Cut your losses!

Litigation , ,

On 18 March 2021, the Supreme Court of Appeal delivered judgment in the case of Massmart Holdings Limited v The Commissioner for the South African Revenue Service. The case dealt with losses which were incurred within the broader Massmart group in respect of the investing of equity instruments as part of an employee share incentive scheme. The mechanism of the scheme was that shares allocated to the designated employees would be purchased from a share Trust with funding from Massmart Holdings.

Upon distribution of those shares to the designated employees, the share Trust could either have losses in respect of the distribution, or taxable gains. Over several years of assessment, the Trust realised losses on the distributions on the vesting of those shares in the designated employees for a cumulative amount of R954 million.

Rather than claiming these capital losses in the Trust from where they arose, the group proceeded to claim those losses in Massmart Holdings. In other words, the group attempted to claim losses on the disposal of assets which never belonged to the claiming party in the first instance.

Massmart’s original objection to SARS’ disallowance of the losses of the Trust was that Massmart Holdings was essentially an extension of the Trust and that it maintained control over the Trust’s activities and should therefore be allowed to claim the losses. After disallowance of the objection, Massmart added a further ground on appeal being that it [Massmart] acquired a right to call on the Trust for delivery of the shares to the identified employees. It argued that its base cost for that asset was the loss incurred by the Trust on that realisation event (i.e. when the shares vested) and that it obtained no proceeds on that disposal, resulting in a capital loss.

Without entertaining that argument in too much detail, the Supreme Court of Appeal (“SCA”) found that it was not possible for Massmart to claim those losses and that there exists no mechanism in terms of which losses can be distributed out of a Trust into the hands of a beneficiary. While a distribution of gains is well recognised in our common law and law of taxation, it is a firm principle which has now been confirmed by the SCA that Trust losses cannot be distributed from trusts to beneficiaries.

Ironically, Massmart was adequately advised by their respective advisors prior to claiming the losses, but proceeded nevertheless. It appears the battle was lost before it even proceeded to court.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Is blockchain the future for transactions?

Finance News , ,

Unless you’re an avid fan of cryptocurrency and trading in Bitcoin or Ethereum, you’ll be forgiven for not having a clue about what blockchain is or does. However, chances are that you’ve come across the word more and more frequently in the past five years. As with many things that gain prominence throughout the years, a point eventually arrives where not speaking about it comes at your own detriment. And while blockchain might be relatively new and may not have a big impact in your business right now, it is not to say that it cannot. There is a strong probability that it will become a favoured way of handling transactions in the future.

What is blockchain?

An in-depth discussion on blockchain will be filled with lots of jargon, but on a basic level, blockchain is a digital ledger (record) of transactions, capturing a string of details in chronological order. The data is encrypted but also decentralised (i.e. the information is spread across a wide network of computers).

What would make blockchain good for doing business?

  • Decentralised, private transactions

Since the data of transactions in a blockchain are not held on a single computer, it increases the safety of the transactions made, as there is no way to hack into a single database/server and retrieve all the data regarding your transactions. This doesn’t completely remove risk, but transactions will become a lot safer.

Furthermore, blockchain is a set of encrypted instructions, which means that there is a much greater focus on the privacy of transactions through a decentralised system.

  • Fewer restrictions on payment

When considering the difference between traditional financial institutions and payments made by way of blockchain there are major differences to be noticed:

    1. Blockchain is fast: Blockchain processes transactions in as little as 15mins and has no set open-hours, whereas banks often take time and are limited to operation only during certain parts of the day.
    2. Blockchain eliminates the middleman: The data transaction happens almost instantaneously, with a way to track the details of a transaction, without the need for an intermediary. This also reduces the cost of transactions and makes it more lucrative to receive payment through blockchain than by traditional means.
    3. Blockchain makes easy tracking of information/transactions possible: Businesses can easily trace transactions to their origins.
    4. Blockchain is essentially a programmed set of instructions: These are instructions to transfer value from one account to another, and thus makes it possible to build contracts into a blockchain so that there is less volatility and room for reneging on contracts.
    5. Blockchain is international: Many traditional transfers can have numerous restrictions based on information such as location and exchange rates. Blockchain payments can easily remove these restrictions as the blockchain isn’t bound to a single location or currency, but holds value of its own.

Where to next?

In many cases, the use of blockchain technology will grow without much input from businesses who will merely make use of the technology. So, while blockchain becomes more and more prevalent, it won’t be all that noticeable (except to the discerning eye).

Right now, however, blockchain technology and transactions are still in their infancy and in South Africa, will not start to see its application in everyday transactions any time soon. But just as with many new technologies that add to accessibility and ease of use for businesses, becoming an early adopter of the technology could hold a wide range of benefits and set you apart from your competitors. When that might be is still TBA, but what is sure is that you won’t be able to ignore it for too much longer.

Keep your eyes peeled and speak to your financial adviser before making any decisions regarding the way you handle your transactions.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Decisive action, better conflict resolution

Employee , ,

Many employers often decide to leave disciplinary matters for a later date and/or overlook matters of concern to avoid conflict. However, when handled well, conflict can have a positive impact on an employee’s performance and behaviour after they have made an error.

Did this ever happen to you as a teenager? You’re sitting in the backseat of the car after being picked up from school and one of your parents says something you disapprove of, and before you know it you’ve given them lip and voiced your unwanted opinion. The next words you hear are the most dreadful words any teen can hear – “Just wait until your mom/dad gets home”.

Those few words are enough to strike fear into the most entitled of young’uns, and it makes the rest of the day unbearable. While your parenting style is very much a matter of opinion (barring obvious wrongs), the same style of discipline in the workplace leaves much to be desired and can, in fact, lead to unwanted conflict and legal repercussions down the line.

Delays in the process have the following results:

  • Employees are anxious

When you delay discipline and the relevant employee is aware of their error, it often leads to anxiety and unproductivity. This happens because the employee can become so fixated on the problem to be discussed and be mentally consumed by constructing a defence.

  • Evidence is lost

When you delay discipline, you allow the evidence for the error on the part of the employee to get away. Reconstructing the facts at a much later point often leads to misrepresented, exaggerated, or understated claims. Taking decisive disciplinary action and detailing events and relevant documents is easier when it is done sooner.

  • It devalues legitimate issues

When you don’t take decisive disciplinary action soon enough, it makes it appear as though the error of the employee is less serious than it may be. It also sets an undesirable precedent and could lead to resentment for the employee who has made the error from their peers.

  • It often comes across as (and can be construed as) unfair

When discipline is delayed (especially with the addition of the factors mentioned above), the eventual discipline can feel like a personal, discriminatory action. It raises the legitimate question of why action wasn’t taken sooner.

Quick, decisive action, on the other hand, has the following results:

  • Course correction 

When discipline is taken quickly and decisively, it leaves the employee in a position to correct their action going forward and encourages unity in the workplace. Good disciplinary procedures will set out a clear description of what went wrong with a clear action plan to improve the employee’s behaviour or performance going forward.

  • Fair hearings with relevant evidence

When action is taken without delay, it allows everyone to gather the most relevant available information. Everyone can share their experiences and present their best case before a plan of action is made. The employee is also given a fair opportunity to appeal the decision made with the case they present.

  • Better case for escalation if the issue persists

Often, bad behaviour or poor performance persists if action isn’t taken timeously. It then makes it much more difficult to escalate your approach if no formal disciplinary action for the first instance of misconduct has taken place. Not only is decisive action good for correcting the behaviour, but it also ensures that there are no delays to escalation if the situation does not improve.

  • More respect for management

Good managers lead well. If you set a clear example every time of how discipline is approached in the workplace, you only stand to earn respect. Too many managers are seen as weak managers for their inability to take action when conflict arises.

Don’t let poor behaviour or performance slip and cause you unnecessary problems down the road. Get in touch with your Labour Law adviser to ensure that the policies and procedures that you have in place are both secure and relevant and make your workplace an environment that is conducive to fast and effective conflict resolution.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Decriminalisation of cannabis and the workplace

Criminal , ,

The personal use of cannabis has been decriminalised in South Africa by the Constitutional Court in Minister of Justice and Constitutional Development and Others v Prince 2018 (10) BCLR 1220 (CC). The Constitutional Court held that it is permissible for adult persons to possess, use or cultivate cannabis in a private place for that person’s own personal consumption. However, the court did not give much clarity on how this will be implemented in our daily lives and it was left to the legislator to fill the gaps.

One of the important questions that arose from this judgment is what would be classified as private space? Looking from an employment perspective, would your personal office or any isolated space at the workplace be classified as personal space? And if so, would your employer be able to prevent you from personally consuming cannabis at the workplace?

In 2000, the legislator brought the Cannabis for Private Purposes Bill (“the Bill”) before Parliament. In terms of the Bill, ‘‘private place’’ means any place, including a building, house, room, shed, hut, tent, mobile home, caravan, boat, or land (or any portion thereof) to which the public does not have right of access. Furthermore, ‘‘personal use’’ is defined as “the exclusive use of an adult person”. Should your office space be isolated from the space which customers/clients/patients have access to, would that mean that the office on the work premises would be classified as a “private place’’ and open for private consumption?

What is important to note is that the working environment is often regulated by specific policies and rules. These rules and policies are often put in place for the health and safety of the public, staff members, and/or for the nature of the service provided or product produced. Should there be a policy in place that prohibits the possession or consumption of drugs on the work premises or restricts employees from working while under the influence of any drugs, the employee may still be subject to disciplinary procedures. Therefore, just because the personal consumption of cannabis has been decriminalised, it does not mean that it will not be seen as an offence in the workplace.

What then happens when there is no policy in place that prohibits the personal consumption of cannabis on the work premises? The legislator also aims to protect minors and persons who are not cannabis smokers. The Bill criminalises any public smoking or consumption of cannabis, any private smoking or consumption in the immediate presence of children or non-consenting adults, as well as any private smoking or consumption near a window or vent adjacent to another structure or public space which would cause hindrance to others.

At this moment in time, the Bill has not been enacted and therefore its provisions cannot be enforced. However, employees should be wary of taking the risk of consuming cannabis at a work premises or working while under the influence of cannabis.  This could be seen as misconduct and will be subject to disciplinary procedures should there be a policy in place. Furthermore, it is also important to note that your work environment, depending on each case’s specific circumstances, will not always be seen a “private place” and, therefore, the employee can still be criminally charged with an offence.

Reference List: 

  • Minister of Justice and Constitutional Development and Others v Prince 2018 (10) BCLR 1220 (CC).
  • CANNABIS FOR PRIVATE PURPOSES BILL.
  • Rob Cooper and Andrew Levy (Seminar) – discussions on the decriminalisation of Cannabis affect drugs and testing in the workplace.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

The role of homeowners’ associations

Property , ,

Finding the right home is not only about finding an architectural structure that meets your requirements (three bedrooms, sun in the afternoon, a yard for the dogs, access control for the kids, etc.). The search is as much about finding a community you want to become a part of. For many residents, the community that surrounds them is governed by an entity known as a homeowners’ association (HOA).

HOAs are created in full title or freehold housing establishments and are, at their core, responsible for the wellbeing of a residential area and the community that exists within its boundaries. An HOA will fall into one of two categories: a non-profit company or a common law association. When registered as a non-profit company, the HOA will be governed by the Companies Act and must appoint directors to manage its affairs. A common law association, on the other hand, is created informally and offers more leniency in its management, which is overseen by trustees instead of directors. While the formation of a common law association is indeed simpler, is does lack the security, accountability, and clout found in a registered non-profit company.

The responsibilities of the HOA include ensuring the upkeep of infrastructure and the creation of rules that ensure a harmonious living environment. The main purpose of these rules are to create a community that values the lifestyles and aesthetic preferences of the homeowners that reside within it and to create a sense of harmony. It is important for interested homeowners to familiarise themselves with the restrictions of the Memorandum of Incorporation (MOI) to ensure that they are comfortable with adhering to rules.

The rules created by the HOA are contained in its MOI, which should be made available to all new homeowners who move into the area. The rules of an HOA can include items such as quiet hours and regulate parking on sidewalks but can also include items that promote uniformity, such as what colour the exterior of a property may be painted and what flora may be planted in publicly visible areas.

When moving into a residential area run by an HOA, homeowners are required to become members of the HOA and will usually be required to pay an HOA fee. These fees primarily go towards the upkeep of the community’s infrastructure, including the maintenance of lawns and common areas, such as play areas and parks.

An aspect that is often overlooked when considering the scope of the HOA’s role, is the promotion of community building. Community activities and social events, such as yoga classes, book clubs, and even the classic braai, should be arranged by HOAs to bring the community together. HOAs can also promote activities such as recycling and encourage more environmentally conscious behaviour.

It’s clear that homeowners’ associations can play a vital role in the creation and wellbeing of communities when approached correctly. If you want to learn more about the creation of a homeowners’ association or have questions regarding the one you are a member of, get in touch with one of our professional property practitioners to assist you.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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