Category Archives: Tax

UT or share portfolio

There are many with strong opinions about the merits of a share portfolio versus a unit trust portfolio. Here’s another one (strong opinion) in favour of a unit trust portfolio.

One of the aims of investing surely has to be to accumulate wealth which will enable you to live “comfortably” at a later stage in life (usually referred to as retirement). In this regard, it is my opinion that a unit trust portfolio trumps a share portfolio, every time!

A retiree’s primary aim is usually security of income and this is where a share portfolio falls short; it is very difficult to draw a regular income from a share portfolio. Investors usually have to depend on dividends which are irregular, sometimes unreliable and the long-term dividend yield is less than 3% (±2.8%). An investor with a share portfolio of R10m would therefore expect to receive less than R300k pa from the dividend yield. Alternately they would need to sell shares (CGT) and this is also tricky as many investors are emotionally tied to their investments.

The same amount in a unit trust portfolio could reasonably generate a sustainable (and close to tax-free) income of ±R500k pa (5%). This would be done by selling units on a monthly basis to provide the income – essentially rand-cost-averaging on the way out. Sure, this is a capital gains tax event but in most cases, this would be very tax efficient (if not completely tax-free).  Most unit trust investors also have no idea of the underlying shares that they hold and the emotional attachment to “granny’s shares” is simply not there.

SARS – touching lives negatively

Just received a revised assessment from SARS for a client for the 2014 tax year, disallowing her retirement annuity contribution and thus resulting in a revised assessment and penalties!!!

On what planet does SARS get to disallow an RA contribution? Do they now get to make up their own rules? Are they so desperate for money that they are now issuing frivolous penalty assessments to scare clients into paying to improve SARS’ cash-flow?

This is insane and amounts to victimization by SARS. It’s definitely not in keeping with SARS’ charter of treating tax payers fairly.

Yes, we will lodge a dispute and it will be over-turned but this is such a waste of time and money and just further serves to erode the public trust in SARS that is already in free-fall.

Come on SARS, you can do better – you are touching lives negatively

Bad design – come on SARS

At first I thought that maybe it was only me and that the settings on my computer must be faulty – turns out it’s not me. It’s everyone who uses efiling…

While there are many positives about efiling, can someone please look at the system from a design point of view…the page does not fit on the average screen and most frustratingly, it does not scroll down.

Also, why do I have to re-enter my practitioner information each time – why cant this pull through automatically? It just adds to the costs for tax payers.

Surely this is basic design stuff – or does no one at SARS care?

 

 

 

 

The value of advice?

Much has been written about the value of financial advice. There are many people who believe that financial planners offer little value for the fees charged while there are others who believe that the value financial planners add is very significant.
Research by Morningstar has revealed that the value of advice (they call it “gamma”) can be as much as 3% (of the client’s portfolio) per annum. This is, among other things, a result of managing investor behaviour and greater tax efficiency for the advised client.
We have more than a few clients who prefer to manage their own funds with no on-going advice fees and who will then consult with us from time to time when they think it necessary. And while this may seem to save them an “annual advice fee”, in my experience, it has almost always cost them significantly more than the fee that they would have paid as an “advised” client. Consider the following example from our practice.
The client retired a few years back and transferred his funds to a living annuity – he met with us around the income draw, asset allocation and resulting fund selection and has been looking after it on his own since then. He has been drawing the minimum income (as a result of some consulting that he was doing) until the anniversary earlier this year when the consulting stopped and he needed to increase the annuity. Which he did – without consulting us and without any thought to the tax consequences.
He did not consider that he had a discretionary pot of money from which he could effectively draw (close to) tax-free income. The result is that he is now paying at least R100k in tax that he need not be paying. This is R100k that we would have saved him if he had been an advised client (or if he had at very least sought advice before making the change). The R100k is certainly many times the quantum of the annual fee that we would have been paying. And he is currently staring at an estate duty problem because of the choice to increase the annuity income draw and leave the discretionary assets in his estate.
Add to this the fact that he recently switched funds – “the funds had done nothing for the past few years” and so he made the change. The move was at exactly the wrong time and his asset allocation is now also out of kilter (way too much offshore exposure for a living annuity with a 5% draw). The annual fund fees that he is paying is also way too high – he had “no idea that was an issue”.
Clearly in this case, the value of advice would have been way less than the cost to his portfolio. But then, perhaps we have ourselves to blame. If all clients think we do is choose funds then why would you pay (a significant) ongoing fee for that?
We need to make sure that clients fully understand that asset allocation is but one part of the value-add from a professional financial planning service. There is so much more to the financial planning service, but they wont know that if we don’t tell them and more importantly, if we don’t demonstrate it.

 

 

RA’s still make so much sense

I must admit to feeling quite deflated post the budget speech – kind of feels like we are just getting squeezed even more and that there is little motive to working hard and attempting to save when in reality we are just being taxed more and more and are given little incentive to save (R33000 into a tax-free savings account is not going to get you anywhere meaningful).

Dividend tax has gone up by 33% (15 to 20%) , capital gains tax has gone up for the maximum marginal tax payers and there was also no increase in the maximum tax deductible contribution to retirement saving – it is still capped at R350k per annum.

And then I got to thinking about the tax advantages of using RA’s and of even over-contributing to one where there is no tax relief on the contribution. Think about it…

  • You will get tax free growth on the investment – there is no tax on interest, no dividend taxes and no capital gains tax in the RA.
  • Any contributions where there has been no tax relief roll over to the following year or to retirement when you can take them out tax-free. This can either be as a lump sum (tax-free) or as income via your living annuity. I know that this is currently a bit of a process as SARS’s systems cant deal with it so you end up getting a tax refund not tax-free income. But if you take it out as a tax-free lump sum you could then invest it into some UT funds and draw income from it by way of sale of units. This would allow you to reduce the income draw on your annuity (which is taxable) by supplementing it with income from your UT portfolio (which would be close to tax-free income).
  • If you were to die with excess contributions in your RA then currently they would still form part of your estate but your beneficiaries could take them out as a tax-free lump sum.

So maybe there was little in the way of incentive to encourage people to save but with a little bit of thought we can make use of the prevailing tax laws to maximise retirement saving and find the light at the end of the tunnel.

I’m off to do another RA top-up!

 

TFSA or not to TFSA?

Alec Hogg recently wrote a piece encouraging people to take full advantage of the tax free savings account before the end of February (http://www.biznews.com/undictated/2016/02/05/go-full-out-for-tax-free-savings-accounts-but-with-two-provisos/)…I disagree with him on this one and here are the reasons why.

Sorry Alec but I disagree with you on this one…I have previousy written about how I’m not so excited about TFSA (https://www.thefinancialcoach.co.za/2015/03/23/tfsas-a-better-way/) but we need to remember that the TFSA’s are not aimed at the people that read our websites – they are intended to get non-savers saving. For the average reader of our sites who has maxed out their retirement savings and has spare cash to invest, I would rather have funds invested into a UT or ETF physically offshore than a TFSA in SA…funds invested into an offshore unit trust are to all intents and purposes tax free in SA.

On a roll-up fund there are no distributions and therefore no tax implications in SA…yes there will be CGT one day but I will not be bringing all the funds back in one go so the tax effect of the capital gain will be muted. I think the TFSA is a great idea in principle but as with all other Government savings initiatives they dont go far enough (Fundisa being another example).
To my mind, to be meaningful the annual amount should be closer to the UK amount of 15k GBP – even R200k in SA would have been better…but government dont want to be seen to favour the wealthy.
Anyone who thinks that they are going to have a fortune saved from the TFSA is dreaming. Realistically, the R30k pa for 15 years should allow you to draw a monthly income of roughly R2150 in todays terms for 30 years…not even half a month’s shopping for our “average” reader.

If you have spare cash to invest before the end of February then first maximise your RA/retirement contributions and once you have done that then look to take the funds offshore directly into a foreign currency based unit trust or ETF. That’s what I am doing!

SARS, like Nike – just do it!

I have posted on this previously but it seems to be an increasing issue and even SARS call centre agents are starting to admit that their systems are not up to scratch! The result is that even if you are not liable to submit a tax return (in terms of SARS own rules) I strongly advise you to file your returns…we are coming across more and more hostile situations where SARS are insisting that ALL outstanding returns be filed…

SARS speaking with forked tongue (again)

Filing season for the 2015 tax year opens today and SARS have been sending out plenty of emails about this. One of them is titled “BE TAX SMART – Check if you need to submit an income tax return!” which implies that some people might not need to submit an annual return.  We followed the link on the email and this is what we found:

“Taxpayers earning less than R350 000 a year may not have to submit a tax return this year…this Tax Season the annual income threshold for submitting a tax return has been raised from R250 000 to R350 000.

This means that any taxpayer earning R350 000 or less during a tax year (1 March to the end February the next year) may not need to submit an income tax return as long as they also meet all the requirements listed below:

  • You earn a salary from only one employer (i.e. you get only one IRP5 or IT3A certificate).
  • You don’t have any other form of income (e.g. interest or rental income).
  • You don’t want to claim any tax related deductions (e.g. medical expenses, retirement annuity contributions or business travel expenses).”

All good and well and how very progressive of them, however, in our experience, tax payers who have not submitted returns (and who met the criteria for not submitting returns) are in for a nasty surprise when they die – or at least their executor is in for a nasty surprise. At your death, it seems to be SARS practice to insist that all the years’ outstanding returns are submitted – even though you were not required to submit a return. It is also an issue for people who have not submitted returns and who want to buy/sell property or get a tax clearance certificate…all “outstanding” returns must first be submitted…and there is no one with whom you can reason. Just do it!

So my advice is that until SARS sort out their systems and the estates department speaks to other departments, is that even though you might be exempt (in terms of their own criteria) submit a return. It will be a whole lot easier (for everyone) if all your returns are filed while you are still alive…it’s not always easy to get the required information when you are no longer around (and can certainly increase the costs of winding up your estate too).

Happy Filing Season 2015!

SARS speaking with forked tongue (again)

SARS speaking with forked tongue (again)

Filing season for the 2015 tax year opens today and SARS have been sending out plenty of emails about this. One of them is titled “BE TAX SMART – Check if you need to submit an income tax return!” which implies that some people might not need to submit an annual return.  We followed the link on the email and this is what we found:

“Taxpayers earning less than R350 000 a year may not have to submit a tax return this year…this Tax Season the annual income threshold for submitting a tax return has been raised from R250 000 to R350 000.

This means that any taxpayer earning R350 000 or less during a tax year (1 March to the end February the next year) may not need to submit an income tax return as long as they also meet all the requirements listed below:

  • You earn a salary from only one employer (i.e. you get only one IRP5 or IT3A certificate).
  • You don’t have any other form of income (e.g. interest or rental income).
  • You don’t want to claim any tax related deductions (e.g. medical expenses, retirement annuity contributions or business travel expenses).”

All good and well and how very progressive of them, however, in our experience from previous years, tax payers who have not submitted returns (and who met the criteria for not submitting returns) are in for a nasty surprise when they die – or at least their executor is in for a nasty surprise. At your death, it seems to be SARS practice to insist that all the years’ outstanding returns are submitted – even though you were not required to submit a return.

So my advice is that until SARS sought out their systems and the estates department speaks to other departments, is that even though you might be exempt (in terms of their own criteria) submit a return. It will be a whole lot easier (for everyone) if all your returns are filed while you are still alive…it’s not always easy to get the required information when you are no longer around (and can certainly increase the costs of winding up your estate too).

Happy Filing Season 2015!

Risk free returns?

I recently saw an advert for RSA Retail Bonds that was advertising “risk-free” returns. This kind of thing really gets up my nose and in my opinion it smacks of false advertising…RSA Retail Bonds are not the only culprits – just about all of the banks do it too.  “No fees or commissions” or “Risk-free”.

Let’s get this straight – there is no such thing as a risk-free investment. The reason they are advertised as “risk-free” is because they are only ever referring to one kind of risk; that of volatility! These “investments” never refer to inflation risk and they also assume that “default” risk could never apply either!

Broadly speaking there are 2 kinds of risk that really matter to investors: volatility and inflation and they are kind of on the opposite ends of the risk spectrum from one another. Volatility is a short-term risk whereas inflation is a long-term risk.

When things like RSA Retail Bonds claim to have no risk associated with them they are referring to volatility and that is all. They are not claiming to be risk-free, especially when it comes to inflation risk. This is, in my opinion, misleading. You could well invest your money into these kind of investments believing that you are taking no risk at all (because that is what the adverts imply) and then find out that when your investment falls due that you actually have less money (in real terms) than when you started off – all because you did not take enough risk. It’s kind of ironic that in order to counter inflation risk you need to take some volatility risk.

On top of this, any money invested into the RSA bonds is locked in for a minimum of 2 years. The historic returns from these investments have been around 7% pa. By contrast, if you had invested into an “enhanced income” type unit trust fund you would have had returns of ±8-10%* pa for the past few years and would have had access to all of your capital within 48 hours…and all because you took a little bit of (volatility) risk!

So be warned; RSA Retail Bonds are not “risk free” as is claimed. They carry a significant amount of inflation risk, especially after tax.

 

Note:

*typically these funds are designed to generate returns of “cash+2%”pa. This is not guaranteed and there is a small amount of volatility risk that could apply over periods of less than 12 months.