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Many businesses resumed operations on 1 June 2020, subject to compliance with the regulations issued under the Disaster Management Act. A number of specific relief measures have been announced by the government. These have been well covered by commentators. This article highlights some more general tax considerations that may be relevant to the measures that businesses need to implement to comply with the Alert Level 3 regulations. 

Compliance with directions set out in the regulations

The regulations require that businesses adhere to various directions, including directions relating to health protocols and social distancing measures. Businesses may incur significant costs to comply with these directives. The deductibility of these costs is governed by, amongst other, the general deduction rule. It allows a deduction for expenditure actually incurred by a taxpayer for purposes of its trade and in the production of income, provided that it is not of a capital nature. Expenditure does not need to directly produce income in order for it to be incurred in the production of a taxpayer’s income and for purposes of its trade. Rather, as was indicated by Watermeyer AJP in Port Elizabeth Electric Tramway Company Ltd v CIR: “income is produced by the performance of a series of acts, and attendant upon them are expenses. Such expenses are deductible expenses, provided they are so closely linked to such acts as to be regarded as part of the cost of performing them” Expenditure necessarily attached to or incurred for the bona fide purpose of carrying on these acts are sufficiently closely linked to the operations. In principle, expenditure incurred for purposes of complying with directives issued under the Disaster Management Act should arguably be sufficiently closely connected to a taxpayer’s trade and its income-earning activities. Over the years the courts have laid down various guidelines when expenditure would be of a capital nature. Expenditure to acquire or improve capital assets used to carry on business is 

generally capital in nature, while costs incidental to performing the income-producing operations are not. Another test that is often applied to determine whether an expense is of capital nature is to ascertain whether it brings into existence an asset or provides the taxpayer with an enduring benefit. Expenditure that relate to the installation or alteration of more permanent fixtures to comply with the regulations may be capital in nature. This does not necessarily mean that these costs are not deductible at all. It may qualify for wear-and-tear or other capital allowances, in which case it could be deductible over a period of time. 

 

• Building resilient portfolios is about the quality of the funds we choose and how they complement one another.
• We use data to assist in portfolio construction.
• Diversification benefits are limited beyond a small number of funds. Our research shows that if chosen correctly, 3-5 funds are sufficient.
• We have funds in ‘reserve’ – in case we need to make a change.
• Doing nothing is also a choice – if your portfolio is built to be resilient, no large changes is necessary.
• Financial market crises highlight those managers who have strong investment processes.

•  Source: Anchor

  Finance Minister Tito Mboweni presented his much-hyped 2020 Supplementary Budget on 24 June and in this note, we discuss what was said, what he did not say and we consider the implications for investing in South Africa (SA). The economic picture painted by the minister was bleak. SA GDP growth is expected to decline by 7.2% YoY in 2020, while growth next year is forecast at a paltry 2.1% YoY. This means that we should expect this year’s tax collection shortfall to exceed R300bn. All the aforementioned were anticipated and, while the minister’s outlook is slightly more negative than that of the rating agencies, the IMF and the SA African Reserve Bank (SARB), these differences are rather minor. Economists agree that the COVID-19 pandemic, along with government’s response to the crisis, has dealt a devastating blow to the nation’s already weakened finances …

Market downturns leave many investors hopeless for various reasons. Portfolio values and income levels that have declined, the confusion as to what to do about it, a bombardment of information from various sources, and explanations by industry experts using terms you have never heard before. How should you know what to do if you don’t even understand what the problem is in the first place? 

While it is impossible to control what happens in markets, you can make sense of these events by gaining a better understanding of relevant investment terms. In the following article, we look at a few financial terms that are often used during market downturns with the hope of assisting investors to make better sense of the myriad of terms being used. 

Recession 

The term “recession” in its strictest definition means that an economy experiences two consecutive quarters of negative economic growth as a result of a significant decline in general economic activity. 

During a recession, businesses experience less demand (i.e. they sell fewer products and/or services). These businesses then usually react to this by cutting costs and sometimes laying off staff in order to protect the bottom line and profitability of the business. When staff are retrenched, this leads to higher unemployment rates. 

Generally, a recession does not last as long as an expansion does. Historically, the average recession (globally) lasted 15 months, compared to the average expansion that lasted 48 months. 

Causes of a recession can vary. While COVID-19 has certainly put a drag on the global economy, it remains to be seen whether it will have lasting effects on economic output. It is important to realise that recessions are a normal part of an economic cycle and every person will experience a few in their lifetime. 

Bear Market 

A bear market is when a market experiences a decline of at least 20%, usually over a two-month period or longer. Bear markets often arise from negative investor sentiment because the economy is slowing or due to the expectation that it will slow down. Signs of a slowing economy may include a decrease in productivity, a rise in unemployment, a decrease in company profits and lower disposable income. When someone talks about having a “bearish” view, it means they have a pessimistic outlook. 

While a recession and a bear market often go hand in hand they are associated with different issues. The distinction between a bear market and a recession is that a recession is measured ©2020 Morningstar. All Rights Reserved. The Morningstar name and logo are registered trademarks of Morningstar, Inc. This document includes proprietary materials of Morningstar. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar is prohibited. Morningstar Investment Management South Africa is a subsidiary of Morningstar, Inc. All data sourced from Morningstar Direct as at May 2020 unless stated otherwise. 

A bear market is identified by a decline in stock market values in excess of 20% over a prolonged period as a result of negative investor sentiment. 

Some other terms that you might come across when reading up on market downturns include: 

• • A pullback, which is a short-term price decline within a longer-term trend of price increases. 
• • A correction, which is when an asset's price falls by at least 10%. 
• • A market crash, which is a drastic market decline over a short period. 
• • A depression, which is a long-term recession that can last multiple years. 

Volatility 

Markets have been highly volatile of late, meaning equity prices have bounced up and down rather severely from one day to the next. Volatility marks how much an investment's price rises or falls. If an investment's price changes more dramatically and/or more often, it's considered more volatile. 

Price volatility is usually expressed in terms of standard deviation, or how much an investment's price has fluctuated around its average price over a certain period. A higher standard deviation implies an investment's price is more volatile. 

Investments with more uncertain outlooks, like equities, are typically more volatile. That is because equity returns are based on a company’s profitability, which is difficult to predict. In uncertain market environments, like the current one, investors tend to be especially pessimistic about how businesses will perform, which can result in steep market declines. 

So, why would you want to invest in a more volatile investment? Because you are likely to be rewarded with a higher return over the long-term. 
 

Source: Morningstar Investment Management South Africa, June 2020 

Debra Slabber, CFA® 

Business Development Manager 

Morningstar Investment Management South Africa