Authored by: Jerry Botha, Managing Partnert At Tax Consulting SA & Jonathan Goldberg, CEO of Global Business Solutions
The Companies Act 71 of 2008 sets out a broad range of duties that company directors need to abide by. Specifically, section 76(3) provides the following with respect to the standards of care that company directors must follow in the execution of their duties as directors for a company.
A director of a company, when acting in that capacity, must exercise the powers and perform the functions of director:
It is not possible to have directors who are merely figure heads, appointed for their reputation and the contacts that they will bring to the particular company.
By all means, a company director may have been a celebrity cricket, soccer or rugby player in a previous life (as many ex- players have gone on to do).
However, before taking up the position on the board of a company, they will need to upskill in what is expect of them as directors.
With this imperative placed on company directors to be scrupulous, the following question arises.
If a director is paid a bonus based on the expectation that he or she will render a certain level of performance, but the required performance is not rendered, should not the bonus be repaid to the company if the director has not delivered.
It is clear if the required performance demanded by the company and / or shareholders, said director must repay the bonus.
This should not even be something which the new of remuneration committee should be requesting or demanding from the director. An ethical director would do the right thing without being asked.
What makes the question more interesting and the predicament so much larger is where large bonusses have been paid to top executives and company directors in well-known public, private and state-owned entities and through various disclosure the evidence coming to light that the basis for paying these bonusses were incorrect.
According to Goldberg, this “the decision to do the right thing in these circumstances goes to the core of being a responsible director, not just ethically, but also from a Companies Act perspective.
We increasingly assist Boards in making the tough, but correct decision. When they do not act in the interest of shareholders and stakeholders, they operate outside the law and become part of the problem.”
This means that a new Board cannot just look forward and towards the future, there is an equal responsibility to ensure accountability for the past.
Incentives and bonusses approved by a Board on incorrect, incomplete or, even worst, fraudulent information, must be recouped.
There is no tax disadvantage to reimbursing bonuses
If one were to put forward the notion that company directors and executives needed to reimburse performance-related bonuses that should never have been paid in the first instance, the following question would be asked:
“I’ve already paid a sizeable sum of tax on this bonus. Will I get this back if I repay it?”
In 2009, Section 11 (nA) was introduced into the Income Tax 58 of 1962 to allow a taxpayer to take a deduction of any amount into account - which is refunded by the taxpayer– when calculating taxable income in the year of assessment that the amount is refunded.
This only applies if that amount had been previously included in his or her taxable income.
“This means that,” says Jerry Botha: managing partner at Tax Consulting South Africa, “should a company director be required to pay back a bonus, he or she will be able to claim back the tax paid on this bonus – or a portion thereof – in the fiscal year when the repayment has been done.”
He adds that “this has always been one of the principles of our tax system, that a taxpayer should not be taxed where there is no net enrichment, and we have never encountered a problem with SARS to allow this deduction where done on a first-time accurate basis.”
Thus, from a governance and tax perspective there appears to be no reason why directors should not be required to pay back bonuses where the simple fact is later established that it was improperly paid in the first instance.
Despite this, there are very few (if any) company directors who do, in fact, repay these monies. In our next article, the consequences of the practice of non-repayment will be looked at from a labour law perspective.
MEDIA CONTACT: Rosa-Mari Le Roux, 060 995 6277, email@example.com, www.atthatpoint.co.za
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