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Making BEE Work for You

BEE can provide your business with a differentiator. Now is the time to shift how you think about BEE and make it work for you.

Juliet Pitman

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Black economic empowerment is often identified as a hold-all reason for the multiple challenges facing small businesses, and is blamed for everything from the inability to access capital and government tenders, to the problems of hiring staff.

But smart entrepreneurs, having realised that BEE can provide their business with a real competitive edge, are using it to great effect. In an increasingly competitive business environment, entrepreneurs should be on the look-out for anything that can provide them with even the smallest degree of differentiation, and those that get BEE right know it can be made to work for their businesses.

Understanding the codes

The government’s stated purpose in implementing broad-based black economic empowerment is to ensure that a more representative portion of the population can reap the benefits of involvement in the economy, thereby addressing the past economic imbalances brought about during Apartheid.

While BEE has in some instances developed a poor reputation for benefiting a few privileged individuals, there is an increased focus on ensuring that it impacts a broader cross-section of the historically disadvantaged community – hence the shift from Black Economic Empowerment (BEE) to Broad-Based Black Economic Empowerment (B-BBEE). (For the purposes of this article, BEE can be taken to imply B-BBEE).

There are seven elements of the Department of Trade and Industry’s Broad-Based Black Economic Empowerment Codes of Good Practice (commonly known as the codes). Companies are scored on their performance in implementing each element, or a combination of elements.

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Don’t Lose Your Business. Dos and Don’ts of BEE. Click Here for More

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The seven elements of the codes

1. Ownership: measures the equity that black people hold in the business according to their voting rights, economic interest (including entitlement to dividends, capital gains and other rights of shareholders) and realisation points (the accumulation of net economic interest in the hands of black shareholders).

2. Management Control: measures the extent to which black employees participate at the Board level and are employed in senior management positions.

3. Employment Equity: measures the percentage of black staff employed in the business. On the QSE scorecard a distinction is made between black managers and black employees, while on the Generic Scorecard only black senior, middle and junior management employees count.

4. Skills Development: measures the extent to which the company has invested in the development of skills among black employees. It is split between skills and training, and learnerships.

5. Preferential Procurement: this element measures the extent to which a company uses the services of black-owned or BEE compliant businesses, and is based on the empowerment level of a business’s suppliers.

6. Enterprise Development: this element is aimed at developed small, black-owned enterprises. Beneficiaries must meet certain black-owned or size criteria.

7. Socio Economic Development: measures the investment that a company makes in uplifting black individuals, communities or groups, mostly through charitable means.

BEE basics

Contrary to a commonly-held belief, BEE is not only relevant to big corporates or black-owned businesses. In fact, the codes take cognizance of the role that small to medium enterprises play in the economy and make provisions for their needs.

The codes differentiate between businesses of different sizes and there are different scorecards for Exempt Micro Enterprises (EMEs), Qualifying Small Enterprises (QSEs) and Generic Enterprises.

  • Exempt Micro Enterprises (EMEs)

Businesses with a turnover of less than R5 million a year are automatically exempt from BEE requirements. They are automatically deemed to be a Level 4 Contributor if they are less than 50% black-owned or a Level 3 contributor if they are more than 50% black-owned. Start-up businesses are treated as EMEs for the first year following their formation, regardless of their expected total revenue. (EMEs that wish to tender for government contracts of between R5 million and R35 million will, however, need to use the QSE or Generic scorecard.)

  • Qualifying Small Enterprises (QSEs)

QSEs are organisations whose annual turnover is between R5 million and R35 million. The dti has developed a BEE scorecard specifically for QSEs whereby each of the seven codes is weighted equally at 25 points. QSEs are then given the option of selecting any four of the seven codes on which to comply in order to achieve their requisite 100 points.

This addresses one of the most common BEE concerns that entrepreneurs have, namely the (incorrect) perception that you have to ‘give away’ shares in a company in which you’ve invested everything. It makes BEE more accessible and manageable for SMEs, and because all codes are given equal weighting, gives you maximum recognition for any investment your company might make. For instance, QSEs can earn a full 25 points for their investment in socio-economic development (commonly known as corporate social investment or CSI) projects, whereas larger companies that are scored using the Generic Scorecard can earn a maximum of five points for such activities.

  • Generic Enterprises

Generic Enterprises are those with an annual turnover in excess of R35 million. Their scorecard differs significantly from the QSE scorecard as they have to report on all seven codes in order to assess their BEE status, and codes are weighted differently according to their perceived importance in furthering broad-based black economic empowerment in the country.

The weighting of the various dti code elements for each group of enterprises is detailed in the table that follows:

Contribution levels and BEE verification

A verification certificate provides other businesses with assurance of your BEE status, and is imperative if they want to claim BEE points for having conducted business with your company.

EMEs can be assessed by a BEE verification agency, an auditor or an accounting officer but auditing firms need to be accredited by the Independent Regulatory Body for Auditors (IRBA) to conduct BEE verifications and issue BEE certificates. For QSEs and Generic Enterprises BEE verification should be done by a recognised BEE verification agency. They will conduct an independent BEE audit on your company. Strict rules govern the conduct of these agencies and it’s best to select one that has achieved accreditation with the South African National Standards (SANAS).

The number of points you score for each element will determine your BEE contribution level. The lower the contributer level, the more compliant the business – in other words a Level 1 contributor is the most BEE compliant with a Level 8 contributor being close to non-compliant.

Thinking differently – how BEE can benefit your business

When entrepreneurs understand that BEE can actually deliver benefits to their business, or that they can earn BEE points for investments that they are already making, it often brings about a shift in their negative perceptions of black economic empowerment.

So instead of feeling resentful about ‘yet another hindrance that government has placed in the way of small business’, consider how you can use the legislation to your advantage. There are many benefits to be derived from a strong BEE status, in addition to the obvious one of putting your company in line to win tenders and contracts.

For example small businesses can use the Enterprise Development (ED) code to access mentorship and investment from big business. Becoming BEE compliant and making your business an attractive ED investment can open up doors to immensely beneficial partnerships with big businesses. A number of savvy would-be start-ups featured in various issues of Entrepreneur magazine have accessed capital, equipment, mentorship and business deals from large organisations looking to earn ED points.

Similarly, the Preferential Procurement code can enable your small business to join the procurement database of a range of large corporates, something that’s considerably more difficult to achieve without the leverage of BEE.

An investment in skills development will provide your business with multiple long-term benefits while earning you BEE points, and involvement in community and social upliftment projects can boost your brand and build morale and loyalty among staff. Programmes that fast-track the development of black employees into management positions can widen your network of business contacts and provide you with access to a broader market.

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The BEE Waters Are Rather Murky. Here’s Why

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Employee participation

The ins and outs of ESOPs

Thinking of implementing an Employee Share Ownership Programme? Here are some important points to consider.

Barnstone Corporate Services provides consulting services and advice to large corporate organisations and has been instrumental in helping some of the country’s biggest blue-chip companies to implement Employee Share Ownership Programmes (ESOPs) worth billions of rands. The company also has valuable advice to offer small businesses that are considering ESOPs as part of their BEE principles. “The following principles may be useful for any organisation considering implementing an ESOP,” says James Steere, manager in the company’s Executive Advisory Services unit.

He offers the following insight on some important considerations when implementing an ESOP:

1. Understand why

You need to understand why you are implementing an ESOP. If it is for BEE purposes, you need to understand how your business is classified by the BEE codes (as an EME, QSE or Generic Enterprise).

Consult with a BEE rating agency to establish what the scheme would have to achieve in order to improve your rating. You need to know what percentage of the company would have to be owned through an ESOP structure and whether the employee demographic is suitable. If your company is made up entirely of white males, an ESOP obviously won’t benefit you on the BEE front but you might still want to consider it as a tool for aligning employee and shareholder interests. Similarly, if you are a QSE an ESOP would only give you a maximum of 40% of the available score on the ownership element, so just doing an ESOP may not be enough if you fall short on the other elements.

Another important consideration is whether you want different employees to benefit in different ways. For example, will length of service in the company or job grade form part of the evaluation in determining how employees will benefit.

Understanding why you are implementing the ESOP is an essential first step as it guides the choice you make about the preferred structure and how best to implement it.

2. Structure

Your second step is to select a suitable legal structure in which to house the ESOP. Remember that however well intentioned an ESOP may be, employees face the same financial pressures as we all do, and they might simply sell any shares that they are given in the company. This would render the ESOP fairly meaningless.

To get around this, the preferred ESOP structure is a trust, with employees as the beneficiaries. This allows for benefits from share ownership to accrue to employees over a period of time whilst limiting the ultimate control that employees have over the shares. It also allows for new joiners to the company to be included as beneficiaries and for people who leave the company to forfeit part or all of their benefits under the ESOP.

Typically, the company provides a low-interest loan to the trust with which it acquires a block of shares in the company. This loan is then paid back over time from the dividends accruing to those shares now owned by the trust. The balance of the dividend stream due to the trust after each loan payment is then paid out to trust beneficiaries and/or reinvested in the trust. After a defined period of time (usually a ten-year lock-in period) – provided the loan has been settled – the shares are allocated to the employees who can then sell them or keep them.

In this way, the interests of employees are aligned to those of the shareholders and managers because if the company is more profitable, everyone benefits.

3. Communication

It’s extremely important that you take the time to actively communicate to employees and other key stakeholders so that their expectations are managed and they understand and support the transaction. Some important communcation considerations:

  • Don’t assume that people understand the basic concepts such as share ownership, trust structures and dividends. You will need to invest in an accessible education campaign that helps them understand all aspects of the ESOP. Create a forum for discussion and debate. It doesn’t have to be a masterpiece of communication – but the worst thing to do is rely on informal discussion of these concepts and structures outside of work. This typically creates unrealistic expectation about the benefits. If possible, conduct two or more engagement sessions with your employees at different times. People will often listen through a presentation and only later come up with a question. Repeated discussions help to build trust in the process.
  • Don’t shy away from the difficult conversations. If you need to allocate different beneficiary rights or values to different employees, explain why this is necessary and take it on the chin if people are angry. The only mistake you can make here is to ignore a problem – get stuck in and let people vent if they need to. Provided your reasons for setting up the ESOP as you are are fair, employees will generally understand even if they don’t agree.
  • If you are in a unionised industry, proactively engage with unions but ideally create the understanding that the ESOP is not up for negotiation. Rather it is a structure to be presented and discussed. Ultimately the company shareholders will decide if and how it is established. If the structure is patently unfair, the Union representatives are likely to object so make sure that it works.

ESOP tips

  • Get a good tax consultant/auditor/lawyer – this is not a conventional commercial transaction so you need to be careful about how it’s accounted. There are tax implications and legal documents that need to be carefully drafted. If it’s a big transaction you’ll probably need support from a banking team to guide you on the best financing options.
  • When selecting trustees, the first priority has to be that they function as a group. Don’t elect trustees simply because they are prominent individuals or well liked. The role of the trustee is critical in ensuring the proper functioning of the trust over a long period of time.
  • Make sure that the structure is well supported and that there’s someone in the company whose job it is to oversee the ESOP. These things go on for a long time and need internal day-to-day processes to make sure that as employees leave or join, ESOP records are appropriately maintained.

Juliet Pitman is a features writer at Entrepreneur Magazine.

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1 Comment

1 Comment

  1. Clint White

    Sep 13, 2012 at 15:26

    How do we get BEE accreditation / certificate if we are an EME?

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BEE

LFP Training – The ‘Agents’ Of Transformation

Implemented correctly, BEE has the potential to change the current status of South Africa’s economy. Add to that LFP Group’s focus on helping corporates to boost employee skills and engagement and upskill disadvantaged people across the country, and Louis Pulzone is aiming to make a real difference.

LFP Training

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LFP training

LFP Training is the leading provider of BEE aligned turnkey skills development training in South Africa, delivering innovative, industry-first learnership programmes to educate and upskill abled and disabled individuals in line with the BEE codes of good conduct.

LFP Training’s fully accredited learnerships are strictly aligned to BEE guidelines and allow companies to implement skills development.

To date, more than 700 companies have actively benefited from LFP Training’s solutions, reaching their desired target spend at a fraction of the cost. This solution is the most cost-effective way of implementing BEE initiatives while gaining maximum points.

The team at LFP Training comprises industry experts and combines years of experience with a passion for transformation, education and making a difference.

Today, both unemployed and employed, disabled and able-bodied people in all industries are actively benefiting and contributing to society, thanks to LFP Training’s turnkey training solutions and strategic partnerships. 

In South Africa’s tough economic environment, where unemployment levels are so high, how is LFP an ‘agent of transformation’?

It’s no secret that times are still tough in South Africa. Our economic inequality is one of the highest in the world and unemployment is still a massive concern.

While this is nothing new, the good news is that it has forced us to become more resilient and find new strategies. At a time like this, we need to invest in our people and kick-start the economy again. At LFP Group, we look to new strategies, growth and the upliftment of people to help shape the future. Being agents of transformation means that we look towards solutions for a better South Africa for tomorrow.

We also recognise that government cannot do everything. Our goal as LFP Group is to be a leader in our industry, helping government achieve its goals for reducing unemployment. Our aim is to forge ahead with a great public-private partnership strategy.

Related: Black-Owned Businesses Need BEE Compliance

What role do you play in transforming South Africa? Why is this important?

With the shortfall in education, responsibility has fallen on corporates to provide opportunities and to upskill employees. Many companies are filling the gap between what has been previously learnt and what is required in a practical job function.

By partnering with corporates, LFP can help companies to achieve their BEE objectives and gain access to rebates, while providing education in the form of learnerships. The stipend provided by corporates to learners is invaluable in mobilising learners to grow, learn and fill roles, while having financial security.

By providing a turnkey solution, all parties benefit from our all-encompassing approach — both on and off campus.

Each solution is accredited and optimised to ensure that both the learner and the business benefit from the skills acquired. Our offering has expanded over the years based on demand for further skills development and quality education.

As LFP Group we do not only consider transformation as a process of change and opportunities for individual employment; we see it as a way of transforming attitudes and creating hope for a nation that truly needs and aspires to be that country that does not live in the past, but acts in the future. We believe that transformation is the duty not only of state and politics, but every South African. We started by transforming our Group first, and now our vision has shifted to our country.

Why did you launch LFP? What was your goal, and how have you realised that goal?

Having recognised a critical gap for skills development to help address unemployment in South Africa’s ever-changing economic landscape, I founded turnkey training provider LFP Training in 2013.

The company’s innovative programmes are aimed at educating and upskilling people who have disabilities and who are unemployed, in line with the country’s BEE Codes of Good Conduct. More than this, I am truly committed to transforming not just the employment and skills development side, but my country’s quest for transformation. LFP Group is a platform where I could achieve that objective. I also believe in creating a winning team that echoes my vision and shares my passion to deliver that goal.

With more than a decade’s experience in the education industry, I am passionate about making a difference through education and saw a gap in the market for innovative training programmes aimed at educating and upskilling. By partnering with corporates, we have trained more than

7 000 learners with an excess of 700 clients paying R70 million in stipends directly to learners in stipends or salaries; this has resulted in a 100% pass rate in their BEE verification audits. This has a tangible impact on unemployment in South Africa.

Why is investing in people the single most important thing that businesses can do?

Addressing staff development and training is often low on the list of business priorities — but the relationship an organisation has with its employees can directly impact commercial success. Continuously evaluating, refining and improving your greatest asset — your people — can maximise their potential and bring wider business benefits; not least that individuals are happier and more motivated, and therefore more productive. In a recent survey on adult learning, 41% of respondents indicated that further education helped them improve the skills they needed to do their jobs.

Continually training staff means more of them will have up-to-date and relevant skills, which are valued and respected by the industry.

Continuing to develop staff not only adds value to the company, strengthens the workforce and improves workplace efficiency — it also improves job satisfaction, encourages loyalty and ensures commitment to the success of the business. Another final piece of our human investment capital is adding value to our internal staff, and that of all the clients and leaders of the companies we serve. LFP Group has created a specialised IP and as a leader in the industry I believe that we must educate and invest in the people we’re associated with.

Related: Scoring BEE Points

How should business owners and executive teams view training?

Education is a fundamental right, and everyone should have access to it. With a passion for education, I always look to a quote by Nelson Mandela, a true advocate for education: “Education is the most powerful weapon which you can use to change the world.”

This could not be truer. The private sector is having to fill the gaps in education and companies need to innovate to provide opportunities. In the fields of STEM there is a critical skills shortage, and we need to work together to empower and advance our country and its people. One of the most critical tasks we’ve focused on is training the leaders of industry.

Many business owners, CEOs and senior management, even shareholders of corporates, fear the mention of BEE and Transformation. The reason is simple: South Africa is not transformed enough, and this is part of our vision. We must ensure that as much as we service our clients and provide the services LFP Group has set out to do, we are slowly but surely penetrating the leadership market to educate and prepare them for transformation.

The policies of BEE are constantly in the spotlight because of the opportunities it can provide. By embracing it, companies and people are able to benefit from it wholly.

What is the role of BEE in South Africa? Why should businesses embrace it?

If implemented correctly, BEE has the potential to change the current status of our economy. B-BBEE addresses transformation in South Africa through ownership and management in companies, upskilling of employed and unemployed people and growth of the economy and smaller enterprises through enterprise and supplier development.

Investment in B-BBEE and compliance creates massive business opportunities for your organisation in the form of public sector contracts and business from other B-BBEE compliant companies. This provides a competitive edge.

As LFP Group we recognise that BEE and transformation in the labour and corporate sector, will be with us for a long time. As an industry leader we must be on top of our game and always be at the forefront of knowing our industry, and more vitally what is to come. This will allow us to address the historical imbalances and assure that all citizens in our country have skills and an opportunity for a long-lasting and sustainable job.

What does LFP Campus do?

The LFP Campus is a blended online learnership platform that makes it possible for clients to gain substantial points towards their skills development spend in line with the BEE codes.

Applicable to all industries, this popular offering avoids downtime and loss of productivity, while supporting flexibility, thanks to a blended online offering which can be undertaken outside of working hours.

LFP Training has not only aligned its online initiative to the BEE codes but also made it possible for clients to do so at a fraction of the cost — all while being eligible for government initiatives such as tax rebates, youth subsidies and other grants.

Clients are now able to claim the salary of an enrolled employee for the full duration of the learnership without compromising on their business’s operational requirements.

Clients can also claim more than 500% of the actual spend towards their skills development target spend.

LFP Group’s offerings

Youth Employment Services Implementation Programme

A staggering six million youth aged between 18 and 34 are still unemployed and this is the exact reason why LFP Group is coming to the fore.

With the Youth Employment Service (YES) initiative — officially gazetted on 28 August 2018 — aimed at creating one million jobs within the next three years, companies can now earn additional BEE benefits.

The LFP Group, in support of the YES programme, recognises the critical role that South Africa’s youth play in shaping the economy and our country. LFP now offers YES programme management implementation to benefit clients and individuals.

The offering includes:

  • Comprehensive assessment of the employer to determine YES eligibility and management of the entire project.
  • Recruitment of the youth and full registration of recruited youth onto the YES initiative.
  • Registration of the client on the YES initiative.
  • Coaching, mentorship, a personal development plan and key performance indicators.
  • Access to permanent placement opportunities for youth not absorbed upon completion of the YES initiative after 12 months.
  • Compilation of verification file containing supporting evidence for YES and B-BBEE recognition.

Related: BBBEE Employee Share Schemes – Should I Or Not?

LFP Permanent Placements

LFP’s attentive team of trained experts source talent in line with a company’s B-BBEE scale and predominantly recruit for roles in the fields of administration, healthcare, technology, retail and start-up hiring.

With a clear understanding of each clients’ needs and objectives, LFP Permanent Placements has a proven track record with a project completion rate of 97% and the remaining 3% attributed to unforeseen circumstances such as project shutdowns, health issues, relocation etc.

LFP Payroll

More than learnerships, LFP prides itself in providing its clients with a turnkey solution. For this reason, LFP not only handles recruitment, training, facilitation and paperwork for learners, but also takes care of outsourced payroll requirements.

LFP Group has a dedicated and trained administration team to handle the day-to-day management of a company’s learners’ stipends, temporary employees and permanent employees.

BEE CONNEX

Changing and adding suppliers is a complicated and tedious task, but as a company’s BEE needs evolve to meet the demands of new legislation and accommodate further company growth, the need for more knowledgeable and reputable suppliers becomes inevitable.

BEE-Connex is a first of its kind app, changing the way South Africa does business in the BEE industry.

It’s as simple as downloading the BEE-Connex app and signing up to the biggest and most reputable network in South Africa. Here clients receive a host of benefits including:

  • Enjoying hassle-free BEE.
  • Getting connected to the right supplier in just a few simple steps.
  • Gaining access to a comprehensive network of verified suppliers who understand and can meet your specific needs.
  • An easy, cost-effective solution to gain maximum points.

Visit www. lfptraining.co.za for more information

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BEE

It’s Do Or Die In BEE Compliance

What this means when doing business in South Africa.

Jacolien Botha

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More and more, we see businesses and BEE verification firms coming under the spotlight for fraud and non-compliance. BEE ratings are viewed as a ‘hot commodity’ and many BEE services firms have popped up over the past few years to accommodate the demand.

Pressure mounts on businesses to reassess their skills development spend, youth contributions, ownership and management structures in-line with the BEE scorecard, and the Government has been particularly verbal in highlighting the need for BEE compliance.

AJ Jordaan, Sales Manager for leading BEE-aligned Skills Development training company, LFP Training says that its more than compliance – it’s a way of life for businesses today. “Over time, businesses have realised that while they are doing almost everything right, what would make or break a deal could very well be their BEE rating,”

“Businesses receive additional points for doing business with BEE-compliant companies. Enterprise & Supplier Development is key to a firm’s business strategy. With legislation changing on a regular basis, we always advise that clients do it right from the get-go,”

Related: How Do I Become B-BBEE Compliant?

A scorecard is not a target – it should be incorporated into a business’s vision and growth strategy; it is just as important as any other top-line business matter these days. “With the need for more and more guidance in the realm of BEE, more suppliers have popped up to provide strategic counsel and it’s easy to get caught up in the ‘hype’. Terminology, weightings, paperwork and implementation are daunting tasks, but with so many businesses still failing their BEE audits – even under advisory – how do we know who to trust?

“Referrals by word of mouth are always great. I also believe that businesses must ask for a company’s success rate and previous customer testimonials. More than anything, the consultant/ BEE supplier that a company chooses must understand how to truly implement BEE strategies to achieve exactly what it’s there for – to empower the previously disadvantaged and help bridge gaps in society” says AJ.

With all the hype, we forget about what its there for. “Trading in points is not the intention; the end goal is economic transformation and fair opportunities for all,” he continues. “If a company fails its BEE audit, it’s essentially failed to promote exactly what BEE is all about. Money has been wasted and no transformation has really occurred. Partnering with a credible and knowledgeable partner is therefore key.”

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BEE

BBBEE Share Schemes – A Ticking Time Bomb?

At the forefront of these mechanisms are employee share schemes.

Nicolene Schoeman-Louw

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BBBEE Share Schemes

Since the promulgation of the amended codes of good practice under the Broad Based Black Economic Empowerment Act 53 of 2003, as amended (“BBBEE” or “the Act”), compliance with the ownership element has become a compulsory compliance element for both Qualifying Small Enterprises (“QSE” having between R10 and 50 million annual turnover) and generic enterprises (over R50 million annual turnover). As a result, businesses have found themselves considering mechanisms which aim to address this element. At the forefront of these mechanisms are employee share schemes.

The first of these structures were constructed in the early 2000’s by JSE listed companies. The aim of these structures were essentially two-fold:

  1. An employee retention strategy similarly constructed as executive share schemes in many ways, and
  2. Compliance with BBBEE.

These structures have recently been under the spotlight again . Mainly because of the questions it raises in terms of whether it is true empowerment or not.

Related: Corporate BBBEE Compliance Turned Into BBBEE Investment

For businesses wanting to utilise these structures, a number of aspects are to be considered:

  1. Employers and employees stand in a vertical relationship with one another. This is because the employer directs the expectations and the standards of the services exchanged between them. Shareholders, on the other hand, are in a horizontal relationship as they are equally entitled to regulate and direct matters which may affect their shareholding or investment. So, to shift from a vertical to a horizontal relationship requires the necessary professional inputs, management and attention.
  2. These share schemes are separate entities that require the necessary attention and inputs. As such, it is not just a case of setting it up and it simply running itself.
  3. These structures need to have a shelf life in my view. In this regard, I mean that a clear commercially feasible strategy needs to be devised and implemented in regards to the trust. This would include a structured plan whereby employees would not only be entitled to dividends but would also have the opportunity to up-skill and to improve themselves in various ways. The financial benefits should aim to facilitate direct ownership.

It is important to remember that inviting partners to sit at the table, needs to fully embrace the concept. If it does not, it not only negatively impacts the relationship, but disempowers the people involved. The human aspect thereof is as devastating as the legal non-compliance which may even go as far as constituting fronting.

Related: The 5 Elements Of BBBEE

In order to avoid this, these structures need to be setup correctly and managed correctly, which means:

  1. The trust deed must clearly define the beneficiaries and the proportion of their right to receive distributions;
  2. The trustees must actively take part in managing the trust at a level similar to the management role of shareholders in a company having a shareholding;
  3. Based on the aforesaid, in my view, the trustees should be appointed by the beneficiaries;
  4. A written record must be kept identifying the beneficiaries as well as prove that they fall within the designated groups as defined in the Act. The trustees must have no discretion in this regard;
  5. A written record must be kept of fixed percentages of claims or outlining formulas for calculating claims. The trustees must have no discretion in this regard;
  6. The trustees must present the financial reports of the trust to the beneficiaries yearly at an annual general meeting of the Trust;
  7. The trust deed or other relevant statutory documents of the trust must be made available, or on request, to any beneficiary in an official language in which that person is familiar;
  8. On winding up or termination of the trust, all accumulated interest must be transferred to the beneficiaries or to an entity representing the interests of the participants or class of beneficiaries.

Expert professional guidance is therefore crucial in order to avoid these structures becoming your own ticking time bomb.

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