Trusts are being used progressively more in concluding a variety of business transactions. Trusts are often preferred as a means of “legacy protection”. However, there are certain fundamental rules relating to trusts which, if not observed, could render the protection sought in the use of a trust useless and may even result in serious personal liabilities for trustees. The following are the fundamental rules which trustees and parties that transact with trusts should be wary of.
Ensure the trust is properly established
The law requires that there should be separation between the control and ownership of the trust assets on the one hand and, on the other hand, the enjoyment of all benefits of the trust assets. As such, one of the basic yet crucial elements in the establishment of trusts is that one person (the founder / donor) transfers from himself property (the trust assets) and place such property in sole and exclusive control and ownership of the trustees (in their capacity as such) to be administered by them for the benefit of other persons (the beneficiaries).
Most often, trusts (especially family trusts) are structured in such a way that all trustees are the also beneficiaries. In such instances, the trust concerned would not meet the basic legal element as noted above. Therefore, the validity of such a trust may be open to challenges by third parties and, most certainly will not withstand close scrutiny by the courts.
In order to guard against breach of the rule noted above, which is a common oversight in many family trusts, the Supreme Court of Appeal has in previous cases recommended that trust deeds should always provide for the appointment of at least one independent trustee.
Ensure trustees who act have letters of authority
Section 6(1) of the Trust Property Control Act, 1988 requires that trustees appointed after 1 March 1989 act as trustees only if authorised by the Master of the High Court (i.e. after the Master issued that trustee with a letter of authority). It follows that if a trustee acts without the letter of authority, such acts would be invalid.
Guard against the rule of subminimum number of trustees
Most often, trust deeds set out a rule of minimum number of trustees required to be in office at any given time. This rule requires caution for trustees and third parties alike because if the trustees are fewer than required, then unless the trust deed provides otherwise, the trust will be deemed to be legally incapacitated and thus any transactions or agreements it purports to conclude will be invalid. In this regard, the trustees may only act for purposes of appointing an additional trustee but they will be in breach of their duties if they continue to act in any other way while they are fewer than required.
Ensure correct decision-making process was followed
It is important to ensure that decisions of a trust are taken in accordance with due process required by law and the trust deed. A trustee may not make decisions as an individual and without regard to the input of other trustees. This is a serious breach of the rules of the trust law and if such decisions are later challenged in court, the trust might not be bound by such decisions and the errant trustee may be held personally liable to the beneficiaries and /or the third parties for losses suffered as a result of such individual decision.
In this regard, the following rules should always be borne in mind when trustees make decisions:
- Meetings must be properly called and qourated
All trustees must be given due notice of all trust meetings. If one of the trustees is deliberately excluded from a meeting, the decision taken at that meeting will be open to challenge. It is a different case if a trustee who was given notice of a meeting fails to attend a meeting. In this regard, the requirements regarding the minimum number of trustees that should be present before a meeting can take place (the quorum requirement), as set out in the trust deed, must always be observed.
- Round robin resolutions
If decisions are taken by way of written resolutions without a need for attendance of meetings (the so-called round robin resolutions), care should be taken to ensure that the passing of such resolutions is permitted in the trust deed and that such resolutions are taken strictly in accordance with the provisions of that trust deed.
- Decision by majority or all trustees
Trust deeds often provide a threshold for approval of various decisions. Some decisions may require approval by a simple majority whereas some may require the unanimous approval of all trustees. Accordingly, trustees (and third parties dealing with trusts) should always consider the nature of the decision and the level of approval required by the relevant trust deed in order for the decision to be valid.
- Trustees act jointly
The law requires that whenever trustees act on behalf of a trust, they should do so jointly (except if a trust deed expressly provides otherwise). This means that although the decisions of the trust must be approved by the majority of the trustees, when implementing those decisions the trustees must act as a collective.
Put simply, resolutions for the implementation of decisions of the trust must be signed by all trustees (including those who voted against the decision). A resolution signed by only the majority of the trustees would not be consistent with the principle of acting “jointly”. Of course the trustees may nominate one of them as an agent of the trust in implementing a particular decision, but again such nomination must be made jointly.
How Economic Crime Is Impacting Business In South Africa
77% of SA organisations have experienced economic crime and CEO’s and boards are increasingly being held accountable for economic crime.
South African organisations continue to report the highest instances of economic crime in the world with economic crime reaching its highest level over the past decade, according to PwC’s biennial Global Economic Crime Survey.
South African organisations that have experienced economic crime is now at a staggering 77%, followed in second place by Kenya (75%), and thirdly France (71%). With half of the top ten countries who reported economic crime coming from Africa, the situation at home is more than dire.
The Global Economic Crime and Fraud Survey examines over 7200 respondents from 123 countries, of which 282 were from South Africa.
The rise of economic crime
Trevor White PwC Partner, Forensic Services and South Africa Survey Leader, says: “ Economic crime continues to disrupt business, with this year’s results showing a steep incline in reported instances of economic crime. At 77% South Africa’s rate of reported economic crime remains significantly higher than the global average rate of 49%. However, this year saw an unprecedented growth in the global trend, with a 36% period-on-period increase since 2016.”
Related: PwC Focus On Sugar Tax
Economic crime in South Africa is now at the highest level over the past decade. It is also alarming to note that 6% of executives in South Africa (Africa 5% and Global 7%) simply did not know whether their respective organisations were being affected by economic crime or not.
While the overall rate of economic crime reported was indeed the highest for South Africa, the period-on-period rate of increase for South Africa and Africa as a whole was below that of our American, Asian and European counterparts.
Global indicators of a rise in economic crime
From a regional perspective, the biggest increase in experiences of economic crime occurred in Latin America, where there was a 25% increase since 2016 to 53% in respondents who indicated they had experienced economic crime. The US was a close second with a 17% increase over 2016 to 54% of respondents, while Asia Pacific and Eastern Europe experienced increases of 16% and 14%, respectively.
Asset misappropriation continues to remain the most prevalent form of economic crime reported by 45% of respondents globally and 49% of South African respondents. While the instances of reported cybercrime showed a small decrease in the South African context (29% in 2018 versus 32% in 2016), it retained its second place in the global rankings (31%) albeit at a lower rate of occurrence than 2016.
One of the new categories of economic crimes was that of “fraud committed by the consumer”.
It is the second most reported crime in South Africa at 42% and takes third place globally at 29%. This was followed closely by procurement fraud (39% in South Africa versus 22% globally). This indicates that the entire supply chain in SouthAfrica is fraught with criminality.
Related: PwC: Pria Chetty
When combined with the high instances of bribery and corruption reported (affecting more than a third of organisations at 34%), the resultant erosion in value from the country’s gross domestic product (GDP) is startling. Accounting fraud, which is usually perpetrated by senior management and results in the largest losses, increased from 20% to 22%.
Accountability of the board
Accountability for fraud and economic crime has moved into the executive suite, with the C-Suite increasingly taking responsibility, and the fall, when economic crime and fraud occur.”
The survey shows that almost every serious incident of fraud has been brought to the attention of senior management (95%).
85% of South African respondents indicated their organization had a formal business ethics and compliance programme in place.
In addition, 20% of local respondents indicated that the CEO (who is part of the first line of defence) has primary responsibility for the organisation’s ethics and compliance programmes, and is therefore more instrumental to the detection of fraud and the response to it.
PwC Focus On Sugar Tax
The proposed sugar levy is unlikely to make sizeable dent in fiscal deficit, but the Sugar Beverage Industry is offering a helping hand to reduce obesity.
In 2016, the National Treasury announced a Sugar Beverage Levy (SBL) on sugar-sweetened beverages (SSBs) scheduled to take effect April 2018. The aim of the levy was to prevent and control obesity in South Africa, but key industry players also viewed it as a potentially significant new source of revenue that could help plug the growing fiscal deficit.
The fiscal deficit has been widening as National Treasury faces slow economic growth and a shrinking tax base. Initially estimated at 3.1% of GDP, fiscal deficit projections increased to 4.3% of GDP in October last year.[i]
However, official data suggests the deficit already reached R195 billion in the first 8 months of the 2018/19 fiscal year, so it could amount to approximately R250 billion, thereby exceeding Finance Minister Gigaba’s October projections by 25%.
The levy has undergone various changes since it was first announced.
When the levy takes effect in April this year, it will amount to 2.1 cents per gram of sugar per 100ml, above 4 grams per 100ml.
This is down from an initial 2.29 cents per gram of sugar with no exempted amount.[ii]
Our estimations suggest the tax burden is approximately 10% given current levels of sugar content, down from approximately 20% previously. In addition, industry has recently reacted to the news of the SBL, reducing the sugar content of popular beverages by including non-nutritive sweeteners.
In addition to efforts to reformulate, the industry introduced smaller bottle sizes to curb excessive sugar consumption and limit the excise tax burden.
SBL excise revenue estimations
We estimated that in a scenario in which the beverages industry makes no change to the sugar content of SSBs, the levy would result in an estimated R1.5 billion loss in sales revenue and a R 1.4 billion excise revenue gain for government.
However, a reformulation by industry would result in a lower loss in sales revenues of only R1.07bn and lower than expected excise revenue gain for government of R990mn.
Given the estimated fiscal budget deficit of up to R250bn, additional revenues of between R990mn and R1.4bn are unlikely to make a significant dent in plugging the deficit and could support the assertion that the levy will focus on curbing sugar consumption rather than providing significant additional revenue inflows.
In our quantitative analysis of the proposed tax on SSBs, we use the PwC Economic Impact Assessment Model to derive the potential impacts, based on a 10% sales reduction calculation due to potential excise driven price changes.
Although excise revenues are expected to increase, other tax revenue streams are likely to experience a decline. Not considering excise impacts, the prospective tax revenue loss stemming from reduced sales revenues and showing in lower VAT, corporate income tax (CIT) and personal income tax (PIT) could range between R363 million and R518 million in the reformulation and non-reformulation scenarios, respectively.
Therefore, the net impact on estimated tax revenue combining the implications for excise tax, VAT, CIT and PIT revenue would only range between R631 million and R856 million, subject to which scenario is implemented.
It is unclear whether the SBL levy will assist in reducing consumers’ sugar consumption. However, industry facilitates lower sugar consumption by reducing bottle sizes and through reformulation.
Smaller sizes nudge consumers to lower sugar consumption
In addition to reformulating popular SSBs, the beverages industry has altered the size of the 500ml buddy bottle to 440ml, potentially nudging consumers to reducing their sugar consumption.
The move to the 440ml bottle represents a 12%[iii] reduction in size and means that sugar content fell from 53 grams in the 500ml bottle to 46.6 grams in the 440ml bottle.
The implementation of the new levy could still result in an approximately 61 cent increase in the price of the 440ml bottle.
It remains to be seen how South Africans will react to the current and impending price change of SSBs and if the SBL can indeed assist in reducing obesity. It is clear that monitoring and evaluation are key tools to help government and industry understand the effectiveness of this initiative to prevent and control obesity in South Africa.
- [i] Treasury, 2017. Medium Term Budget Policy Statement. [Online] Available: http://www.treasury.gov.za/documents/mtbps/2017/speech/speech.pdf [Accessed 08 February 2018]
- [ii] SARS, 2017. SARS to collect for sugar tax (SBL) from 1 April 2018. [Online] Available: http://www.sars.gov.za/Media/MediaReleases/Pages/15-December-2017—SARS-to-collect-for-sugar-tax-from-1-April-2018-.aspx [Accessed on 06 February 2018]
- [iii] PwC calculations
What It Will Really Take For South Africa’s Businesses To Scale And Create Jobs
It is the “low-hanging fruit” of scaling up South Africa’s established SME businesses that we believe is at the core of how we can grow this economy further.
Much has been said about the potential of SMEs to drive job creation and economic growth for South Africa. Our unemployment rate is at 26.7% – an astonishing figure that speaks volumes about the dire need for job creation. On the back of this, we are seeing increasing amounts of money being channeled into incubators and the funding of startup companies.
Although important, the starting of new businesses, unless they are completely innovative, well-timed and highly scalable, will not provide us with much-needed quick wins on our path to job creation and economic growth. It is the “low-hanging fruit” of scaling up South Africa’s established SME businesses that we believe is at the core of how we can grow this economy further.
The state of established businesses in South Africa
Established businesses that already employ 10-20 people have a working product, willing buyers and a proven business model and with some modifications, increased guidance and adequate management, they have the potential to increase their number of employees significantly as they scale up. However, a 2016/2017 report by the Global Entrepreneurship Monitor (GEM) in partnership with the University of Cape Town found that the rate of established businesses in South Africa has declined by an incredible 26% since 2015.
In fact, South Africa had one of the lowest established business rates of all the economies that participated in the GEM 2016 study (ranked 61st out of 65 economies). This, the report says, “paints a bleak picture of the SMME sector’s potential to contribute meaningfully to job creation, economic growth and more equal income distribution.” While we should not neglect the starting of new businesses, scaling up established businesses will provide young people with much needed experience to ensure that when they eventually start their own businesses, they may have greater chances of success.
How to increase the proportion of established businesses that scale up
Have a clear vision for your business
When we as business coaches work with established businesses that are scaling up, we make sure to start with the founder as their attitudes and desires determine how far the business will go. Scaling up an established business begins with a clear vision. Often, we find that the businesses owners don’t have a clear vision of where they want to take their business, and without a vision, it’s very difficult to scale.
Determine why your business exists
Linked to a clear vision, business owners need to have a strong purpose that answers the question of why they want to scale. Some business owners often see their business as a vehicle that provides them with an income, rather than the business serving a bigger purpose to impact an industry or the broader society. As a result, they often stop short of developing the full potential of their businesses.
Be willing to learn and seek help where needed
Business owners also need to have a willingness to learn. Being entrepreneurs, they often have a definitive view of the world and how it should work, which drives them to create something that they believe needs to exist (a new business venture). A risk to these strongly held views and high levels of confidence is that entrepreneurs potentially won’t open themselves up to new ideas, or to being challenged that some of their beliefs and views may, in fact, be holding their businesses back.
Business owners need to realise that they may not have all the skills to scale their business. I’ve found that entrepreneurs tend to be strong in customer service, innovation and sales, and are often weaker in people management and attention to detail – skills that become a lot more critical at the point of scaling the business.
Other areas of importance in scaling up
There are other critical areas that businesses need to address in scaling up but dealing with the founder is most critical. Strategy is one, cash flow is another, as is the question of hiring/finding and developing key talent. I will be unpacking these and more at the upcoming Business Day TV SME Summit on 8 March; and with increasing efforts by government to address the unemployment crises through platforms like the Jobs Summit announced in the State of the Nation Address, we hope that more conversations are had around harnessing the job creation power of established businesses that manage to scale up quickly and sustainably.
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