Accounting for withholding tax on dividends
I was on the SAICA committee that decided that Secondary Tax on Companies (STC) was an expense. There was a furious debate at the time as to whether the tax was, in substance, merely part of the normal tax payable by a company, or whether it was a tax on
the dividend of a company. If it were seen as a tax on dividends, which in my opinion it clearly was, the charge should not have been an income statement charge but a direct hit to the statement of changes in equity.
The accounting framework supported the latter treatment. So why did our committee decide to treat this as an income statement charge? There were two reasons:
1. The government of the day explained the concept behind STC as an optional tax on profits. If a company wanted to plough back profit for growth, a lesser tax would be payable. If it wanted to pass profits onto its shareholders, a higher tax charge would apply.
2. The users of financial statements had a simple approach to the problem: it’s a tax and a tax is an expense. In retrospect, I believe that we took the wrong decision. We should have stuck to accounting principles. All sorts of problems arose as a result of this decision, e.g. companies that restructured and paid dividends out of past profits were hit in the current year with a large tax charge, which had nothing to do with the current profitability of the company.
I am a shareholder of two companies that postponed the declaration of their dividend, thereby penalising their individual shareholders through the higher tax to avoid charging the STC to profits for the year.
Was that due to bonuses based on profits?
Well all of that is now history. Companies that now declare dividends are no longer liable for the tax. The tax is an expense
of the shareholder and the company withholds the tax and pays it directly to SARS. This does not apply, for example, when a
shareholder is a company, as the latter will withhold the tax when it on-pays the dividend to its shareholders, who are not companies.
Beware of companies showing lovely growth rates in earnings this year – a large portion of such increase could be due to the change from STC to withholding tax.
I provide a free accounting service to a select number of investors on the JSE. An important measure is to establish whether or not the investor has earned beta (the market return).
As we strive to generate alpha (a return over and above the market returns) we need to compare like with like. The JSE’s published
dividend yields are, quite correctly, arrived at before deducting tax on dividends. This makes sense as not all shareholders are subject to this tax.
Shareholders should, therefore, account for tax on dividends as an expense of earning those dividends and not net the tax against
the dividends. Netting in accounting is taboo. So one would expect the JSE to publish dividends declared per share for each company gross of withholding tax. Agree? They actually publish dividends declared per share net of withholding tax, despite that fact that the company declares the gross dividend and not all dividends are subject to withholding tax!
I suppose I should not criticise as we, in my opinion, got the accounting treatment of STC wrong.
Author: Charles Hattingh CA(SA), Chartered Financial Analyst, is the Managing Member of PC Finance Research cc
What is ‘Human Capital’
Many readers will be familiar with the benefits of diversification for a personal investment portfolio. Academic studies have consistently demonstrated compelling theoretical and empirical evidence for an approach in which an appropriate investment mix is determined by paying attention to the expected returns, risks and correlations of each of the relevant financial asset classes.
What may be less familiar is a more recent proposition: in order to achieve an optimal asset allocation, it is not only the investor’s financial assets that are relevant. Human capital must be taken into consideration too.
What is this thing called human capital? In a countrywide context, governments and universities are very fond of talking about the importance of their contributions to it.
However, our concern here is with a single individual. From this point of view, human capital is, quite simply, what is left behind if a person’s real and financial assets are completely stripped away: cash, shares, property, cars – the lot. The residual in this doomsday scenario of a thought experiment is a person’s set of skills, education and abilities.
Undeniably, these things have cash-generating potential. Logically, therefore, they represent an asset class for an individual.
Human capital may, in principle, be quantified in exactly the same way as any other financial asset, by applying an appropriately risk-adjusted discount rate to expected future cash flows. The riskiness of someone’s human capital may be evaluated by considering its nature.
A finance professor with a secure position in a financially stable university may, for example, be considered to have low-risk human capital. On the other hand, one of that professor’s students, headed for an exciting career in the capital markets, will probably be regarded as having higher-risk human capital.
Finally, taking the correlation of human capital with the traditional financial asset classes into account, strong challenges to old asset allocation ideas arise. It no longer looks sensible for a finance professor to allocate large financial capital proportions to bonds and money market funds, because the human capital involved may be highly correlated with those asset classes.
Similarly, a finance student should carefully consider the suitability of equities, bearing in mind the close relationship between his/her human capital and this asset class. There are other interesting implications. For example, the reduction in diversification
from over-investing in your employer’s shares is already unfortunate in the context of the traditional framework. But the newer approach demonstrates even more vividly the potential calamity of a situation in which the entirety of your human capital and a large slice of your financial capital are directly connected to each other.
Author: Mark Bunting CA(SA), CFA, is an associate Professor of Finance at Rhodes University
Acing ‘Mindfulness 101’ today
You live in the age of distraction. You’re so busy thinking about the past and watching out for what’s ahead that you don’t take time to enjoy where you are. When you’re at work, you fantasise about being on holiday; on holiday, you worry about the work piling up on your desk.
How to overcome this everyday challenge? By being mindful. Mindfulness means paying attention in a particular way; on purpose, in the present moment, and non-judgmentally. Mindfulness is an ancient principle and still relevant today. Dynamic corporate cultures have witnessed how mindfulness and social awareness are important components of an effective modern business strategy.
Mindfulness at work means finding ways to become more aware, tapping into your reserves of creative leadership and compassion and practising those skills.
Mindfulness in your own life means to purposefully be grateful in your present by having no specific wants other than the genuine moment. If you strip your life’s needs down to basics (survival mode) your grateful’s change to being able to eat, share, communicate and experience.
The benefits of living in the moment are backed by many philosophical and religious traditions. Mindfulness reduces stress, boosts immune functioning, reduces chronic pain and lowers blood pressure. It helps you to be more attentive, creative and resilient. Mindful people are secure, happier, empathetic and exuberant. Being aware in the here and now reduces the
impulsivity and reactivity that cause depression, binge eating and attention problems.
I took it on myself to see if it works and tested it twice over the last month. My tools: my kids and spending time in nature (camping). Yes, and the effect on my family was profound. You might not like camping or have kids but you need to purposefully try proven tips to be more mindful.
Proven tips – spend a lot of time in nature; practise purposeful breathing daily; forgive and let go; forceful smiling; spend time with children; break your routine; pay attention to very ordinary things; be helpful to people in need and just be thankful.
Do it today
As Richard Branson says, “Let’s do business like there is a tomorrow.” But more important; to create a better tomorrow, you
must start by being more mindful today. “Thanks Pooh, today is my favourite day”.
Author: Stanford Payne CA(SA) is an ICF Accredited Executive and Business Coach.
Leading by Example
Humans have known for millennia that neglecting to lead by example does not lead to sustainable success.
As many a tyrant has discovered, the orgies and conspicuous consumption may be fun while they last, but the ultimate price is high.
I can’t think of a corporate leader today who comes close to repeating the spectacular mistakes of a Nero or a Ceausescu or a Gaddafi — but there are subtler ways to fail. Contemporary management jargon is full of words like ‘alignment’ and ‘integrity’, which basically come down to this: If the entire organisation, from the Board on down, is not playing by the same rules, with the same goals in mind, you can expect trouble.
A Board that demands accountability, ownership, strict financial discipline and similar good things, but does not deliver these things in its turn, is inviting cynicism and disloyalty. Such leaders should not be surprised to find their organisations filled with people intent on working every situation to their own personal advantage.
So what do things look like, when executives and managers are leading by example? One of the most important tell-tale clues can be found in how information moves up, down and across an organisation. Do senior managers make decisions based on gut instinct, personal whim or hard information? If they use information, does it accurately reflect what’s really going on? Do mid-level and junior employees understand the rules of the decision making process and trust its efficacy?
If the answer to any of these questions is “no”, or even “ermmm…”, the red flags should go up immediately. Of course, making decisions based on hard information is not always easy. The data may be saying that a leader’s personal pet project is failing, or that customers hate the new packaging you were so excited about, or that you made the wrong call on a new product line. We all have cherished ideas about how the world should be — it’s all too easy to ignore the clues that tell us we’re wrong. Sadly, reality has a way of asserting itself no matter how hard we protest.
Effective leadership requires, firstly, having accurate information — and secondly, that leaders should act on that information. The first can be delivered by good systems; the second is where the real test of leadership comes in.
Author: Kevin Phillips CA(SA) is the Managing Director of Idu Software.
Materiality gets more real
Although listed companies are now warming up to the JSE’s integrated reporting requirement for preparing their annual reports, managements are finding certain aspects of it counter-intuitive to the concept of a concise and focused report.
The one is stakeholder relations, which queries whether stakeholder inputs have informed company strategy and were considered when deciding which information is material and should be published. For those used to dealing primarily with shareholders, investors and analysts, this departure from past practice doesn’t make sense.
It raises the challenge of how does one prepare a succinct integrated report, when its audience has become so wide? Are we not moving away from those massive annual reports? Another area is the concept of materiality. If every stakeholder’s input must be solicited, what is included and what left out? Again, how do we avoid reporting on a lengthy shopping list? Some clarity became available in April, when the International Integrated Reporting Committee (IIRC) released its Consultation
Framework on integrated reporting for general comment.
This draft contains key revisions regarding stakeholders and materiality that should be broadly welcomed within the corporate reporting community. It recommends that providers of financial capital be prioritised before other stakeholders when preparing an integrated report, as in this updated definition of materiality: “A matter is material if, in the view of senior management and those charged with governance, it is of such relevance and importance that it could substantively influence the assessments of the primary intended report users with regard to the organisation’s ability to create value over the short-, medium- and long-term.”
Primary intended report users are clearly identified: “An integrated report should be prepared primarily for providers of financial capital in order to support their financial capital allocation assessments.” So now we know – annual reports are still to be targeted mainly at the financial community.
The Consultation Framework does, however, add the provision that integrated reports should also inform stakeholders with valid
interests. With the IIRC opening a 90-day window for commenting on this draft, I’ve no doubt that this key shift will attract much attention. In May the Global Reporting Initiative (GRI), released its updated V4 guidelines, which focus more on sustainability. Although too late for comment in this column, V4 should further clear the fog on stakeholders and materiality.
Hopefully the IIRC’s first definitive integrated reporting framework scheduled for December 2013 will merge in the GRI V4 stance and clearly signpost King III’s ‘journey’ to worthwhile annual reports.
Author: Clive Lotter is an Integrated Reporting Consultant and writer of Annual reports for listed companies.
The law of ‘fee flexibility’
When most firms analyse their revenues, they will generally find that 90 to 95% of their income derives from compliance
work, with other services the humble remainder. Firms offering specialist services using dedicated resources will normally record a lower percentage and the converse usually applies.
However, let us further analyse noncompliance revenue between services ‘sold’ by the firm and those ‘bought’ by the client. For example, if a client is buying or selling a business, they know they will need professional advice – which hopefully will be delivered by your firm. Thus that additional service revenue is driven by the client’s circumstances, with your good standing there meaning you will be retained.
But, what about those services clients buy from you because they recognise the value and reliability of your all-round offering? Some of these services might perhaps be regarded as ‘outsourcing’?
Let’s first of all look at the opportunity of revenue potential. I think that generally there is a limit as to what clients will conceive paying beyond the cost of compliance. If they pay you R15 000 a year, it is probably outside the scope of their financial relationship with you to pay you a further R15 000. This leads me to outline what I call the ‘law of fee flexibility’. Simply stated, this suggests that clients have a budget of up to 60% of the compliance fee, provided they can clearly identify service value.
The threat you face is that, should others offer those services to your clients, they might respond by saying: “Interesting, my regular
accountant doesn’t do that.”
How to get going? Start by having firm owners outlining the services they are capable of delivering that, say, at least 20% of clients may be interested in. Do you have systems, policies and procedures e.g. an engagement letter, to deliver these services efficiently and within stipulated deadlines?
Are you clear on the value to the client, for example is it time saving, tax saving, or profit enhancing? Then have your staff perform the same exercise. Their list will differ from those of the firm owners because they see clients differently; they are usually more engaged with the client at grass roots level. Start your planning: next month we look deeper into maximising the power of fee flexibility.
Author: Mark Lloydbottom is an author and consultant at Mark Lloydbottom Consulting.
In the shoes of the boss
“If I were the boss…” is a most useful mind-game to play, not only when you are daydreaming or upset, but to realise what would impress that person you report to. If you were the boss, what would you prefer? Here are a few options to consider:
Problem or Solution
There is no such thing as a dumb question as long as you always offer a suggested solution. It builds enormous confidence
when realising you actually can answer most questions yourself.
Complain or Fix
If you had the choice of an employee who always complains versus one from which you only hear how a problem has been resolved, who would you choose? Yet, in the throes of irritation, we tend to comfortably resort to a good old moan, without realising
the unfavourable impression created in doing so. Fix rather than complain. Live by the slogan: “Impossible is nothing!”
Happy or Grumpy
A smile is a universal upbeat communication mechanism, no matter what language you speak. Stressful environments, more often than not, cause sighs, frowns and scowls. Intense concentration may portray a negative picture – guard against not informing your face if you are happy. Who do you prefer to spend time with – grumps, or infectiously happy people?
Timesaver or Time-guzzler
Successful people have a sincere appreciation for a maximum return on effort – achieving the most in the shortest possible
period. Winners appreciate people who save rather than guzzle up time. Who do you prefer on your team? The stars that save you time by planning, thinking and acting ahead, or those who clog the system by first wishing to sap your time. How useful are you to a boss who has to do your job by providing you with all the answers? Invaluable team players are those who save time by moving ahead!
Positive or Negative
Whether you say I can, or whether you say I can’t, you will always be right! It is important to realise that your attitude and disposition direct the future as a self-fulfilling prophecy. All people have a sincere appreciation of someone with a positive outlook that lifts the spirits and ‘ups’ the bar on the achievement barometer.
Agonise or Act
As it is every person’s job to work themselves out of a job, it is important that you perpetually strive towards and achieve the
next level, at the same time teaching and empowering those that report to you to ensure no balls are dropped.
Appreciate that the fastest career advancement will be by those who have already proven, repeatedly and without fail that
they are able to operate at the next level. If you get this right, you might just be in the boss’ shoes sooner than you think!
Author: Anneke Andrews is the director that leads RecruitTalent at Deloitte.
Don’t underrate your trade mark
To many the trade mark is simply a document that records a business name at the local trade mark office. It’s not compulsory and it takes so long to obtain, that it is frequently dismissed as an irritation. So, it’s relatively cheap, but why should we be paying close attention to our registered trademarks and those who administer these?
Well, in short, it is the title deed to your brand. Your brand is, of course, everything that encapsulates and communicates your business, everything that keeps customers coming back. It may be a name, it could be a slogan, it could be colours, it could be three dimensional, it could even be a smell. All of these are capable of being registered as trademarks.
So then, what’s the fuss? Well, properly obtained, these title deeds can be listed in your asset register. They can be valued, used to raise finance and sold separately from the business. They can be let for cash or be allowed to sit passively, preventing others from communicating their offerings in your trademarked manner. They protect the value generated by your brand. They protect market share both actively (in the hands of an attorney) and passively (just by sitting on the register).
But just like a Verimark ad – that’s not all! The trade mark can be attached in legal proceedings to enable the jurisdiction of South African courts or they can be used to transport goodwill into a diversified space that may just provide a hedge for your business, or enable it to grow.
They can also be transferred to enable efficient tax planning or to reduce the exposure of assets to business under Brand protection using registered trade marks is at least 50% less costly than alternative methods such as passing off, and there is significantly less risk to the proceedings. Defending a trade mark infringement can minimise the risk of the dreaded urgent court order for a product withdrawal. In the growing social media space, the registered trade mark is frequently the only method of safely removing hijacked or rogue sites aimed at discrediting your business or holding it to ransom for a fee. Still not convinced?
Consider the recent ISO standard (ISO 10668) for brand valuation, which requires an audit of the legal protection of a brand as a fundamental step in its valuation. Skype’s initial public offering (IPO) in 2010 disclosed an on going legal dispute with BSkyB as a material threat to its brand, which illustrates the correlation between proper trade mark management and the value of the business.
So, the next time you find yourself assigning a junior administrator to look after a seemingly endless list of trade mark enquiries and small bills, or dismiss them as an irritant, please stop and reconsider. That person guards possibly the most important asset in your business.
Author: Darren Olivier is partner and head of commercial Intellectual Property at Adams & Adams.