By Ferdi Booysen, Head of Strategic Relationships at Old Mutual Wealth.
The aim of the 2018 Budget was to create stability and generate economic growth. Should it succeed in this – and it looks like it may, particularly following the increased 2017 GDP figures released this week – the resultant gains should far outweigh the cost in the form of increased tax.
While the changes announced in the Budget will have an impact on South African investors, financial planners and their clients should view these changes as an opportunity. Economic growth will have a far greater positive impact on investments than the negative impact of changes to taxes will have on investors’ pockets.
ANNOUNCEMENTS IN THE BUDGET WHICH MAY AFFECT INVESTORS FINANCIAL PLAN:
- Increase in prudential limits
The Budget deals with reforms in financial services. This includes a specific proposal to increase prudential limits with the aim of managing capital flows and encouraging investment. The proposal is to increase the offshore limit for institutional investors by 5% across all categories. Effectively, this means that clients will benefit from increased offshore allocation, depending on the specific investment vehicle and investment funds. For example, retirement funds will be able to invest 30% offshore (previously 25%) as well as 10% in Africa (previously 5%).
The increase will allow investors to further diversify their investments outside of South Africa. Financial planners need to ensure that clients have the right asset allocation exposure to meet their personal investment targets. Investment management teams will then incorporate the changes into their investment planning process and make the necessary asset allocation enhancements where they deem appropriate in portfolios.
- VAT increases from 14% to 15%
Whilst the impact on consumers may be more significant, the financial planning impact is relatively low. The example below sets out the impact of the increase in investment charges and the increase in expenses in retirement due to the VAT increase. Note that the example assumes that clients will not reduce their savings towards retirement.
Mr J, 45 years old and retiring at 65.
Retirement annuity R3 000 000 (contributing R10 000 pm)
Linked investment R500 000 (contributing R1500 pm)
Current expenses: R35 000 pm and Retirement expenses: R40 000 pm
Changes based on VAT increase:
- If we assume that the client’s expenses of R35 000 now, includes VAT at 14%, then the increase to 15% results in a R300 increase.
- If we assume that the client’s post retirement expenses of R40 000 (including VAT at 14%) increases to account for the additional 1% in VAT, the increase in his expenses is R350. The impact on the client is that their financial plan runs out 1 year earlier.
- Donations tax
Donations tax on amounts above R30 000 000 increases to 25% (from 20%) in line with the increase to Estate duty.
- Estate duty change
Estate duty on dutiable estates in excess of R30 000 000 increases to 25% (from 20% previously). No changes were announced to the abatement.
The tables below show the impact across different marital regimes. The impact is reduced for clients married in community of property and for those married out of community of property with accrual, or where assets are bequeathed to a spouse. However, for those married out of community of property without accrual and on second passing there is a more substantial impact for dutiable estates above R30 000 000.
5.Income tax change:
Whilst no changes were announced to marginal tax rates, the impact of fiscal drag means that client incomes will reduce after inflation is taken into account.
The tables below show the impact for clients based on different income levels, including the % reduction which can be compared to inflation to understand the real impact.
TAX IN THE CONTEXT OF FINANCIAL PLANNING
The rule remains unchanged: don’t plan to save tax, plan for the client!
Structuring a financial plan purely to manage tax is not the best advice nor is it in the client’s best interest. If saving tax is the ultimate objective of a plan, planners risk structuring the client’s plan in a wat which could have an adverse influence on their ability to meet their goals in the future. It is important to remember that tax changes every year and often in a way which isn’t predictable.
It is imperative to start by ensuring that the client’s plan is structure to provide flexibility and liquidity so that they can attain their desired lifestyle through potential goal changes over time. Once the plan is structure to achieve the client’s goals, only then should one assess whether it is appropriately structured to be tax effective whilst providing the flexibility to achieve the client’s goals.
Planning solely for a tax objective, may win you a refund but could cost you the ability to achieve your goal.
The framework below assists in choosing the most appropriate vehicle but should only be used in the context of the client’s goals.