Category Archives: Finance

How government is collecting more tax revenues by stealth

Over the last few years government has collected a significant amount of tax revenue by not fully adjusting the personal income tax tables for inflationary increases in earnings, thereby increasing the effective tax rate of individuals.

A middle-class individual earning a taxable income of R400 000 per annum in the 2016 year of assessment, would have seen her after-tax income increase by only 5.42{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} and 5.05{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} in the 2017 and 2018 tax years respectively, even if her taxable income increased by 6{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} every year.

During his most recent budget speech, finance minister Pravin Gordhan collected more than R12 billion of the R28 billion in additional taxes he needed from the personal income tax system in this way.

In a similar fashion, taxpayers may now become liable for capital gains tax (CGT) purely because three of the exclusions have not been adjusted for the effects of inflation since March 1 2012.

1. The primary residence exclusion

When taxpayers sell their primary residence and realise a capital gain on the transaction, an exclusion of R2 million applies.

Louis van Vuren, CEO of the Fiduciary Institute of Southern Africa (Fisa), says if the exclusion was adjusted for inflation over the past five years, it would have increased to around R2.6 million over the period.

For someone who bought an upper middle-class house in Cape Town for R650 000 in 2002 and who wants to sell it now, this has significant implications.

Van Vuren says today the house would be worth roughly R3 million. If it were sold, the capital gain realised would amount to R2.35 million (assuming no capital improvements and a base cost of R650 000). Due to the primary residence exclusion, R2 million would be disregarded, and 40{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} (the inclusion rate for individuals) of the capital gain of R310 000 (after deduction of the R40 000 annual exclusion) would have to be included in the individual’s taxable income.

At an assumed marginal income tax rate of 41{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327}, the individual would have to pay R50 840 in CGT, purely because the primary residence exclusion hasn’t been adapted for inflation, he adds.

2. The year of death exclusion

Apart from the primary residence exclusion, the South African Revenue Service allows for a capital gain exclusion of R300 000 on all other assets in the year of an individual’s death (instead of the normal R40 000 annual exclusion). Personal use assets like artwork, jewellery and vehicles do not attract capital gains tax.

Van Vuren says if someone had invested R250 000 on the JSE in March 2009 in the wake of the financial crisis and it kept track with the performance of the All Share Index, the investment would have grown to roughly R700 000.

Since the individual would be deemed to have disposed of the investment upon death, the capital gain would amount to R450 000, which would reduce to R150 000 after the R300 000 exclusion had been deducted.

Van Vuren says if the exclusion kept track with inflation it would have been around R400 000 today and the gain would be only R50 000 (R700 000 minus R250 000 minus R400 000).

At an inclusion rate of 40{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327}, the R100 000 “additional gain” that had been realised will add R40 000 to the individual’s taxable income, which, at a marginal tax rate of 41{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} would lead to R16 400 in CGT, purely due to inflation.

3. Special exclusion for small business owners

Van Vuren says because the retirement provision of small business owners are often locked up in the value of their companies, it would be quite harsh to levy capital gains tax in the normal way when they dispose of their interest in the business upon retirement.

As a result, small business owners receive a special capital gains exclusion of R1.8 million upon retirement (minimum age 55 years) or death, subject to certain conditions (and over and above the R40 000 annual exclusion):

  • The individual must own at least 10{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} of the business;
  • The total business assets of all businesses the person is involved in must not exceed R10 million;
  • The individual must have been actively involved in the business for at least five years;
  • If at retirement, the disposals must all happen within a 24-month period.

If the exclusion had been adjusted for inflation, it would have been roughly R2.3 million by now, Van Vuren says.

If an individual sold her small business assets for R2.3 million, she would have a capital gain of R460 000 (R2.3 million minus R1.8 million minus R40 000), resulting in CGT of R75 440 (R460 000 x 40{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} x 41{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327}) purely because of inflation.

A small business owner who wants to scale down by selling his primary residence (using the values above) and move to a retirement village could pick up a CGT bill of R132 840 [(property gain R350 000 plus business gain R500 000 less R40 000 annual exclusion x 40{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} x 41{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327})] in the process, due to the inflationary impact.

Investing in property a good idea

In this advice column Barry O’Mahony from Veritas Wealth answers a question from a reader who needs advice on whether to invest in property.

Q: Please may I ask you to assist me with advice regarding a dilemma my husband and I have right now? He is 69 years old and has two more years of working, earning R50 000 per month. I am 54 and have my own small home-based business which takes care of personal expenses, luxuries and family holidays.

We own our primary residence, with no bond, worth around R3.3 million, and a holiday house at the coast worth R1 million. The only debt we have is about R120 000 we owe on a car. We have one son who still has two years of schooling to complete, and four years at university.

Our investments include R5.5 million held with an investment company, R800 000 in a retirement annuity, R450 000 in a pension product, and R1.3 million in the money market.

An opportunity has now come up to purchase a townhouse for R1.7 million. My husband doesn’t feel that it the right thing to take cash we currently have in the money market and invest it in a residential property. He feels that he would rather invest it with the current investment company.

I however feel that a second property would be a better investment, particularly as this could be rented out. The rent could cover a small bond until the property is paid off and we could then have the benefit of a second income when he retires in two years.  

We could also potentially take the early retirement value on the pension product and use this towards the bond on the property. 

What would you advise?

 

In looking at your situation, you are both doing relatively well from an earnings point of view, but the 15-year difference in age is a huge factor that makes planning much more difficult. You also started a family relatively late and as we all know, kids are incredibly expensive, especially in their teens and early 20s.

Given your family situation, it counts in your favour that your husband plans to work until age 71. We fully support people carrying on their working lives while this is still fulfilling, and the additional economic contribution it provides increases your chances of being financially independent in retirement. If it is possible for your husband to continue to earn some money for another few years beyond age 71, this again would be an enormous help.

Before going into the specifics of your situation, there are a few considerations to bear in mind when considering the investment case for physical property against an investment in a balanced portfolio:

 

  • Property can be leveraged, balanced unit trusts should not.
  • You will receive a capital gain from the property and also earn an income once you have retired.
  • Liquidity in real estate can be a problem from time to time. The transaction costs involved are also very high and there is the hassle factor of maintenance and finding tenants. If you hire a management company to do this, then this will reduce the rental income. A balanced fund is liquid within a week and is hassle free.
  • Property prices are very interest rate-sensitive and rates are expected to continue to rise in the short term.
  • The long-term average return from SA residential property is lower than portfolios with high equity holdings.

Choose a guaranteed income in retirement

In recent years there has been a growing focus on investing for an income in retirement as opposed to just targeting the best possible investment return.

Investors know what their salaries are today and want to replace it (or a portion of it) in retirement, but often only really find out what income they would be able to purchase on the day of retirement.

It is this gap that Liberty Investments hopes to fill with its Agile Retirement Range.

What it is

The Agile Retirement Range includes a retirement annuity and preservation fund products and aims to find a balance between investment returns and income certainty. Investors can choose from a range of roughly 100 underlying investment portfolios from 15 asset managers, including a variety of low cost index-trackers and can spread their contributions across these funds. Minimum investments are R1 000 monthly or a R15 000 lump sum.

One of the underlying portfolios is the Exact Income Fund, which Liberty manages internally. It is this fund that provides income certainty.

Investors who want a higher level of income certainty in retirement could allocate a higher proportion of their monthly contributions to this fund, while investors who want to invest for growth may want a lower (or no) allocation to this portfolio. The assets invested in the Exact Income Fund will be converted to a Liberty life annuity in retirement. The assets invested in other funds can be used to buy a life annuity or a living annuity from anybody in the market at retirement.

Since the Exact Income Fund is considered a low risk portfolio, investors with more than 20 years to retirement won’t be able to invest in this portfolio.

Mark Lapedus, head of product development at Liberty Investments, says it will guarantee an income in retirement each time a contribution is made into the Exact Income Fund. The income is guaranteed no matter what happens to markets, interest rates or currencies between now and the time of retirement.

The level at which income is guaranteed

Lapedus says the age and gender of the investor and the time left to retirement will determine how much an amount invested today will guarantee in retirement income. A 40-year old female and a 60-year old female who will both be retiring at 65 will buy a different level of guaranteed income.

But how would an investor know if this is good value for money?

One possibility is to compare the level of guaranteed income and the investment returns in the scenario with the returns the investor would reasonably expect from a typical Balanced Fund over the same period, Lapedus argues.

A 40-year old male who invested a R100 000 lump sum in the Exact Income Fund can expect a guaranteed income of R3 240 in retirement at age 60 (in today’s money). If an investor retired at age 60 today and wanted R3 240 a month as income, he would need R380 000, Lapedus says.

“So effectively what we are saying is your R100 000 is going to grow to R380 000 after all costs in 20 years’ time and that annuity rates of today will still be applicable in 20 years’ time,” he says.

For R100 000 to grow to R380 000 in 20 years after costs would translate to a 6.9{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} per annum return. In a typical Balanced Fund the overall costs would be roughly 2{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} per annum and to target a 6.9{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} return after costs, the return have to be around 8.9{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} per annum before costs.

“So if I were to earn an 8.9{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} return on my portfolio over the next 20 years and there is absolutely no change in the annuity rates between today and 20 years’ time, I actually wouldn’t care whether I went into the Exact Income Fund or the XYZ Balanced Fund that gave me an 8.9{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} return over the period,” Lapedus says.

But if there were a fairly high degree of certainty that the XYZ Balanced Fund would deliver a return much higher than 8.9{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} per annum, the conclusion would be that the Exact Income Fund is poor value.

While Balanced Funds in general over the last ten years provided investors with a return of roughly 13{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} after costs, fund managers are cautioning that returns are likely to be lower in the coming years, but with a lot of risk, he says.

Mutual impersonator still at it with phishing scam

A marketing and sales team purporting to represent Old Mutual Financial Services has re-emerged and is offering fraudulent loans to the public at 5{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} interest in an effort to get hold of personal details and solicit upfront payment for the release of loans.

This type of phishing scam has become popular over the last few years, with fraudsters using the name of well-known, credible organisations to gain legitimacy. Moneyweb’s name was previously illegally linked to a similar loan scheme offered by “Moneyweb Private Banking South Africa”.

In November last year, the Financial Services Board (FSB) issued a warning against a scam called Skeme Finance Group which requested an “enclosure fee” from individuals before a loan could be granted. To pacify individuals getting wind of the con, the scheme issued a fraudulent letter using the FSB’s logo and a picture of the deputy registrar of financial services providers, Caroline da Silva.

Consumers are lured with promises of very low interest rates – typically no more than 5{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} per annum. Interest rates on personal loans at most banks generally range from 13{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} to 28{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} per annum. This makes the offer “too good to be true”, often the first warning sign that something fishy is afoot.

But shutting down these operators can be a long and cumbersome process and individual vigilance remains the best form of protection.

The Old Mutual impersonator, who calls herself “Melissa Green”, was offering loans to the public late last year, but despite Old Mutual issuing an alert and reporting the case to the police, “Green” was sending emails with a loan offer as recently as Monday.

A woman named Mary-Ann reported “Green” to the fraudalert website in January and although she did not lose any money (Green allegedly asked for R5 750 to cover attorney and insurance costs), she did share her personal details.

“I am afraid that they can do something illegal with it,” she wrote on the website.

Green’s number is still in service. When Moneyweb phoned the number on Wednesday, she repeated the emailed offer, highlighting the “special” interest rate and added that the offer would expire by the 15th. Scammers often put a clock on offers to put pressure on individuals to commit.

The best deal on your personal cheque account

The latest report by the Solidarity Research Institute shows that increased competition among the nation’s banks appears to be driving fees down. But increased financial pressure on consumers means charges, albeit lower, can still be a significant burden.

So, how do you get the best possible deal on your personal cheque account?

Negotiate your bank charges

There is no law or code regulating the negotiation of bank charges. But Advocate Clive Pillay, the Ombudsman for Banking Services, says the charges levied on ordinary cheque accounts can be fully negotiated.

“In the case of a ‘big account’ with much activity and a reasonable balance, a bank would be more likely to negotiate a reduced rate, to retain the customer, than it would in the case of ‘a small account’, with little activity, such as a salary deposit each month and a number of withdrawals during the course of the month with a very low balance,” he told Moneyweb.

However, it is important to note that the bank can refuse to negotiate lower rates by “exercising their commercial discretion,” says Pillay. In which cases, customers can do little but switch banks, provided the new bank offers lower rates.

If that fails, there are other relatively simple ways to save money on bank charges.

Make sure your account suits your needs

Some banks offer two types of basic cheque accounts: bundles and pay-as you-transact accounts. Depending on the amount of activity on your account, one option may prove more cost-effective than the other.

Bundles, offered by the big four banks, comprise fixed monthly fees for a package of transactions including finite cash deposits and withdrawals, and oftentimes unlimited electronic transactions and notifications. Any transactions which breach the bundle limits are typically charged on as pay-as-you-transact (PAYT) basis.

The PAYT charges – offered by Absa and Standard Bank – include a minimum monthly service and additional fees per transaction. Capitec’s sole account option, the Global One Account is a PAYT account.