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 EXECUTIVE FRIENDLY SOCIETY
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.
OUTSOURCE CONSULT
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.
QUALITY OF COMPENSATION STRUCTURES
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.
IR 35 - UK CONTRACTING
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.
TRUSTS
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.
STRATEGY
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.
RECENT TAX CASES
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.
COMPANY VALUATIONS AND SALES
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.
TRADEMARKS
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.
INDIVIDUAL SA TAXPAYERS
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.
COMPENSATION STRUCTURES
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.
MANAGEMENT CONSULTANCY
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.
NOTICE
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"