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Anderson Whittle cc Newsletter June 1999: enc

Title: newsletter



Anderson Whittle House
17a Pentz Drive Tableview 7441
Cape Town
Rep. of South Africa
P.O. Box 11133
Bloubergrand 7443
Tel: (27) (21) 557 6438
Fax: (27) (21) 557 6434
E-mail: andwhit@iafrica.com


"Adding Capital Value to your life"

Singapore Equity Values The Executive Friendly Society Outsource Consult Quality of Compensation Structures
IR 35 - UK Contracting Trusts Strategy Recent Tax Cases
Company Valuations and Sales Trademarks Individual SA Taxpayers Compensation Structures
Management Consultancy Notice


Singapore equities continued their climb from the 1998 oversold position. The growth in the portfolios values was 53% from 1 January 1999 to 30 June 1999. In fact the Straits Times Index ten month growth from Sept 98 was the greatest historical growth ever in this market ( 163%). Our clients profited from exposure to the climb. As stated in our last Newsletter, liquidity was reduced, and the proceeds were invested ( concentrated )in the Electronics Sector, the result being that our investments outperformed the Index . Accordingly we have attained a 5yr record of 320% growth in SA rand, which we believe is better than any SA domiciled Fund, and places us close to top decile world fund performance. We are one of very few companies offering direct investment into equities from South Africa.

At the end of July 1999 we were again aggressively liquid, to the level of 60% of the portfolios, while holding defensive stocks, and have maintained low exposure to the IT Sector. For the short term we will maintain this position. We refer you to the Research Desk of a well known analyst of this market, who stated ( September 1999) " the most damaging factor (after the July Index fall ) was the sharp fall in lower - liners ,..... the current corrective phase is in line with our expectation".

In 1994 we compared the Singapore Equity outlook to the JSE outlook, and took fifteen factors into account. These ranged from the economic possiblities in the hinterland, GDP growth, GNP growth, Labour productivity and legislation, Government attitude to business, infrastructural support for the sectors we were interested in, currency strength, quality of systems, education, stockbrokers, Government purchases ( planned ) of IT, quality of analysts, to crime, etc (not necessarily in the above order). In each of the categories Singapore was adjudged to be better than South Africa by ourselves. Presently on the next five year view, we cannot see any reason why we should amend this view. Accordingly, if we are correct, Singapore Equities should again outperform the JSE over the next five years. Over the past five year period the Sing $ has strengthened by 51% alone against the rand. Factors to watch out for in the next Five years include the perceived overvaluation of the Dow ( perhaps by 30% ), Y2K, problems in the old Commmunist countries, and interest rates in the US. It is clear that the US growth bubble is fuelling world growth, particularly in the East, which is an important factor in our management of funds.

Please note that the investments into Singapore Equities by ourselves are consciously high risk. That is we seek the volatility and rewards of the IT type investment, with their short term earnings horizons. Further we concentrate the portfolios to further leverage the risk /reward relationship. We do not however invest in any option, warrant or margin product. We take the view that IT is presently the most interesting investment sector. We further believe the quality of the IT equities we purchase on the SSE are of higher quality than JSE IT equities, and the purchases are almost always at better P:E Ratios than SA IT equities. Any investor who invests through us in this regard must realise that his portfolio is invested at his own risk, and that past performance is no indication of future return. Any investment through us should be of spare capital.


The tax deductible employer contribution to a Friendly Society was deleted from the Income Tax Act from 1 March 1999. Accordingly only the growth, and most, if not all Society disbursements to members are now tax free. However we wish to draw your attention to some unique aspects of the Society. The EFS was a world first in that it was the first tax free fund that did not provide for mutuality of interest ( pooling of funds or sharing of risk), in the English speaking world. That is members accounts were seperate, and thus the member knew exactly what his credit account stood at. We must pose the question, in principle, why must an individual share his assets to get a tax benefit? We are sure that as the world moves away from the concept of the employer looking after the employee in retirement, that the concept of individually owned retirement benefits with as little shared interest as possible, will become more and more interesting to the man in the street. We wish also to state that the EFS was one of the very few pure tax free funds available to taxpayers in the last generation worldwide. The Society outperformed other tax vehicles such as film schemes, aircraft partnerships, and medical "benefit funds" by a large margin. As no member could go into debit, the Society's risk of insolvency was minute. But good things like this are often legislated out of existence. However we wish to state that as there is no mutuality of interest or shared risk, the Society is still a fine medical aid provider, in tandem with medical insurance, for the person who wishes to set aside funds (self insure) for medical costs, 50% of which eventuate in the last few years of life, with after tax money.

If we take an average medical aid which costs R 1000 p/m, and discount this at 5% ( net of inflation and assumed costs, which figure is optomistic ) over 20 years one arrives at a present value of R 412K, in todays money. We wonder how many existent medical aids will be around when you the reader, need them most. The incentive to overuse, defraud, as well as for Government to force medical aids to pay for profligate lifestyles of others, means that the long term solvency of many such funds may be in question in our view. To put it in another manner, much of current medical aid subscriptions are, and will be, wasted, in our view. It is clear that, in our opinion, South African taxpayers have to provide for themselves, and look after their own interests long term. Simple reliance on Retirement Funds and Medical Aid, and your employer is not good enough. SA Taxpayers have to think and provide for themselves. The rules of the game of employment and long term benefits have changed. The future, even the present, lies somewhere along the lines of Lord Rees - Moggs' "The Sovereign Individual". Anderson Whittle cc has come up with a manner for SA Taxpayers to take charge of their destiny, that is to provide for yourself, with our Outsource Consult system.

We would like to point out to taxpayers that Governments will no longer be able to call upon nationalism as an emotion for support. Governments are competing against other Governments, and the State that provides a secure, low tax enviroment, with good services will attract best quality minds. These minds are the most important factor in the success of the State - that is manual labour is of no value anymore( even a large land army is of no value against technology ( viz Desert Storm) - only intellect is - and as such a welfare state which spends a large percentage of it's income on looking after the indigent is no longer viable. No welfare state means that you cannot expect state aid. You must provide for your family and yourself. We submit the most effective manner to do this is via our new Outsource Consult system.


The concept of joining an employer, and retiring with him, when he will take care of you in retirement, is dead. The logical extension to this is never to join an employer, never retire with him, and look to provide for yourself. We do not think that you will disagree with the trend which we are illustrating in this logical extension. That is it is too costly nowadays to enter into employment - for BOTH employer and employee. The employer has to bear the costs of PAYE, UIF, RSC,WCA, Skills Levy, LRA provisions, CCMA, Retrenchment, legal and court costs of enforcement, Disciplinary procedure costs, costs of contract, costs of termination, payroll costs, costs of HR specialists to administer the morass of systems, costs of serving as Trustee on Retirement Funds, costs of contingent liabilities present in medical and/or retirement funds, and employer contributions to medical and retirement funds. We believe the costs shown above increase an employees cost by 100% over his cash component. For employees the costs include exposure to punitive SA PAYE, and the hidden and very large costs of leaving portion or whole of the employer contribution in the retirement/medical fund on termination, as well as the inflexibility of long term employment.

We have developed what we believe is the most advanced system anywhere for persons to consult through. We retain the services of such persons, and offer our well known management consultancy services through Outsource Consult, onwards into the market. We reserve the right to select consultants to work through us, and further we reserve the right to terminate the services offered to us, should the services rendered by the consultant not come up to our expectations, or should they appear not to conform with the Income Tax Act, SA Income Tax precedent or International Tax precedents. Thus should you the employer approach us with a level of Management which you wish to retrench and contract back to your company, we would not be interested in taking them on. However should you be in need of consultancy services, we should be able to provide you with a person who has the profile and structure of independence.

When you take on this type of person, your massive outlay in risk, money, systems, statutory requirement ( with normal employment ) shrinks down to one contract, and one cheque per month, with Outsource Consult.That is all.

Outsource Consult is to our mind at the cutting edge of international service provision for companies in need of outside consulting inputs. The system is based on a proprietary software programme, allied with our own inhouse software, and is backed by three mutually exclusive contracts. Consultants using our system have had excellent results, and we now intend to offer this more widely into the market. The system is the most advanced in South Africa, and is at the forefront of such developments worldwide.


Anderson Whittle has been in the forefront of compensation structures. We believe that our management clients who have used our compensation structures over the last 12 years are between R80K and R500K better off in capital value than those exposed to the unmitigated force of PAYE. We note that none of our structures have been attacked by SARS, and we have never had to defend our systems or our interpretation of the Income Tax Act, in the Special Tax Court. Further we have always insisted on structures being backed by Service Contract. This insistence has paid off in our view in the light of the recent SARS vs CapeTech case, in which salary sacrifice of medical aid was disallowed as a pre tax deduction for the employee, as a result of an agreement not being in place between employer and employee. Our clients would not be exposed to such an attack.

We believe that at Anderson Whittle we have the best knowledge resource of the 4th and 7th Schedule, as well as certain sections in the main body of the Act, in South Africa relating to employment and holding of office. As Tax Consultants we are in the business of trying to keep our clients out of the Income Tax Court. None of our clients have had penalties levied on them. We have however had problems in the past in interfacing our spreadsheet structures with client employer payroll systems, this being often a people interface problem. In complex systems of this nature we prefer to run such systems in house, such as on our Outsource system, which embodies purpose written software, as well as advanced structures that we would normally use.

It may seem expensive to enter into tax contracts, but should certain aspects of your compensation not be adequately covered, employers may have a very large liability hidden, but existent in their business. We are available to help employers via diligence tests in this area. SARS has ringfenced many areas in the Act relating to employee benefits,via Amendments to the Act, but in our view, most are available to our clients if careful structuring is used.


The UK Inland Revenue, under pressure from particularly the French and German Governments, as to the perceived unfair competition engendered by the UK allowing IT Contractors to Contract via companies, rather than have PAYE deducted at source, have put forward legislation to reduce this area of tax benefit. However the House of Lords have not passed the legislation. It is likely redrafted legislation may be expected next year.


From 2000 it is expected that Jersey will have to have licenced Trustees, so bringing an element of control to the registration and administration of Jersey Trusts. Further the Jersey Law Commission called for interested parties to submit views on disclosure of Trust Documents by July 1998. One of the problems for beneficiaries of Jersey Trusts are the lack of disclosure precedents, which means that often Beneficiaries have no rights to see the Trust Deed, let alone the administration record. It is clear that Jersey Trusts pass very large amounts of control to Trustees, and this may disadvantage your intentions as Settlor. However there have been two recent cases, Bhander vs Barclays PB, and the Den Haag Trust case, in which Beneficiaries were awarded discovery. However litigation in Jersey runs to in excess of Stlg 200 p\h, and disagreements with Trustees can become very expensive. It is clear that Jersey is well behind the UK in their Trust Law.

Lately, we were approached by a person who had invested a large amount of money offshore in a Caribbean domicile via Trust, on the advice of a well known Newspaper Financial Columnist, which was followed by disappearance of the offshore parties concerned, accompanied by the disappearance of the the funds. What we could do was very little. We urge persons wishing to invest overseas to be very careful.

In our view the manner in which Trusts are registered, controlled and administered in South Africa is fair and reasonable, and we advocate the use of these instruments, both for asset holding, income and estate tax protection, business use, and creditor protection. We are able to set up trusts for you efficiently and quickly. The recent fire in the Master's Office Cape Town, did not affect our clients, as full copies of Deeds and Letters of Authority had been kept by us, and the Master has accepted copies from ourselves in replacement of destroyed Trust Deeds.


The foward planning disciplines of strategy, financial management and income tax can often be profitably integrated via multi-disciplinary strategic overview. These can be for projects or companies, and useful to include in a five year strategic plan.


ITC 1626

A company in trouble sought from a director help, via cession of life policy. The company paid the premiums, and debitted the directors loan account interest free. The Court held the interest free loan was not to the benefit of the director, and rather to the company, therefore there was no 7th Sched benefit for the director in the interest free loan, being the debit loan account.

ITC 1647

The cession of the taxpayers income from labour broking to their client ( being the recipient of the services ), where the quid pro quo was a commission earned for the provision of the services, was upheld by the Income Tax Court. Accordingly the taxpayer was not a labour broker.

ITC 1635

The rewarding of an employee with a travel allowance, instead of cash, at the option of the employee, was held by the ITC to be deductible by the employee, and thus the anti avoidance ( Sec 103 ) attack by SARS failed (which attack was launched at employee).

ITC 1658

The sole director of a company travelled to Thailand and Mauritius with a woman, purportedly on business, and sought to deduct the costs. Sars disallowed the deduction and levied penalties in terms of Sec (76)1c of the Act. The court upheld SARS disallowance and levying of penalty tax.


We are able to provide Discounted Cash Flow, stripping value and Net Asset value valuations of your projects or companies. Further we are able to tax structure the sale of these, onward.


SARS is presently in the process of undertaking amendments to the depreciation of these intangibles, and taxpayers wishing to intitute such assets need to contact us urgently before the opening is closed.


Anderson Whittle cc brings over twenty years of experience to your tax problems. Our record is outstanding with SARS, and our attention to detail is of high quality. As such our clients can expect top class service and best results. Our Provisional Tax Service is particularly powerful, and is used extensively by high earners to maximise their legal tax benefits.


Anderson Whittle cc Compensation structures for top management are used widely, by top management teams. We undertake the entire compensation structure based on yearly cost to company figures given to us. The structures are backed by Service Contract, and by Employee Cost & Allowance Schedules, and extended through to Provisional strategy for Directors. We have run these structures most successfully for 12 years now, and our clients have large tax savings as a result of the structuring. The Contracts have to be updated when applicable amendments are made to the Income Tax Act, and our system has not been attacked by SARS. We undertake Sec 8 allowances, reimbursives, 7th Schedule benefits, long term benefits, fringe benefits, deductions, restraints, and salary sacrifice schemes.

We have taken the view that compensation tax structuring in the past provided most of our clients with more tax benefits than their retirement tax benefits ( that is the tax saved on Retirement Fund contributions ). Although the Act is not as flexible anymore as perhaps it was 12 years ago, we still hold to our view that good compensation tax structuring is more tax efficient for top management than tax savings generated on retirement contributions. We believe we had the best structures 12 years ago, and we believe that our structures are the best available at present.


Anderson Whittle cc 's Management Consultancy service is now being operated by Outsource Consult which can be contacted at the same telephone number. We are actively looking for consultants who are searching for short term contract work, and would be pleased to hear from you if you have spare work capacity.


Due to pressure from the wide ranging activities of our ( small ) company we will not be producing another Newsletter. We have published our Newsletter bi - annually for 7 years, and provided the service free to our clients. We trust that the Newsletter has helped our clientele in making informed intelligent choices, and indeed it has made us many friends and long standing clients.However the range and depth of our activities means that we cannot continue to provide this service, even though we would like to do so. Accordingly we are sorry to state that this is our last Newsletter, and thank you for your past readership and comments on our views. Anderson Whittle cc of course is continuing in exactly the same manner, as well as Bick & Anderson P | L, and of course our new division, Outsource Consult,which is already operational.

Prof Lonnie Strickland - one of the World's top Strategists - states ; " ...an excellent Newsletter"