BVSA NEWSLETTER APRIL 2017

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Tax consequences of the vestingof shares by employee shareincentive schemesEmployee share incentive schemes, as a matter ofcourse, involve the utilisation of trusts to hold therelevant shares, until it rests in the hands of theemployees.

The tax implications of equity instruments acquiredby persons by virtue of their employment, aredetermined in terms of section 8C of the Income TaxAct. As a result, many incentive schemesconcentrate solely on this provision in the IncomeTax Act.

However, “Binding Private Ruling 259” (BPR 259) asissued by SARS, indicates that the capital gains tax(CGT) implications when the shares housed in atrust vest in the names of the employees, is afurther aspect to be considered.

BPR 259 applies to an arrangement, in terms ofwhich a parent company sets up an employees’trust, to incentivise qualifying employees employedby various subsidiary companies of the parentcompany.

The parent company will issue shares to theemployees’ trust. The subscription price of theshares is to be settled by the relevant subsidiarycompanies that employ the participants (qualifyingemployees) with respect to the share incentivescheme in question.

Dear ClientWelcome to our BVSA newsletter for April 2017.

The content of this newsletter has been compiledespecially for you and we hope you will enjoy thispublication and find it informative.

In this edition you can read more about thefollowing:

Index:

Tax consequences of the vesting of sharesby employee share incentive schemes

Does direct property have a place in aninvestment portfolio?

The value of a brand

If you have any queries or would you like moreinformation, please contact us by sending anemail to info@bvsa.ltd.

Kind regards,

P. 1

P. 3

P. 4

Pieter Wessels

BVSA NEWSLETTER APRIL 2017

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A qualifying employee will acquire participationunits in the trust, without making any contributionto participate in the scheme, which would afford therelevant employee the right to trust incomedistributions over a period of 5 years, as well as anentitlement to the underlying shares, should thequalifying employee still be employed by the groupon expiration of the aforementioned 5-year period.

BPR 259 reinforces the fact that the employees’trust will not realise a capital gain or loss on thedisposal of the underlying shares at the time whenit vests in the qualifying employee.

This confirmation is significant for the reason thata taxable capital gain in the hands of the employees’trust, would have increased the operating cost ofthe employee share incentive scheme for therelevant employer (subsidiary of the parentcompany).

BPR 259 therefore emphasises, to taxpayers, toconsider the impact of a share incentive schemewhich incorporates a trust, as well as the potentialtax cost that could be incurred due to theinvolvement of a trust in the structure.

Article by Erick Marx

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Various opinions are constantly expressed onwhether an investment in direct property has aplace in the sun in a private investors’ portfolio.Direct property investments typically mean aninvestor buys an apartment or a house and leasesit. A direct property investment is usually comparedto listed property trusts. Even though bothinvestments, direct property and listed propertytrusts, have property as their underlying asset, I findit unfair to compare the two directly with eachother. For this article, I would rather look at thequestion: “Does a direct property investment havea place in an individual’s investment portfolio?”

At the time of writing this article SA’s inflation rateis 6,6%. The main purpose of any investmentdecision surely is to beat inflation over the longterm. The table below is a real example of a clientwho made an investment in a direct property isused. Obviously, the assumptions used are not exactand the possibility exists that property value cangrow with less than 8% or rent can stagnate. In a10-year time frame building costs, inflation and thedemand for rentals will at least keep up withinflation. Our calculation and conclusion is that areasonable rental’s Internal investment return canreach up to 13% over a 10-year period. This is notbad at all and definitely has a place in an investment

Does direct property have a place in an investment portfolio?

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BVSA NEWSLETTER APRIL 2017

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Individual investors usually make the followingmistakes when it comes to direct propertyinvestments:

Self-managementMost of us feel that it is easy to lease your propertyyourself. Of course, it is, until your tenant complainsabout the geyser bursting on a Sunday afternoon.Rather consider a good rental agent. Not only willthe owner receive market related rent, but hisinvestment will also not inconvenience him on aSunday afternoon.

Buy to SellWe all want to have a quick return on an investment.It is possible in some cases but property’s optimalreturn lies in the long term usually 10 years orlonger. Usually in 10 years’ time an investor cannotbelieve how cheap the investment property was 10years ago. Investors are also prone to want to sellproperty at the first case of vacancy or unplannedrepairs.

Bad TenantsNowadays it is not necessary to have a bad tenant.Again, a good agent can assist you withinvestigating potential tenants to ensure the owneris not disappointed.

A Direct Property Investment has a place in anyindividual’s investment portfolio. It can in the longterm richly reward an investor, if it is managedcorrectly.

Article by BVSA Financial Services

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The value of a brandWhen looking at a brand, we look at a logo, symbol,or name related to a product or service. Your brandis a summary of your total offering to yourcustomers; what it stands for, what personality ithas, the experience it promises to deliver to yourclients and the language, tone of voice andmessages it uses to communicate.

The impact that a brand has on the consumer'spurchases of a product is known as brand collateral.Here we refer to an equity, which indicates that anasset was generated. In this case, the asset isintangible and is measured in terms of the valueassigned to it when a consumer buys the product orservice. A brand's equity can also be measured byconsumers' judgement to select a product or serviceover another.

How to measure brand-collateral:How does one go about measuring an intangibleasset? According to the Customer-Based BrandEquity (CBBE) model, the following six steps can beused as a diagnostic tool that combines displayedstatistics and help create branding strategies.

1. A brand must be recognisable: If your brand doesnot have recognition in the market place, it isnecessary to develop and implement a tacticalbrand strategy with a fully integrated branding plan.Brand recognition increases by repeated exposure.

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2. The brand name must be unforgettable: Thebrand name should be of such a nature that it willresonate in your mind after hearing it the first time.If this does not happen, inform your target marketabout what your brand offers and why it's unique.However, it is important to realise your claims onboth an emotional and rational level.

3. A brand name should be considered favourably:As we often remind our customers, it’s not enoughfor people to be aware of a brand name. The targetaudience should also feel that it is able to meet theirneeds with the trust and respect that representsthe brand.

4. A brand must be distinctive: When consumersare ready to buy an item (product or service), theyshould feel obliged to look at your product, becausethey feel your product offers a unique brandpromise, better than that of your competitors. Wecall this trade perception, and it takes place onfunctional and emotional levels. The purpose of thisis to place your brand effectively, by emphasisingfeatures that motivate purchases.

5. The brand must be preferred: Ideally, customerswill choose your brand over all others and be willingto buy it repeatedly. If the preference of your brandis low, you must determine the reason for this bymeans of a brand audit.

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After that, re-evaluations and interventions can bemade, based on the analyses and findings thereof.Basically, if you want to build long-term brandloyalty, you need to build brand-confidence.

6. Your market must be satisfied with the brandname: Ideally, customers will be so happy with whatyour brand offers, that they are not only personallysatisfied, but would like to recommend your brandto friends and family - that is, brand champions. Ifthis is not happening, you may need to evaluatewhere the dissatisfaction lies and work to improveyour product or service in terms of both perceivedand actual levels.

Effective measurement of brand collateral is criticalto the development of a marketing strategy andultimately supports the return-on-investmentanalysis. This brings us back to the financial equityon collateral.

Article by: BVSA Communication

BVSA Communication is a division of the BVSAGroup. We plan and implement communicationassignments for the group, as well as ourclients, and support them with professionalcommunication activities in their pursuit ofmaintaining and growing a successful businessin a cost-effective and co-operative manner.

For more information, please visit:www.bvacom.co.za