Monthly Archives: October 2016

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% and 5.05% in the 2017 and 2018 tax years respectively, even if her taxable income increased by 6% 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% (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%, 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%, 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% 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% 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.

Save for kids school fees

With the start of 2017 looming, many parents may have started to consider the cost of their children’s school and tuition fees for the next school year. While families have a number of financial commitments to attend to every month, this is the time of year where school funds are often moved to the top priority to ensure that the family is financially prepared for the expenses that accompany a new school year.

Saving for a child’s education requires careful consideration and proper planning.

Here are some tips below for parents to ensure that they have planned appropriately for their children’s education costs:

Start early

Parents should start saving for their children’s education as soon as they possibly can. Many people do not consider, or are not aware of, the great advantages of compound interest, and how accumulated savings grow over several years when invested properly. By investing from an early age, parents will eliminate the financial worry of not having sufficient funds to give their children the best education possible, as the funds in their investment will grow every year.

Automate savings

The best way for parents to ensure they are regularly contributing towards their children’s education is to open a dedicated savings account and set up a monthly debit order. This way the parents will automatically save money every month towards this cause. However, they must have a strict rule in place to never withdraw any money from this account if it is not related to the child’s education.

Explore ways to get discounts

It is advisable to do some research and contact schools to find out whether they offer financial incentives that could result in long-term savings. Many schools offer a discount if the fees are paid as a once-off amount in advance. Some also offer a reduction when there is more than one child attending the school. These types of savings can make a big difference over an 18-year period.

Include education funding in the financial plan

It is important that parents include education funding in their overall financial plan. These expenses have to be accounted for as part of the monthly household expenses to determine how it will affect the family’s overall financial position. When it comes to developing financial plans, it is usually a good idea to consult a reputable financial planner who will be able to develop a solution for the client to ensure that they have provided sufficiently for their children’s tuition fees and related education expenses.

A financial kick in the pants

  • Prepare an itemised list of all your expenses and divide the expenses into Group A, being fixed expenses, such as car repayments, other debts and payments you are contractually bound to pay monthly. Other discretionary expenses you are able to reduce or even cancel without suffering any negative legal or financial consequences such as entertainment, clothing, cable TV should be included in a Group B.Select certain Group B expenses you wish to reduce or stop [that gym subscription?), do so and allocate extra payments to shorten the outstanding payment periods (and reduce the interest payable) of Group A expenses or start a small rainy day account for those unexpected financial surprises. Which expenses should be reduced and in what order of priority will depend upon circumstances such as interest rates, tax deductibility, outstanding payment periods and so on. Always a good idea to consult a professional to assist you in making the correct decision.
  • Make an appointment with your financial planner to verify whether your life, disability, dread disease and accident benefits are adequate or surplus to your needs and whether recent product developments have resulted in more cost efficient and/or comprehensive cover being available at the same or at a cheaper cost to you. Planners are, today, required to provide you with comprehensive comparative information to provide you with the peace of mind that you are making a decision that is in your best interest.
  • Create a filing system (whether it be a lever arch file or a folder on your desktop for emailed documentation) for all your financial records such bank or credit card statements, accounts and invoices. This will save an enormous amount of time when a payment is in dispute. If you have other important legal documents, why not also save these using a similar format?
  • Request your short term broker to review your insurance to ensure that your house, car and other property is sufficiently insured against damage or loss.
  • You will have, in all probability, already made a decision as to your medical aid plan for 2017. Speak to the medical aid consultant about so-called Gap cover to meet any possible shortfalls you may experience in the event of a medical emergency. These plans are relatively inexpensive and worth consideration.
  • Harass your banker for a better deal around your banking options. Is it really worth all those bank charges to have a Rolls Royce cheque account and credit card if you are not making use of all the benefits they offer? Consider a down grade of the banking package, at the risk of losing benefits you don’t use anyway but in so doing your bank charges may very well be substantially reduced.

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.