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Danie Potgieter Attorneys
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Corporate & Tax Law Attorneys (South Africa)
Corporate & Tax Law Attorneys (South Africa)

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A common tax trap in divorce and business settlement agreements

Since the beginning of commerce, disputes arose between parties who traded with each other. Disputes were initially settled by the first or the sword and later by the same Government official who took part of our pap and meat.

Presently disputes are often settled by drawing up an agreement in terms whereof each party was obliged to do something or give something and so the dispute is settled.

I have often consulted clients who have entered into agreements to settle disputes, but, because they did not employ the services of a professional tax advisor, the transaction runs into an unexpected tax trap.

Tax trap example:

Say for argument sake Mr. Angel and Mr. Evil are both business men who have a dispute to settle and they enter into a settlement agreement.

Mr. Angel owns a company which is registered for VAT. Mr. Evil also owns a company which is a registered VAT vendor. Mr. Angel alleges that Mr. Evil owes him R10million. Mr. Evil obviously disagrees but on advice of his trusted attorney he enters into a settlement agreement with Mr. Angel without an acknowledgement of wrong doing.

Both parties agree on one thing at least and that is that the tax man should not receive a single cent VAT on the transaction.  They therefore decide that, in light of the fact that Mr. Evil does not have R10million to pay Mr. Angel, Mr. Evil will transfer one of his commercial properties, valued at R10million from his company to Mr. Angel's company.  The ratio behind this agreement is that both the companies are VAT vendors and the transaction would pass as a zero VAT rated transaction.  

Everyone is happy (Mr. Evil a little less happy than Mr. Angel) and the conveyancer submits that transaction to the Registrar of Deeds.  The conveyancer also submits to SARS that the transaction should be zero rated.

They find out that SARS refuses to deal with the transaction as a zero rated VAT transaction.

The ratio behind SARS's reasoning is unfortunately pure in Law. If we analyze the transaction there are actually two different transactions taking place here:

The First Transaction:

Mr. Angel has obtained a personal right for the transfer of the property, even though the property would be transferred directly from Evil's company to Angel's company, the fact that Angel obtained the right means that in essence the transfer of property settles the dispute between the individuals and the transfer from Evil Pty to Angel Pty does not negate the fact that it is Angel in person who obtained the right, not his Company. At the other hand Evil is responsible for payment in person, because the dispute was between him and Angel, not between the companies. The "first" transaction is deemed to be a transfer of the property to Angel in person. And it is subject to VAT at 14%, amounting to R1.4million. 

The Second Transaction:

The property is then deemed to be transferred from Evil to Evil Pty. On this second transaction transfer duty is payable. The transfer duty amounts to R717,000.00.

The tax man takes a healthy R2,1million in the middle. 

In many divorce settlements the parties walk into this every same trap.

It is my submission that obtaining proper tax advice could have breached this trap. 

The question arises; does this trigger a Capital Gains Tax and/or Donation Tax? I will discuss these aspects in my next post.

Author: Danie Potgieter (tax lawyer)

#tax   #taxlaw   #taxlawyer  
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Barter or Swapping

There is an old saying which goes; "there are only two things in life which are certain namely; you will pay tax and you will die".

Ever since man came under the authority of a regime which would rule over him, that regime had to get money from somewhere to feed the fiscus (purse) from which a Government would pay the bill of governance.  

The bartering system dates back to about 6000BC.  It was introduced by the Mesopotamian tribes.  In Roman times they would even sometimes pay the soldiers salaries with salt. Barter was sometimes described in disparaging vocabulary such as "giggling, haggling, swapping and dickering”.  The barter system was widely used until the late 1800’s.  

Barter is not dead and gone, it is alive and well all over the world.

The legislative power runs its business from the tail end. A business man would set a goal as to what the income he must be to earn to cover the business expenses and to (hopefully) take home a profit at some stage. Inherent to the structure is a measure of care to be taken in business expenses.  A Governments' budget works in reverse gear.  Productivity is not the measure, neither is there a will to curtail expenditure for the simple reason that it simply derives an income by making a decision on what new to tax and how much.  

In South Africa we have in number about a hundred different taxes, governed by even more Tax Laws. 

For man to survive it became very obvious that people had to trade amongst either other.  In days gone by a system of barter was sufficient.  I would trade my sheep for some of your maize and the both of us had pap and meat for dinner.  

Then entered the Government which ruled that if I want to trade my sheep for your maize, the Government took a portion from each of us, which meant that you and I had a little less pap and meat and ten other persons in the form of Government officials could also have pap and meat that evening.

In South Africa barter is deemed to be a cash transaction and it must be declared in your financials and income tax returns.

Author: Danie Potgieter (tax lawyer)

#taxlaw   #law   #barter  
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I have been rehabilitated, but my credit record is not clean!

After an insolvent has applied for rehabilitation, according to Section 129(1)(a), (b) & (c) it is regarded that all debts prior to sequestration has been paid in full.  There is also an end made to the sequestration and all the negative effects that vested on the insolvent is removed.

The information on the credit bureaus has to be cleaned up after such a rehabilitation according to the National Credit Act.  This unfortunately does not happen automatically and is either done by the attorney that brought the insolvency rehabilitation application or by the client himself/herself.           

This is unfortunately a very time consuming and frustrating process as some of the credit bureaus do not have sufficient systems in place to remove adverse information.  A handy tip would be to ask your attorney if they remove the information on the credit bureaus after doing an insolvency rehabilitation.

Written by: Breyten Potgieter
Danie Potgieter Attorneys

Tags:  #law #insolvency #rehabilitation
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ITC record clean means no debt 

We have the pleasure of consulting with many clients.  Some of the clients are under the impression that if your credit record is clean, it means that you have no debt and or other legal obligations.
There are about twenty two credit bureau's of which the most well known credit bureaus are ITC and Experion.    

The credit bureaus are a voluntary system which companies can use to list adverse information of consumers.  This adverse information is then used by credit givers in order to ascertain whether it would be risky to loan an amount to a consumer or not.  The credit giver has to do its own risk assessment and cannot merely rely on the information on the credit bureaus, although it seems that many times they do.
As the credit bureaus are a voluntary system, it means that adverse information such as defaults, judgments and slow payments might not reflect on its databases'.  As I understand it the databases gets cleaned up every few years to keep it performing optimally.   

So, if adverse information is not listed on ITC or Experion or any other credit bureau it does not mean that legal obligations do not exist, it simply means it is not listed there.  

Written by: Breyten Potgieter
Danie Potgieter Attorneys

Tags: #debt #law #insolvency
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THE BALANCING ACT PERFORMED BY THE INSOLVENCY ACT

Any process which follows insolvency must of necessity entail a delicate balancing act between the interests of the various stakeholders: being the unpaid creditors, the insolvent debtor and the general public.  Under present South African law, the only way in which an insolvent debtor can obtain a discharge of his debts and make a fresh start is by sequestration of his estate. However in order to obtain this discharge the sequestration of the insolvent debtor’s estate must be to the advantage of his or her creditors.  In establishing this advantage for creditors in order to sequestrate one’s estate, the question is whether the balance between all the parties involved is achieved as more and more weight is being placed on this requirement. The requirement of advantage for creditors has been described as ‘a recurrent motif or dominant thread’ of the Insolvency Act. 

During the last three decades South Africa has witnessed not only a sharp increase in consumer debt, but also a strong increase in the granting of credit to individuals.  Many other jurisdictions have witnessed large scale reform of their insolvency law systems in order to address the problem of insolvencies. It is widely accepted that the American insolvency system leads the way in this respect, because it accepts debt relief by means of a procedural discharge as its theoretical basis, and in so doing enables the debtor to make a fresh start.  The English system can be described as pro-debtor due to various provisions in the Act.  At the heart of the English insolvency system are inter alia its principal aims of the release from debt and the affiliated fresh start approach.  

The tale of the South African attempt to adopt new legislation started in the late 1980’s and has not yet managed to culminate in the promulgation of modern and effective insolvency legislation.  Providing the debtor with debt relief is not the main aim of the Insolvency Act,  but debt relief is an indirect consequence as the debtor receives a discharge of all pre-sequestration debt after rehabilitation.  However, the South African law does not provide for a procedure for the release from debt outside of the scope of this Act. 

Lastly, I refer you to this quote from Josiah Stamp. A little food for thought if you will. “The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight-of-hand that was ever invented. Banking was conceived in inequity and born in sin. But if you want to continue to be slaves of the bankers and pay the cost of your own slavery, then let the bankers continue to create money and control credit.” - Josiah Charles Stamp

tags: #insolvency #law #sequestration  

Written by: Johann Pepler
Danie Potgieter Attorneys
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What is a family trust?

A family trust is simply a contact between a settlor and trustees to manage an estate on behalf of beneficiaries.  The important part to remember here is that a trust is a separate estate.

Lets for argument sake imagine that a hypothetical person named Adam is a businessman.   Adam has decided to purchase his residential property in a trust.  Adam is the settlor of such a trust; Adam and his wife is the trustees and their children are the beneficiaries.         

If the trust is a so called discretionary trust, neither the beneficiaries nor the trustees have a claim to the assets belonging to the trust. The trustees are usually income beneficiaries, meaning that if the property is rented out, they can collect the rent as trustees remuneration.  The beneficiaries in a discretionary trust will only have a right to the assets or rather the capital of the trust in cash or kind once the trustees have bequeathed the assets to them.

Lets go back to the hypothetical businessman Adam.  Lets imagine that Adam, being the businessman that he is, is a director of several other companies and he has signed personal surety for loans obtained by one or more of these companies.  If that company runs into financial trouble and gets liquidated, the creditor of the company will run to the surety for payment.  This means that if Adam's property was in his own capacity it is an asset that will have been executable, even if the property was bonded.

However, since the property is registered in the trust, and the trust has never signed sureties for any of Adam's businesses, there is no legal connection whereby creditors of his companies can execute against the assets in the trust.

At this point in time it should merely be mentioned that the writer hereof would not normally advise that an income generating asset or an asset that grow in value be registered directly in a trust.  It should be born in mind that income tax on a trust is 40% and capital gains tax on a trust is very high as well.  We would normally advise clients to register an immovable property in a company and that the company in turn be owned by a trust.  There is however much to say about corporate structuring when all risks are mitigated and an effective tax strategy is employed.

In the hypothetical example of Adam, the worst case scenario is that Adam has to apply for sequestration of his estate.  His personal belongings will vest in the estate, but excluded from the estate are certain assets.  Notably one of these exclusions is an income under Section 23(5) read with Section 23(9) of the Insolvency Act, Act 24 of 1936.  This means that even though Adam might have been placed under sequestration, he still has a means to contribute towards the property registered in the trust.  In Adam's books this is regarded as a rental agreement, because in our scenario he is the tenant of said property.  The rent in this instance will most probably equal the bond repayments on the property registered in the trust.

Contrary to popular belief, effective estate planning does not merely consist out of policies, pensions and acquiring assets.  An effective estate plan for succession purposes employs separate legal personalities and separate legal estates.

At this point in time it should also be noted that I have not dealt with testamentary trusts nor have a dealt with vesting trusts.  It is my opinion that testamentary trusts and vesting trusts should normally not be employed in a effective estate succession plan.

About the author
Breyten Potgieter is an attorney at Danie Potgieter Attorneys. He specializes in Insolvency Law; asset protection and tax problems.

Tags: #familytrust   #assetprotection   #law   #insolvency   
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If I pay creditors something they must leave me alone

I have heard this one so many times.  There are quite a number of people that are under the impression that to stop legal action, all they need to do is pay a minimal amount to the executing creditor's attorneys.

Lets look at the legal process a little bit closer.

When a debtor obtains credit from a credit giver he will sign certain documentation.  This documentation is the cause of any future actions against the debtor for nonpayment.  The source document will normally obtain a surety if the credit facility was taken out by a company, close corporation or a trust.  

All goes well and the debtor utilizes the credit facility.  A few month or years later the debtor runs into some unforeseen circumstance and starts defaulting on the repaiments.  Lets assume at the moment that the credit facility is a personal loan. As soon as the debtor start defaulting, the credit provider will phone him to request payment. Usually after about three months that the debtor is behind on his or her agreement, the credit giver will refer the matter to legal.  This means that an attorney will first try and enforce the agreement with the debtor and if unsuccessful he will terminate the agreement and start legal proceedings to collect on the balance.

Very short outline of the legal process

The attorney issues summons, the debtor has time to defend the summons if he has grounds to defend it.  If the debtor does not succeed with his or her defense or does not have a defense, the summons becomes a judgment.  A judgment is a court order that the money is due and payable and collectable with due legal process.  After this a warrant of execution is obtained and send to the sheriff for execution.  

The sheriff firstly has to attach the creditors security, thereafter he will normally try to attach movable assets, immovable assets, any amount due to the debtor and lastly he can attach a portion of the debtors income after the proper legal process was followed.

Many people are under the impression that to avoid execution steps you simply have to pay a creditor a nominal amount and that the creditor must accept payment and must stop execution.

This obviously sounds too good to be true.  If this was the case, I would obtain a bond, default on that bond, once it goes to legal I would then issue payment every month for an amount of R1.00 and I am safe from execution steps.  When taken to this extreme it is clear that this will never be a sound legal argument.

In practice a collection attorney has thousands of open or active files. On every file that a debtor pays, he is able to collect a fee.  On a file where no payment is being received, the attorney has no other choice but to follow the legal process for collection.  If payment by the debtors is however quite small and under the amount of interest accruing every month, the collection attorney has no other choice but to try and obtain a higher payment or to take execution steps.     

Payment of an amount might delay execution steps to a certain degree.  In many instances however, payment by the debtor will be below interest and the outstanding amount accumulates.

#debt   #creditors   #insolvency   #law  

About the author
Breyten Potgieter
Attorney at Danie Potgieter Attorneys.  He specializes in Insolvency Law; Asset Protection and Tax problems.
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Main aim of Sequestration (South Africa)

The main aim of the sequestration process in terms of the Act is to provide for a collective debt collecting process that will ensure an orderly and fair distribution of the debtor’s assets in circumstances where these assets are insufficient to satisfy all the creditor’s claims.  The Insolvency Act provides for two forms of sequestration, namely voluntary surrender  by the debtor himself and compulsory sequestration  of the debtor’s estate by his or her creditors. Both voluntary surrender and compulsory sequestration are instituted by means of the application procedure  in the High Court.

In Ex parte Ford  the court held that the object of the Insolvency Act is to benefit creditors and not to provide debt relief to debtors. In R v Meer  the court remarked that the Insolvency Act was passed for the benefit of creditors and not for the relief of harassed debtors. Therefore, according to case law, the main aim of the Insolvency Act is to benefit creditors. However, it is an indirect consequence of the Act that debt relief is provided as the debtor receives a complete discharge of pre-sequestration debts after rehabilitation. 

The Insolvency Act does not define the term ‘insolvency’. However it does define the terms ‘insolvent’  (as a noun) and ‘insolvent estate’  in section 2 of the Act. According to the decision in Venter v Volskas Ltd  the test for ‘insolvency’ is whether the debtor’s liabilities, fairly estimated, exceed his assets, fairly valued. Even though the terms “actual insolvency’  and ‘commercial insolvency’  are not expressly defined in the Act, the distinction is still recognized by the Act and approved by our courts. 

Once a sequestration order is made a concursus creditorum comes into being.  The concept of the concursus creditorum means that the rights of the creditors as a group are preferred to the rights of the individual creditor.  In Walker v Syfret  the court stated that once the concursus creditorum has been established, no transaction can thereafter be entered into with regard to estate matters by a single creditor to the prejudice of the general body of creditors. 
According to section 2 of the Insolvency Act a ‘debtor’ (in connection with the sequestration of the debtor’s estate) means a person or partnership or the estate of a person or partnership which is a debtor in the usual sense of the word, except a body corporate or a company or other association of persons which may be placed in liquidation under the law relating to companies.  Once a sequestration order is given by the High Court, the debtor loses control of his or her estate and such estate will vest in the Master of the High Court, followed by such vesting in the trustee after his or her appointment by the Master. 

From the above mentioned facts one can conclude that the Insolvency Act is very much creditor orientated and only offers debt relief as a consequence of the discharge of all pre-sequestration debts after rehabilitation.


Tags: #Insolvency   #Sequestration   #Law   

Written by: Johann Pepler
Danie Potgieter Attorneys
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Post has shared content
What is the difference between bankruptcy and insolvency?

Insolvency
When an estate's liabilities exceeds its assets, the estate is insolvent.  There are usually two types of insolvency.  The first is factual insolvency, where the liabilities are more than the realizable assets and commercial insolvency, where the expenses are more than the income.

The insolvent's position should not be confused with the financial position as portrayed in financial statements.  

Financial statements are very theoretical and do not reflect the true position of the estate. One mere example will be bad debtors.  Bad debtors can still be shown in financial statements as an asset whereas it is regarded as a liability for insolvency purposes.

Bankruptcy
Bankruptcy has a similar meaning to insolvency in South Africa. The word "bankruptcy" is more used in American Law and other countries.  In South African Law, bankruptcy would refer to a position where it is clear that the estate, whether it is a personal or a corporate person, is so far in debt that he/she or it will not be able to recover. The appropriate legal mechanism would be to apply for sequestration in the case of an individual or to apply for liquidation in the case of a company.

About the author
#BreytenPotgieter  is an attorney at #DaniePotgieterAttorneys .
He specializes in Insolvency Law; asset protection and tax problems.
Link: http://daniepotgieterattorneys.co.za

#banruptcy     #insolvency     #sequestration     #liquidation  
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We hope to be able to connect more, now that we are also on google plus
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