Publications
Partners
SHAREMAX INFORMED us last month – via its legal representatives – that our interpretation that investors could be liable to annual tax on the projected interest of 20% that can be earned on The Bay – even if the interest is only paid in no less than five years’ time – was wrong. Sharemax’s interpretation of its prospectus is that the tax burden only becomes due after five years, when the actual interest rate is determined and the interest paid.
Without the assistance of tax experts, and especially the SA Revenue Service, it’s difficult to say who’s right. However, I’m fully prepared to accept – for the sake of investors in the project – that Sharemax is right: and for its sake, I hope so too.
My interpretation was: Assuming someone invested R1m in The Bay project, that person would experience a negative cash flow (tax) of as much as R80 000 on the “projected” interest rate of 20% every year. Not so, says Sharemax. It feels the interest on the R1m comes after five years, or at least over a period of five years, and that the taxpayer will only have to worry about it then.
On the positive side, Sharemax’s interpretation does away with the negative cash flow for the taxpayer as well as the uncertainty arising from the provisions in two paragraphs of the prospectus. Paragraph 6.2.3 reads: “The actual interest rate applicable to the claims will however be determined from time to time by the directors in conjunction with the auditors of the company.”
That creates complete uncertainty about the extent of the interest and it’s therefore better for investors if the payment of interest occurs at the end of the five years.
Paragraph 6.2.4 creates more uncertainty, especially about the period. It reads: “Investors are hereby informed that their investment in the company will be fixed and can only be called up after a minimum period of 5 (five) years has lapsed since date of investment or when the erven in the Bay Golf Estate which is to be established have been sold and transferred to third parties.”
It’s unclear whether that paragraph refers to only the capital or also the interest.
If the payment of interest is also postponed until after the sale and transfer of the last stand it could take a very long time. In phase one of The Bay development around 500 stands will be made available. About five years ago that wouldn’t have sounded like a lot, but unfortunately the investment climate for golf estates has weakened significantly. We reported on that in Finweek (11 March 2010 and 20 May 2010). In the immediate vicinity of The Bay – that is, next to Hartbeespoort Dam – Sharemax itself admits business is tight at its own development called Mount Rouge, just across from the Pecanwood golf estate. So far, only 24 of the 110 available stands at Mount Rouge have been sold. No houses have yet been built at Mount Rouge. At Pecanwood itself, which is already more than 20 years old, there are still quite a number of undeveloped stands – some going for as little as R600 000, which is less than The Bay is planning to sell its stands for.
The fact is that the investment – and possibly also the interest payments – will, according to Sharemax’s interpretation, only occur when the last stand has been sold and transferred: and that means investors can’t declare the interest income annually and pay tax on it.
Our advice to investors in The Bay is to follow Sharemax’s interpretation and declare the interest payments only after five years. It might just be a good idea to approach Sharemax via an expert – or perhaps even Sars – for an opinion or to obtain a firm undertaking from Sharemax about how the interest will be paid before that decision is made.
But what are the implications of declaring the interest annually or after five years?
Let’s go back to our example of a R1m investment. If interest of R200 000 is declared annually – and that’s the investor’s only source of income – he won’t pay much tax. First, there’s the tax-free portion of the interest, which will hopefully increase regularly over the five years, as well as the fairly low tax rate for someone who earns only R200 000/year, minus the relevant deductions.
However, if all the interest – that is, R1m – on the R1m investment only falls due in five years’ time, the interest income for that year will be the full R1m. You can’t write a letter to Sars and say the interest is actually the total interest for the past five years and that the tax should be spread over that period. Sars won’t fall for that story, an old experienced accountant and tax expert has informed me.
Take the pain in bits yearly or all in one go at the end of the five years, according to Sharemax’s interpretation. Depending on your own circumstances, the Sharemax option could perhaps cost you more in tax than the annual declaration of interest income. Decide for yourself.
In the extremely unlikely event of my investing money in The Bay, I’d choose the period of five years or longer, simply because of the uncertainty of whether I will ever really receive the capital and/or interest in cash during my lifetime.
But best would be for Sharemax to also include a directive about the tax aspect from Sars in the prospectuses for The Bay, of which there will probably still be many issued, or to make sure there’s nothing unclear in their further prospectuses.
Unfortunately, taxpayers can’t choose whether they want to receive the interest every year and pay tax on it or wait five years. Ultimately, the implementation of the prospectus and the view taken by Sars will determine how the interest is dealt with.
Without the assistance of tax experts, and especially the SA Revenue Service, it’s difficult to say who’s right. However, I’m fully prepared to accept – for the sake of investors in the project – that Sharemax is right: and for its sake, I hope so too.
My interpretation was: Assuming someone invested R1m in The Bay project, that person would experience a negative cash flow (tax) of as much as R80 000 on the “projected” interest rate of 20% every year. Not so, says Sharemax. It feels the interest on the R1m comes after five years, or at least over a period of five years, and that the taxpayer will only have to worry about it then.
On the positive side, Sharemax’s interpretation does away with the negative cash flow for the taxpayer as well as the uncertainty arising from the provisions in two paragraphs of the prospectus. Paragraph 6.2.3 reads: “The actual interest rate applicable to the claims will however be determined from time to time by the directors in conjunction with the auditors of the company.”
That creates complete uncertainty about the extent of the interest and it’s therefore better for investors if the payment of interest occurs at the end of the five years.
Paragraph 6.2.4 creates more uncertainty, especially about the period. It reads: “Investors are hereby informed that their investment in the company will be fixed and can only be called up after a minimum period of 5 (five) years has lapsed since date of investment or when the erven in the Bay Golf Estate which is to be established have been sold and transferred to third parties.”
It’s unclear whether that paragraph refers to only the capital or also the interest.
If the payment of interest is also postponed until after the sale and transfer of the last stand it could take a very long time. In phase one of The Bay development around 500 stands will be made available. About five years ago that wouldn’t have sounded like a lot, but unfortunately the investment climate for golf estates has weakened significantly. We reported on that in Finweek (11 March 2010 and 20 May 2010). In the immediate vicinity of The Bay – that is, next to Hartbeespoort Dam – Sharemax itself admits business is tight at its own development called Mount Rouge, just across from the Pecanwood golf estate. So far, only 24 of the 110 available stands at Mount Rouge have been sold. No houses have yet been built at Mount Rouge. At Pecanwood itself, which is already more than 20 years old, there are still quite a number of undeveloped stands – some going for as little as R600 000, which is less than The Bay is planning to sell its stands for.
The fact is that the investment – and possibly also the interest payments – will, according to Sharemax’s interpretation, only occur when the last stand has been sold and transferred: and that means investors can’t declare the interest income annually and pay tax on it.
Our advice to investors in The Bay is to follow Sharemax’s interpretation and declare the interest payments only after five years. It might just be a good idea to approach Sharemax via an expert – or perhaps even Sars – for an opinion or to obtain a firm undertaking from Sharemax about how the interest will be paid before that decision is made.
But what are the implications of declaring the interest annually or after five years?
Let’s go back to our example of a R1m investment. If interest of R200 000 is declared annually – and that’s the investor’s only source of income – he won’t pay much tax. First, there’s the tax-free portion of the interest, which will hopefully increase regularly over the five years, as well as the fairly low tax rate for someone who earns only R200 000/year, minus the relevant deductions.
However, if all the interest – that is, R1m – on the R1m investment only falls due in five years’ time, the interest income for that year will be the full R1m. You can’t write a letter to Sars and say the interest is actually the total interest for the past five years and that the tax should be spread over that period. Sars won’t fall for that story, an old experienced accountant and tax expert has informed me.
Take the pain in bits yearly or all in one go at the end of the five years, according to Sharemax’s interpretation. Depending on your own circumstances, the Sharemax option could perhaps cost you more in tax than the annual declaration of interest income. Decide for yourself.
In the extremely unlikely event of my investing money in The Bay, I’d choose the period of five years or longer, simply because of the uncertainty of whether I will ever really receive the capital and/or interest in cash during my lifetime.
But best would be for Sharemax to also include a directive about the tax aspect from Sars in the prospectuses for The Bay, of which there will probably still be many issued, or to make sure there’s nothing unclear in their further prospectuses.
Unfortunately, taxpayers can’t choose whether they want to receive the interest every year and pay tax on it or wait five years. Ultimately, the implementation of the prospectus and the view taken by Sars will determine how the interest is dealt with.
