle that makes the other four possible. Estimates show that by 2020, 53% of the world will be self-employed again because of the need to self-express and enjoy life. What are you doing to create the career that honours you?

To sustainable lifestyles in 2018!

Your sustainable plan

Sometimes when you have too many goals, you never even start as the challenge seems to big. Maybe this time have one goal for the next six months under each of the five foundations discussed here. Make sure it is tangible and measurable in order to know when you have achieved it. And If you feel your goal needs a strategy and actions, get that sorted.

Now hit hard at creating your sustainable lifestyles.

Remember, life is not about the destinations only but about that journey getting there. Enjoy and learn from your journey.

Author: Stanford Payne CA(SA) is an ICF-accredited executive and business coach

]]> SA’s banks are finding new ways to stay relevant in the market https://www.accountancysa.org.za/sas-banks-are-finding-new-ways-to-stay-relevant-in-the-market/ Tue, 21 Nov 2017 11:11:22 +0000 https://www.accountancysa.org.za/?p=6949 South Africa’s banking industry is rapidly evolving in response to regulatory changes, economic pressures, technological advances and innovation in digital. “The evolution of technology and increased customer expectations combined with the emergence of disruptive competitors, is placing significant pressure on the banking industry to implement new strategies to remain relevant in the future,” says Jorge Camarate, Strategy& partner and partner in PwC’s financial services division.

The growth of unexpected players emerging in the financial services industry has created what has been called a ‘marketplace without boundaries’. Non-traditional players are increasingly exploring new opportunities, enabling them to challenge incumbents and continually change the state of financial services in South Africa.

In an analysis by PwC Strategy& – ‘The future of Banking: A South African perspective’ – we look at how South African banks can contribute to shaping the future, consider and rethink their business models and processes, and reinvent the organisation.

Digital solutions, low-cost operating models and supply-chain integration have moved to the top of the business agenda, with non-traditional players pursuing various aspects of these trends, enabling them to provide their customers with in-house banking solutions.

In response to the growing threat in the retail banking industry, the ‘four universal banks’ (Barclays Africa, Standard Bank, Nedbank and FirstRand) are progressively finding new ways to enable them to stay relevant in the market.

Unlike their challengers, the four universal banks have the principal advantage of being able to serve a sizeable share of South Africa’s retail business and corporate banking customers. In order to maintain this advantage, they will need to develop strong data analytics capabilities and develop new solutions to better meet the needs of their customers, as well as find efficiencies in their legacy businesses to fund the large-scale transformation effort required.

Trends in the South African banking sector

Historically, the South African banking sector has been profitable for the four big traditional players. According to PwC Strategy&’s analysis, there are three trends developing in the market that could impact the banking landscape, as well as the profitability of these banks:

The emergence of digital solutions with lower-cost models launched by adjacent financial services players;
The emergence of sector and industry-specific bans, closely integrated with broader supply chains, launched by non-financial services players; and
Ongoing transformation of the four banks to address changing customer, regulatory and technology needs.

In recent years, the market has seen other players in the financial services industry diversifying their services offerings by introducing digitally-enabled banking solutions to provide better customer experience at a lower cost.

Emergence of sector of industry-specific banks, closely integrated with broader supply chain, launched by non-financial services players

Non-financial services providers, such as retail and commercial companies, have identified gaps in the financial services market driven by the need for more personalised and affordable offerings than those currently offered by incumbents. This has led to the emergence of non-traditional, sector-specific financial services providers, or banks.

There are a number of examples and cases of a growing wave of non-traditional players realising the advantage of integrating banking as part of their industry supply chain. For instance, discussions between various taxi associations have begun around the potential development of a solution that can address growing concerns over high interest rates charged to their member taxi owners. This development could lead to substantial disruption in the banking industry.

PwC Strategy&’s research suggests that this trend and many others will continue, crossing into different industries as players with sizeable customer bases look for different avenues to grow their share of customer’s wallets through competitive banking offerings.

Ongoing transformation of the four universal banks to address changing customer, regulatory and technology needs

The four universal banks in South Africa are responding to advancing digital disruption by making significant investments in digital transformation. This forms part of their strategies to improve risk management, operate more cost-effectively through reducing and replacing core systems, and enhance client centricity through targeted products and improved on-boarding tools or channels.

Despite large investments in transformation, cost-to-income (C/I) ratios have remained in the 54% to 56% range since 2012. This trend may not change significantly in the next 3-5 years as specialist resources are employed to assist the banks with transformation, despite banks citing a necessity to bring C/I below 50% in the short term, and aiming toward 40% to remain competitive in the long term.

In addition, the ability of new digital to easily and quickly launch new offerings into the market strengthens the need for established banks to review the speed in which they launch new products or projects in order to remain competitive.

What should the four universal banks do?

The changing competitive landscape in the financial services sector could have an impact on the profitability and returns of the four universal banks. According to PwC Strategy&’s analysis if they want to sustain their current profitability levels, they will have to take swift action in both the retail and corporate banking segments.

In retail banking

To remain relevant and engage with customers in the digital age, traditional banks can accelerate transformation by incubating outside the legacy organistation, leveraging fintech companies or partners and embark on new ways of working.

Changing technology has also resulted in far more open, modular and capable information systems. For the four universal banks this presents the opportunity to leverage their large customer bases and to build thought into funding habits and patterns through data and analytics.

In business and corporate banking

One of the main advantages that the four universal banks have over challengers is their ability to meet clients’ full set of business and corporate banking needs. However, to maintain this advantage banks will need to develop integrated solutions that meet the changing, complex needs of existing and future customers.

For example, the integration of cross-border networks, debt financing ability, and transaction processing capabilities can present themselves as an all-in-one solution to local businesses that rely on export markets. Increased collaboration between banks to offer more comprehensive products to varied markets is another example of integration aimed at delivering customer value.

Across the enterprise

As the four banks focus on growing capabilities within retail, business and corporate banking to stay abreast of the changing environment, they also need to focus on improving efficiencies of their core legacy systems by funding business and organisational restructuring and building on differentiating capabilities. In other words, they need to become ‘Fit for Growth’. Fit for Growth organisations connect strategy and investment in capabilities with organisation and cultural evolution.

“Furthermore, these players should reorganise for growth by implementing an organisational model, processes and systems that unlock the potential and agility for growth,” Camarate concludes.

Source: www.pwc.com

]]> Opinion piece: Is cybercrime costing banks more than money? https://www.accountancysa.org.za/opinion-piece-is-cybercrime-costing-banks-more-than-money/ Tue, 07 Nov 2017 07:00:13 +0000 https://www.accountancysa.org.za/?p=6942 By Sanjay Vaid, Director of Cyber Security and Risk at Wipro Limited
7 November 2017

Banking has changed vastly over the past few years, as new technologies emerge to change the way we transact. Non-traditional methods of transacting, such as the blockchain and mobile banking, have emerged, causing an influx of data from multiple sources. Data is no longer generated purely from ATMs or on site, but through online banking, eCommerce platforms, mobile applications – both banking and for mobile purchasing, and non-banking platforms such as the blockchain. The introduction of these omni-channel platforms has led to a need for broader, more effective security measures to be put in place.

The likes of Ransomware and Malware have been causing quite a stir on a global scale in the past few months, however the banking sector been besieged by all manner of cybercrime since the dawn of digital banking. As the business of banking is centred around the handling and transacting of money on various scales, banks and their customers are often considered soft targets for cybercriminals looking to make a quick buck. However, while cybercrime can be massively expensive for banks, their true Achilles heel is their reputation, the loss of which can extend the cost of cybercrime even more, as banks lose existing customers, potential business and even sometimes having to shut their doors.

Cybercrime, in line with technology, continues to evolve, taking new forms and finding new ways to infiltrate financial enterprises, and banks are struggling to maintain pace with this evolution. This is largely due to the fact that there are so many new methods of banking along with the strong shift from traditional banking to mobile banking.

Financial theft, fraud, identity theft, theft of intellectual property (IP) and general damage to the business processes, critical infrastructure and IT systems are but a few of the ways in which banks are affected by cybercrime – on a daily basis.

With banks typically absorbing the financial impact of losses caused by cybercrime, whether to themselves or their customers, there is a huge focus on ensuring they are protected and ready for anything that enterprising hackers can throw at them.

The evolution of banking cybercrime

As banking has become more digital, moving from traditional banking methods to Internet banking, telephone banking and mobile banking, breaches of data and confidential information have risen. With every new avenue of banking that is explored, another door is opened for potential access by a cybercriminal.

With so many mobile applications available for transacting, the data generated no longer belongs solely to the bank. Third parties have access to banking data, which compounds the risk. Banks are able to control only a portion of the security of transactions today, and much of the onus is on the third party. The security of unknown devices, such as mobile smart phones, cannot be established, so application developers and banks need to ensure that security measures are built into these applications themselves, in order to protect their customers.

Cross channel and cross border payments and transfers are often intercepted by hackers who lay claim to the funds being transferred. Additionally, the rise of eCommerce has introduced the need for third parties to act as intermediaries between eCommerce stores and banks, which poses yet another opportunity for interception through the likes of phishing scams and data collecting malware.

Over and above the theft of money, is the theft of identities. With so much personal information being required by online retailers and banks, people are quick to trust that their information is going into the right hands that few run the necessary checks to ensure that the data portal is secure, or that their information is reaching the intended destination. This further compounds the risk for both banks and retailers as the likes of the Protection of Personal Information (PoPI) Act come into play.

The impact on banks

Banks carry a lot of risk when it comes to cybercrime. Not only are they susceptible to the financial impact of unsecured transactions, phishing sites, re-imbursement, transaction reversal fees and so much more, but they also need to consider the impact of investigating the cause of a breach and re-addressing their cyber security every time a breach occurs. Beyond the possible risk of an “inside job”, they need to pinpoint their weak spots and address them with urgency – something that can be a cost intensive exercise. There is also the concern of damage to the confidentiality of their customers, which can irreparably ruin their reputation and credibility as a financial institution.

Loss of reputation directly translates to a loss of customer trust in the bank’s ability to safeguard and manage their wealth and assets. A bank that cannot effectively “bank” is no bank at all, in the eyes of the discerning customer. In an age where the customer is the key driver of business, loss of credibility can be detrimental to the success of the business and can lead to total failure.

It is absolutely imperative that, more than simply protecting against theft and financial breach, banks focus on protecting their customer’s personal information and other sensitive data. Not only to appease regulatory bodies – in play or yet to come – but also to retain their good standing with their customers.

Prevention is better than cure

As more and more parties get involved with transacting and as more players become involved in the banking space, often from other industries such as ICT, so do more compliance and security requirements emerge. Traditional security measures simply aren’t going to cut it any longer, and banks need to be always looking to future technologies in order to stay a step ahead of cybercriminals.

Confidentiality is key in today’s age of big data and omni-channel banking. Ensuring data and transactions are protected from all angles will be a challenge – one that banks and third parties will have to collaborate on to ensure their customers are wholly protected, and their data and privacy is completely secure.

Cyber security teams need to be looking at all potential entry points, from online banking to application access to the type of encryption employed by third party enablers. Every engagement platform needs to be addressed. They need to ensure that access is controlled, leveraging measures such as authentication, voice recognition and other biometric solutions, passwords and encryption. As new technologies are introduced and new security risks are identified, approaches such as new forms of multiple authentication will become a new trend.

Banks need to ensure they maintain a 360-degree view of their security, keeping a finger on every pulse of the industry, even extending beyond their own domain to businesses that touch on, or overlap with, theirs. Their measures need to be drawn from beyond existing customers, encompassing past customers as well. Network security, identity protection, governance, mobile and application security, channel security, protection of data in motion and data at rest, data masking, encryption, and myriad other security tools need to be reviewed and updated on a constant and regular basis.

Banks can start by assessing and securing their architecture, ensuring their network and servers are trustworthy, and that access to these are controlled and entrusted to select individuals. They should also be addressing their governance structures and standards, ensuring these are compliant not only with local governing bodies, but also with those countries with whom they do business. Having the right people in the right place, and with the proper identity verifications and biometrics in place can also go a long way to managing risk.

There are a vast number of tools and security measures available on the market today, however banks don’t necessarily need all of them – just the right tools in the right places, with the right access to them, or a service provider who understand the nature of banking from a strategic point of view, who can ensure that the bank has the necessary tools in place for a solution that is integrated and effective and yet won’t break the bank.

Source: www.evolutionpr.co.za

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