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Economic Commentary September 2011

I trust this finds you exceptionally well as spring has sprung. Before you know it we’ll be in the last quarter of the year and then it is a question of when the Christmas decorations come out. I was living in the UK in 2001 and on 25 September 2001, the Christmas decorations were out in full force. Fully three months before the Big Day.

Europe remains a train-crash in slow motion as the contagion seems to be spreading and threatening to engulf hitherto core and financially sound members. There is now a sovereign crisis, an existential crisis and an increasing liquidity crisis, similar in many ways to the distrust between banks in the US in the precursor to the Great Financial Crisis/ Great Recession as financial institutions were not willing or able to trust the financial health of their counterparties (remember Bears/ Lehman). Again, this one of those slow moving crises that seem to go on lurching and lurching with ever-decreasing control and one watches with morbid, albeit horrified, fascination. However it plays out, there will be an impact on South Africa.

In the USA, The Conference Board reported that consumer confidence decreased to 44.5 points in August, from 59.2 points in July. Look at that number. That is a twenty five percent decrease in consumer confidence. IN ONE MONTH. If anything, the mayhem and chaos of the markets in early August had a huge impact on the American consumers as the crazy wild ride on the equity markets, world-wide ran every which way but loose. However, one can confidently say that if consumer confidence hits the floor and starts digging then Joe Average American will be postponing non-essential/ durable purchases and Jo Entrepeneur/ Company Manager American will certainly be deciding that now is not the time to go ahead with the proposed business expansion, given the uncertainties. Added to that, the Fed has signalled that rates will be low for long – so there is no incentive to spend/ invest now because, it has been signalled that interest rates will not be going up for a while. So……….. we wait, potentially waiting into the self-fulfilling defensive spiral.

One cannot cure a problem of too much debt with more debt. There needs to be deleveraging and this takes time and adjustments (to living standards/ benefits/ lifestyles) – something that no politician wants to be in the hot seat for. Democracy being what it is, unless there are real crisis conditions, no elected politician wants to be the one to remove benefits/ impose hardship on the electorate as he or she will simply be voted out (for both Cameron and Obama, the prize has been a poisoned chalice, given what they both inherited).

With all of the disaster’s happening out there, one would have hoped that the powers that be would be making hay while the sun shone and promoting Sunshine SA as a safe and attractive investment destination. However, based upon the village idiot’s (you know who I mean) antics and a number of fairly unattractive investment policies being aired (read nationalization), investors are voting with their feet and choosing to invest in countries perceived to be a safer investment destination than SA (like Sudan’! – they have had a civil war and a secession!’). Enough said.

With regards to the ongoing disaster/ national embarrassment that is the CIPC (replacement body to the truly awful CIPRO), I believe that there is some improvement. Our office has yet to experience it personally but, if nothing else, their spin-doctors are working overtime. Anything remotely CIPC related, please expect a challenge.

As was mentioned last month, (and this is repeated verbatim) another interesting little change coming forth from SARS is that, based on the change by SARS to self assessment, a goodly number of their hitherto processing staff have been promoted to auditors and the number of investigations/ audits performed has increased from some forty five thousand (45,000) per annum in 2007 to one hundred and fifty thousand per annum (150,000) in 2010/11. Effectively the focus is on bigger numbers but we are finding that persons/ entities all across the spectrum are being audited – PAYE/ VAT and Income tax. This has meant that in the “good old days” taxpayers chances of an audit were (say) 1 in 60. They are now, down to about 1 in 15. It has also meant that your tax return/ financial statements would be done, submitted and then forgotten. We are now seeing ever-increasing instances where said financial statements/ tax returns are being recalled for various reasons, SARS instigated a HUGE amount of audits on the 2007/ 2008 tax years at the end of last year. All of this means extra time and cost for the taxpayer.

There is now insurance available from QDos Consulting to cover costs relating to SARS audits. SARS audits, in our experience, often have no relation to the amount of the tax amount involved and SARS can decide to audit without supplying a reason. Internationally, insurance against tax investigations is increasingly becoming the norm (due to ever-increasing costs and ever-increasing complexity) and given the way the world is moving in SA, I would suspect that this trend will be followed here as well.

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