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Companies and CCs

posted 10 Mar 2011, 08:08 by Carl Nielsen
It has been a while since you've heard from me. I guess I've been busy, and there has been no major news worth reporting. However, I thought I'd just send a quick message regarding some changes that are coming up.

From 1 April, the new Companies Act that has been in the offing for quite a number of years now comes into force. Bureaucracy being what it is, the passage to life of the Act has been an interesting one with laws being made subject to promulgation only on announcement by some minister or other, only to be changed before the minister got around to promulgating them. This has meant anyone actually learning the law as it has been enacted has wasted a great deal of time and brainpower. Cunningly I have employed the ostrich approach to the whole thing. However, the whole shebang is now coming to life from 1 April and hence I've started to take notice.

Anyway, probably the issue of most interest to you is what will happen with CC's. I have had a few people ask, intimate or even categorically state that CC's must be converted to companies and/or that new ones cannot any longer be set up. Well, on the first point 100% wrong and on the second point right, but only from 1 April. So, you can set up a CC before 1 April, but from then on, you're forced to go the Company route. I suspect, however, that the shelf company/CC purveyors, realising how much South Africans love CCs, are going berzerk registering shelf CCs which will probably mean that starting a business in an unused CC will be possible for quite some time yet.

You might be wondering on what basis they decided to shut down CCs. The main point is that they reckon a small owner-managed company under the new system will look much the same as an old CC under the old. They're presumably right and I guess over the next while we'll see how it all pans out. It seems that an entity with no real public interest won't need to be audited, putting it on a par with a CC in terms of administrative headache and cost. An entity of sufficient size or public interest (I'm being deliberately vague here because I haven't yet read the specifics of the criteria) will be subjected to an "independent review", another beast whose definition I haven't quite figured out yet, but I think a fairly airy-fairy concept that won't involve nearly the same amount of in-jou-slaai-krappery as a full force audit, and therefore won't cost the earth.

The main point is that if you're thinking you might want to start a CC, then you should probably move to do so, although more than likely you'll still be able to buy a shelf CC without too much headache or cost for quite a while. Or, a company under the new rules shouldn't be much different to a CC, so as the hitchhikers guide says "Don't Panic" - just set up a company in due course.

Of further interest is that after possibly even longer than the whole companies law process has taken, SARS has finally announced the actual date that Secondary Tax on Companies will die and be replaced by Dividends Tax. A bit of background in case you don't know: STC = a tax triggered by the declaration of a dividend by a company or close corporation (or in some cases by being deemed to declare a dividend) payable by the company paying the dividend. Dividends tax is the same thing, except the recipient of the dividend is liable for the tax. However, they've made it a withholding tax, which means the company declaring the dividend still physically pays it. So it'll look very similar to STC.

The reason they decided to change it is that STC was pretty unique to South Africa, so all the dumb foreigners didn't understand it. And apparently it makes things look bad because it increases the tax rate that companies pay. So cunningly they'll shift the burden from companies to their shareholders, and wala, suddenly it looks much cheaper tax-wise to start a company in SA than it used to.

The rate of tax is unchanged, however because under STC the tax reduced the reserves of the paying company, thereby reducing the tax base of the company, the effective rate under the new system works out to about 0.9% more than before (I'll bore you with the maths proving this is you want me to). So, if your company is sitting with a bunch of undistributed reserves, and you're likely to have to distribute them sometime, then best to do it before the change and save that ~1%. The date of the change, by the way is 1 March 2012... so you've got a year to think about it.