Is the ‘state’ of anything simply about choices?

With the recent debacle at the ‘State of the Nation’ address, the budget speech now completed and a celebration this month of Human rights day, one can’t help but feel that there is a common thread that seems to follow the results and outcomes relating to all these – and that is one of ‘choice.’

We are blessed to have free choice, but so often we don’t make the right choices and the consequences can be telling and long lasting. We are not by any means in this article passing judgement, but merely observing how significant making good or bad choices can be and then relate it making financial ones.

The state of our nation

Going right back in history to Sharpeville, the origin of what we now celebrate as Human Rights Day, it can certainly be said that the South African Police of the Apartheid era made the wrong choice by firing live ammunition into a crowd of essentially peaceful protesters.

Fortunately the long term results of the carnage experienced that day had positive results in that it gave a platform to the plight of people of colour in this country, through the international media and it is said by many that it heralded the beginning of the end of the Apartheid era. The fact of the matter though, is that it was a series of consequences set off by certain choices. In most cases very bad ones.

It could be said at the ‘state of the Nation’ address 2020, had some other choices been made earlier in the proceedings we may not have been subjected to such a prolonged and embarrassing delay. Once proceedings were underway we heard, as we did with the budget speech that was to follow, of many financial solutions that had to be found to issues that, truth be told, might well have not escalated to the point of needing rescuing had better financial choices been made in the first place!
From a financial point of view at least we appear to find ourselves in a difficult situation as a country at this time, but it need not be an excuse for any individual or business to lie down and surrender. Yes we have 29% unemployment and yes redundancy in the corporate world is rampant, but this simply tells us that the economic future of South Africa lies in the hands of the Entrepreneur.

What is the ‘state’ of your finances?’

Perhaps you are one of those Entrepreneurs, one of the brave individuals that have set up a business of your own with the intention of making a difference and surviving in the way that you best know how.

Whether this is the case, or you are managing to hold your own in that rather tenuous corporate world, when you get down to analysing your own financial wellbeing, it seems that this too largely rests on the choices we make. To begin with we make the vital choice of whether we indeed wish to build wealth for the long term, or simply spend as we earn and throw caution to the wind.

As Financial Advisors we have seen the sad results of those who didn’t adequately cover themselves for life’s unforeseen twists and turns, or provide for their family’s future. The individual and especially the Entrepreneur need to make some important choices with regards to insurances, cash flow, assets and long term investments.

Choose professional advice

These vital choices which, if not made under advisement, have seen the shattering of many hopes and dreams of a future that offers security and stability. You cannot be expected to know everything about the complicated world of insurance and investments, so the best choice, at the outset, is to choose to partner with a qualified Financial Advisor.

Hereford Group have over 25 years of making the right choices for their clients because, unlike others, we understand that every individual, Entrepreneur and corporate entity is entirely different. Speak to a Financial Specialist Advisor today to begin your own path of wealth and peace of mind – based on good choices!

What is next…?

2020 has started with a BANG, the market is nervous, investors are nervous but strangely, there are a few less people wanting to invest everything in cash. All of this nervous tension is not new, I want you to think back to January 2019. In January 2019 we had just gone through the worst quarter since the global crash, the S&P, MSCI, JSE and both the average high equity and low equity unit trusts were all down for the quarter ending 31/12/2018. The table below reflects all of these losses.

If I had told you on the 1st of January 2019 that during 2019 we were going to see proceedings to impeach President Trump, a hard Brexit becoming a reality, the escalation of trade wars between the USA and China, rolling labour unrest in France and given the dismal returns over the last quarter of 2018, would you have moved everything into cash or would you have stayed in the market? The answer unfortunately is that even without prior knowledge of the aforementioned “calamities”, cash/ income funds showed by far the highest net inflows in 2019. In the second column of the table below you will see what the returns for the various different investment options were for 2019. I have taken the liberty of assuming 30% tax on Money Market Funds (not everyone has a 45% marginal rate)

As South Africans, one of our favourite topics of conversation is how much the Rand is going to depreciate in the next year. On 1 January 2019 the Rand was 14.38 to the US Dollar. If I had have told you that during 2019, load shedding was going to increase, no corrupt politicians were going to be sent to jail, unemployment was going to rise and the parastatals would continue floundering, what would you expect the rand to be on the 1st of January 2020? I would not have had many takers estimating a Rand Dollar exchange rate of 14.01 on 1 January 2020.

Looking forward to 2020, almost 800 highly paid and esteemed economists/business leaders were asked to “guess”/predict the greatest risks to our economy over the short and long term before the Davos summit in January. Guess what? The short-term risk of infectious diseases affecting the world economy was not even in the top 20 most probable risks. It took the Corona Virus a week to prove that forecasting anything is nigh on impossible (this gem was pointed out on Twitter by Deon Gouws from Credo).

Kind regards,

BARRY HUGO
CFP® CA (SA)

Top up your RAs to trim your tax

As the financial year end looms, some useful advice on how you can possibly still save on your tax payments is through investing any taxable funds you may still have available before submitting your return. In particular, this is an excellent time to top up Retirement Annuities, or other tax deductible pension funds, with this additional income.

Retirement Annuities, more commonly known as R.As, are one of the very best ways to invest in a pension fund, as they are tax deductible up to a certain portion of your income. Generally speaking, they trend to offer excellent returns as an investment and at the same time you are saving on tax.

What are they?

RAs are usually applied for and used by single entities – they are really a ‘one person’ pension fund. People in their own businesses find this the most astute way to create a pension. An individual applies to become a member of a Retirement Annuity fund, which is approved by the Registrar of Pension Funds and tax authorities. One does not need to have an employer to qualify for membership and this is why it is favoured by SMEs.
Your contributions are then tax deductible up to a certain maximum and even if you fall into the 45% maximum tax rate the taxman sponsors almost half of your contributions for your retirement.

What other tax benefits do R.A’s have?

There are actually a number of other benefits and this article hopefully will give you some more detailed insight into these. To assist the uninitiated we express this as much as possible in layman’s terms…

Accumulative benefits – Commonly known as ‘disallowed contributions,’ the contributions that have not been deducted, fortunately still have an accumulative benefit over time. They can be carried over to the next year and if not used during the whole period of the contributions they can either be be offset when it is time to retire to increase your tax-free portion of the retirement lump sum, or claimed as a tax deduction against taxable income. So the retirement annuity contributions really do have a ‘lifespan’ until and upon retirement.

Staggered retirement benefit – With any normal employer pension or provident fund you have to retire from your employer and the fund simultaneously, but with RAs you can stagger your retirement and mature your RA at any time after age 55!

Lump sums on retirement benefits – This staggered retirement has implications for lump sum benefits too. Up to R500 000 in retirement lump sums has no tax at all – over R500 000 and up to R700 000 the tax is 18% – over R700 000 up to R1 050 000 it is 27% – and 36% over that.
Tax fund relief – since the ‘Abolition of retirement fund’ tax duty on 1 March 2007, tax on interest or rental income is no longer deducted from the fund. This means no tax at all is paid on the fund build-up, either as dividend income or capital appreciation. Capital gains tax too is no longer applicable. Good news for all taxpayers!

Seek expert advice

This is really a simple overview and there are more tax benefits of Retirement Annuity funds, so why not speak to a Financial Advisor at the Hereford Group to learn everything you need to know about RAs and many other ways you could have been saving on your tax through simply making the right investments.

We at The Hereford group listen to our client’s specific needs before advising and supply the right products for what they need. With over 25 years of success in growing, managing and preserving wealth, we’re still passionate about creating financial freedom for each and every one of our clients.

EXPATS AND EMPLOYERS: PLAN NOW FOR THE NEW EXPAT TAX CHANGES

Expats have until now enjoyed a tax exemption in respect of foreign remuneration earned, provided they meet requirements as to time periods worked overseas. The exemption will however be partially removed with new legislation recently passed.

“An income tax form is like a laundry list – either way you lose your shirt” (Comedian Fred Allen)

This article is important to you if you are either a South African working abroad or an employer of one. If you don’t fall into either of those categories, but know someone who does, please think of passing this on.

As an employee earning foreign remuneration (salary, leave pay, bonuses, allowances, commission etc), you currently enjoy an uncapped tax exemption (on that remuneration only, not on other foreign income) provided that you work overseas –

  • For more than a total of 183 days during any 12 month period, and
  • More than 60 of those days are consecutive.

That however is set to change from 1 March 2020, when only the first R1m p.a. of your earnings will be exempt – you will pay tax on anything over that. With the Rand’s weakness showing little sign of abating, a lot of expats and their employers are going to be affected.

Are you a “tax resident”?

Only “tax residents” are affected, so the first thing you should establish is whether you are still a tax resident or not. That’s not always easy, so take professional advice in any doubt.

To illustrate some of the complexities involved, both physical emigration/relocation and “financial emigration” are different concepts to “tax emigration”. Moreover the Income Tax Act’s tests for tax residency are hardly a model of clarity – you are a “resident for tax purposes” if you are either an “ordinary resident” or a resident in terms of the “physical presence test” –

  • You are, says SARS, an “ordinary resident” if South Africa is the country to which you “will naturally and as a matter of course return after [your] wanderings’, your “usual or principal residence”, or your “real home”.
  • Even if you aren’t an “ordinary resident”, you will still be a resident under the “physical presence test” if you are physically present in South Africa for more than –
    • “91 days in total during the year of assessment under consideration; and
    • 91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
    • 915 days in total during those five preceding years of assessment.”

Under the physical presence test however if you are outside the country for a continuous period of at least 330 days you are not regarded as a tax resident.

Should you “tax emigrate”?

If you are indeed a tax resident, don’t think of changing that status without taking full advice. “Tax emigration” and “financial emigration” are complicated processes and full of pitfalls. For example you could be entitled to foreign tax rebates or other relief on your taxable (i.e. +R1m) foreign earnings, or there may be other benefits to remaining a tax resident. So it is important to have an expert look at your specific situation and determine what is best for you overall.

The big thing is to be aware that change is coming. Some long-range planning is the only way to be certain that there are no unpleasant surprises waiting to spring out on you down the line.

Should you require any assistance please do not hesitate to contact one of our experts: info@lhtc.co.za

PROPERTY BUYERS: THERE’S A NEW DEDUCTION FROM INTEREST EARNED ON YOUR DEPOSIT

If you pay a deposit to the conveyancer when buying property, make sure that you earn interest on it. It may not amount to much (unless there are long delays in transfer and/or we are talking big numbers here) but it is as they say a lot better than nothing.

When you buy property, the sale agreement often provides for you to pay a deposit (normally 10% of the sale price) to the conveyancer (the attorney transferring the property into your name), to be kept in trust until transfer.

Don’t lose out on earning interest on your deposit money – check that the sale agreement’s deposit clause says that the deposit must be invested in an interest-bearing trust account with interest to accrue to you. Also an instruction to the conveyancer to do this is normally in the standard documents you sign at the start of the transfer process. A good tip here is to have all your FICA documents in order as the investment can only be opened after you are FICA’d.

After transfer the conveyancer accounts to you for net interest accrued after bank charges, handling fees and the like, plus – a new charge – a fixed 5% deduction in favour of the Legal Practitioners Fidelity Fund.

That new 5% deduction is mandated by the new Legal Practice Act, it kicked in on 1 March 2019, and it boosts funding for the Fidelity Fund. In most cases it will be only a small amount, and it’s a bit like paying an insurance premium to make sure that your money is safe and secure.

DECEASED ESTATES PAY TAX

DECEASED ESTATES PAY TAX

It is true! Even after you are no longer part of the economy, you are still liable to pay tax!
As you may already know, everything is taxed, even small items you purchase at the shop on a regular day like a can of coke.

HOW DOES THIS WORK WITH A DECEASED ESTATE?

The way in which your Estate Duty is calculated depends firstly on whether you are married, and according to the marital regime if indeed you are married. The total gross value of your estate is considered, including all assets registered in your name as at the date of death, and all deemed property (proceeds from certain domestic life insurance policies and claims in terms of the Matrimonial Property Act). All liabilities in the estate are then deducted from the gross assets to give a net value of the estate.

From the net estate, the allowable abatement permitted in terms of the act is currently R3 500 000, which is deducted to determine the value of your dutiable estate. 20% of the dutiable amount is what is then payable to SARS from the estate. In other words, liability for Estate Duty will only arise if your net estate is more than R 3 500 000.

HOWEVER, IT IS NOT ALL DOOM AND GLOOM!

The act also includes provision for “roll-over” of estate duty where parties were married. Here, the dutiable value of the estate of the surviving spouse will be reduced by whatever portion of the abatement that was unused in the first dying spouse’s estate.

Assume that a husband has an estate with a net dutiable estate of R2 million, with him dying first. In the husband’s estate, there will be R2 million utilized of the R3,5 million abatement.
The R1,5 million that is not utilized in the husband’s estate will be “rolled-over” to the surviving spouse’s estate, which essentially means that the surviving spouse now has an abatement of R5 million – this taking into consideration all the allowable deductions as per the Estate Duty Act.

Should you require any assistance contact our experts: info@lhtc.co.za

Market Flash – February 2019

On the 29th of March Moody’s will announce the results of it’s review of South Africa’s sovereign debt ratings. Moody’s is the only major ratings agency that has not already downgraded South Africa’s sovereign debt to junk. Currently Moody’s has South Africa’s rating at Baa3, one notch above sub-investment grade.

The outcome of the review might be any of the following:

      1. Keep the rating the same with a stable outlook (i.e. no downgrade likely in the next 12-18 months)
      2. Change the outlook to negative (i.e. possible downgrade within 12-18 months)
      3. Place S.A. on a ratings watch (i.e. review for a downgrade within 3 months)
      4. Downgrade

A cut to South Africa’s credit rating would see government bonds ejected from the World Government Bond Index with estimated outflows from the bond market of between $ 8bn and $ 10bn. However, it seems unlikely that South Africa will be downgraded or receive a negative outlook on the 29th, although a postponed downgrade would still remain a possibility.

Read more below for South Africa’s Market Overview:

Market Flash – February 2019 

Seed Market Overview – February 2019

On the 29th of March, Moody’s will announce the results of its review of South Africa’s sovereign debt ratings. Moody’s is the only major ratings agency that has not already downgraded South Africa’s sovereign debt to junk. Currently, Moody’s has South Africa’s rating at Baa3, one notch above sub-investment grade.

The outcome of the review might be any of the following:

    1. Keep the rating the same with a stable outlook (i.e. no downgrade likely in the next 12-18 months)
    2. Change the outlook to negative (i.e. possible downgrade within 12-18 months)
    3. Place S.A. on a ratings watch (i.e. review for a downgrade within 3 months)
    4. Downgrade

A cut to South Africa’s credit rating would see government bonds ejected from the World Government Bond Index with estimated outflows from the bond market of between $ 8bn and $ 10bn. However, it seems unlikely that South Africa will be downgraded or receive a negative outlook on the 29th, although a postponed downgrade would still remain a possibility.

Read more on the link below:

Seed Market Overview – February 2019

Taxation of Foreign Income for South Africans

With the recent amendments to the normal tax exemption relating to South Africans
working outside the country as provided for in s 10(1)(o)(ii) which comes into effect from 1 March 2020, financial advisers have been inundated with clients and others wanting to
‘financially emigrate’ and unfortunately some ‘emigration’ practitioners have also been
exacerbating the problem by often muddying the waters with some rather strange claims.

Of particular concern is that from 1 March 2020 the s 10(1)(o)(ii) exemption from normal tax in South Africa is available only to the extent that the ‘qualifying’ remuneration does not exceed R1 000 000 for a year of assessment.

The first important fact to note is that this exemption from normal tax is applicable only to a South African resident.

Although there is a definition of a ‘resident’ in the Income Tax Act, it uses the undefined term ‘ordinarily resident in the Republic’.

It is then necessary to look at the facts surrounding a taxpayer, especially with regards to binding case law. Two cases from the Appellate Division of the Supreme Court (now the
Supreme Court of Appeal) have dealt with the meaning of the term ‘ordinarily resident’.
These cases are Cohen v CIR and CIR v Kuttel.

In Cohen v CIR, Cohen’s physical presence was not a primary factor but rather ‘the county to which he would naturally and as a matter of course return from his
wanderings’.

It was also pointed out that ‘whether a person is “ordinary resident” in [South Africa] . . . does not [depend solely upon his actions during a particular year of assessment]. An investigation of his mode of life before, or even after, that year [of assessment may be necessary] to arrive at a conclusion.’

There is a so-called physical presence test in the definition of a ‘resident’.

To add even more complexity to this situation, South Africa has in force double taxation agreements with many different countries. These also impact on whether a person is classified as a resident of a particular country for tax purposes.

Given the above it is difficult to understand the number of queries that are being received from people who have been living outside the country for a number of years, with their families but who have not formally emigrated. Formal emigration per say does not change a person’s tax residency status. All the surrounding facts need to be considered when looking at residency. In a follow-up article the implications and the pros and cons of ‘financial emigration’ will be considered.

So, what are the implications of s 10(1)(o)(ii) if a person is a South African resident and is working abroad?

  • First, the s 10(1)(o)(ii) exemption from normal tax relates solely to employment
    income.
  • Secondly, despite it being an exemption from normal tax, it was created to stop
    people paying less tax in the two countries concerned. This means that people
    working in countries with high tax rates, for example, Britain and Canada, will
    suffer less from its impact.
  • One of the major concerns, however, is that ‘fringe benefits’ are subject to normal
    tax in South Africa. So, for example, a person working in a country where an
    armed guard is essential will now be subject to normal tax in South Africa for the
    privilege of staying alive!

One of the most complex areas for a South African working abroad will definitely be the impact and implementation of the relevant double taxation agreement to his particular employment and residential circumstances. These double taxation agreements differ from country to country and their impact can be material.

So while the impact of the changes to s 10(1)(o)(ii) are indeed serious and going to be extremely difficult for SARS to implement and for the taxpayer to produce relevant evidence to prove his stays in and out of a country, it is important remember that it is applicable only when a taxpayer is a South African resident for tax purposes.

Kind regards,

BARRY HUGO
CFP® CA (SA)

TRUSTEES AT WAR: THE REMOVAL REMEDY AND IT’S LIMITS

What happens when a trust’s trustees fall out and go to war with each other? If a polite request to the minority trustee to resign bears no fruit, can the majority forcibly remove him or her? And if so, must they have good reason to do so?

First question of course is what the founding trust deed provides for such a situation, but a recent High Court decision lays additional ground rules for trustees that anyone involved in a trust (in any capacity) should know about.

The case saw a mother facing off against three professionals (two auditors and an attorney) and the latter’s attempt to replace the mother with another trustee ran into troubled waters.

When family infighting impacts a family trust, an early casualty is often the relationship between the appointed trustees and beneficiaries, and/or between the trustees themselves.

And if that results in irreconcilable differences and conflict between the trustees, the only answer may be for one or more of the trustees to be replaced. First prize of course will always be to achieve this with a voluntary resignation – but what happens if a trustee refuses to resign? Can the majority forcibly remove him/her?

A recent High Court decision dealt with just that question.

3 professionals v the beneficiary’s mother

A “valuable property” in Knysna is owned by a trust created for the benefit of a couple’s daughter (11 years old at the time, now 30). There are four trustees appointed by the Master of the High Court (“the Master”) issuing “letters of authority” to two auditors and an attorney (“the professionals”), and to the beneficiary’s mother. The father farms the property through a company and a close corporation. Although no family feud is specifically mentioned in the judgment, it seems clear that the father is in one camp, and the mother and daughter in the other.

The trust deed contained this clause – “The office of a TRUSTEE shall be vacated if …. the majority of TRUSTEES request a TRUSTEE to resign.”

The trustees fell out in a dispute over the father’s loan account, with the professionals proposing that the trust should pay the father interest on his loan, and the mother objecting on the basis that payment of interest had never been agreed to.
This was discussed in a telephonic trustees’ meeting, and resulted in the professionals writing to the mother to say she was removed as trustee for three reasons – “1) all items discussed were either rejected or opposed; 2) she made false allegations against the applicants and 3) she admitted that she did not have sufficient knowledge to fulfil her duties as trustee”. The Master then pointed out to the professionals that they could not resolve to remove the mother, only to request her to resign. They did so in a second letter to the mother.

The mother refused to resign and the professionals asked the High Court to order that the mother “has lost her office as trustee”. Their attitude was that they were acting in terms of the trust deed, no reasons for the decision had to be given, and the Master had no option but to issue new letters of authority.

The clause itself might seem pretty clear, the professionals clearly believed that they were acting entirely within their mandate and they presumably commenced their litigation with high hopes of success. But it was not to be…
The Court, for the reasons we discuss below, held for the mother, who accordingly remains a trustee.
Ambiguity, showing good cause, and ubuntu

The Court’s reasons for its decision contain some important principles that anyone involved in a trust would do well to take note of (with some thoughts on how to deal with each issue in brackets) –

The trust’s removal clause, held the Court, was ambiguous when it provided that a request (involving a choice) for resignation shall (peremptory – no choice) lead to vacation of office. The clause, said the Court, “must be interpreted to read that there must be good cause for such a request and that the trustee shall vacate his/her office only in the event of an acceptance of the request”. (Make sure the trust deed is clear and unambiguous).

Secondly, an implied term should be read into the clause requiring good cause to be shown – to allow trustees to remove another without producing reasons “would be against public policy and the principles of ubuntu, reasonableness and fairness”. (Make sure you can show fairness and good cause for decisions).

Thirdly, the professionals had failed to prove any justification for their action. They could not rely on the clause without giving reasons for their decision and proving that they took their decision “based on the discretion of a good person acting reasonably”. (Make sure you can justify your actions as reasonable).

Fourthly, the resolution to request the mother’s resignation “should have been taken on a properly constituted trustees’ meeting and upon proper notice of their intention”. Instead, they took decisions “secretly and without notifying [the mother] in advance. They also “failed to give proper notice in compliance with the provisions of the Trust Act.” (Comply with all procedural formalities).
Finally, said the Court, there was no deadlock between the trustees – “Decisions in the interests of the trust and trust beneficiary can be taken by the majority of trustees during a properly convened meeting on condition that sufficient notice of all matters to be considered is given. It is not necessary to remove the first respondent in order to conduct the business of the trust in a lawful manner.” (Be sure that removal is actually necessary).

Should you require any assistance please contact one of our experts: info@lhtc.co.za

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