Monthly Archives: February 2017

what it means for your financial plan

Traditionally, the focus of every financial plan was retirement. Everything was built around the day that you have to leave formal employment at the age of 60 or 65.

However, more and more people are having to ask what happens next. In a time when life expectancy is steadily increasing, the idea of throwing away your briefcase and putting your feet up to live out your ‘golden years’ in peace and quiet is looking increasingly less appealing, and less practical.

For a start, there is little point in retiring ‘to do nothing’. Many retirees find that they are actually busier than they were during the working lives, but the difference is that they can do what they enjoy.

“We are finding more and more people who are re-thinking retirement,” says Kirsty Scully from CoreWealth Managers. “In most cases, they have been professionals in their careers and they want to stay employed to continue with their personal and professional growth and development, yet they don’t want a typical work schedule. They are looking for flexible working arrangements so as to have a good balance between work and leisure.”

Wouter Dalhouzie from Verso Wealth says that from both a mental and physical well-being point of view, it is important for retirees to keep themselves occupied.

“I had a client whose health started failing shortly after retirement,” he says. “He started a little side-line business and his health immediately improved. When he retired from doing that, his health went downhill and he passed away within a matter of months.”

Verso Wealth’s Allison Harrison adds that she recently attended a presentation that discussed how important it is for people to remain active. “The speaker explained that if we don’t continue using our faculties, we lose them as part of the normal ageing process,” Harrison says. “The expression she used was ‘use it, or lose it’!”

She relates the story of a retiree who had been in construction his entire working life.

“After a year in retirement, he decided to buy a second home, renovate it and sell it,” Harrison says. “This was very successful, so he decided to repeat the exercise using his primary residence.  This yielded a bigger return than the first one and thereafter then moved from house to house, renovating, selling and moving on.”

This way he ended up making more money in his 20 years of retirement then he did in his 40 year building career.

Data burning a deeper hole in the pockets of South Africans

In the wake of the #DataMustFall campaign, it seems that the data revolution might have a valid and legitimate plea. The campaign founders made a presentation before the Parliamentary Communications and Postal Committee on September 21 on the costs of data in the country. According to the soon-to-be launched findings of the FinScope South Africa 2016 consumer survey, the results show that the average South African spends about 9% of their purse on airtime and data recharge, cellphone contracts, telephone lines and internet payments. The average person spends approximately R700 a month for communication-related expenses.

Parallel to the #DataMustFall campaign, which is gaining traction, is the #FeesMustFall (reloaded) campaign, which is also resurfacing in light of the announcement of an up to 8% fee increase made by the Higher Education Minister Blade Nzimande. While university students would like to see a 0% increase, universities are requesting increases to sustain operations and fund research.

Therefore, in light of these developments and expenses, how does the purse of the South African consumer fair? The preliminary results of the FinScope 2016 survey shows that South Africans spend R688 per month on average on education.

The FinScope findings further show that South Africa’s total personal monthly consumption (PMC) expenditure in 2016 is estimated at R220 billion (monthly). On a monthly basis, the average individual spent approximately R5 400 during the period of conducting the FinScope 2016 survey. The results show that the main components of expenditure are on food (21%), transport (11%), utilities (11%) and communication, which amount to 9% of the spending purse.

Overall, individuals’ spending on education is 6% of their purse (estimated monthly spend of R12.2 billion). Further demographic analysis of the data per race showed that black communities still bear the greatest brunt of the education costs. For the average black South African, education expenses constitute 7% of their purse – this is higher compared to other races for which the purse composition for coloured, Asian, Indian and whites are at an average of 4.3% of their purse.

Furthermore, as one analyses the data further, it shows that nearly 12 million black South Africans spend more than 10% of their purse on education-related expenses. This is further exacerbated when noting that the average income per month is R4 723, R6 294, R12 265 and R17 123 for black, coloured, Indian and white South Africans respectively. As such, the cost of education places a heavier burden on black South Africans.

Save up to buy a second car

Q: I would like to start saving for a second motor vehicle. My current car is paid off and still in very good condition, so I don’t think I will need to replace it within the next five years.

I would therefore like to save the money that I was paying towards my monthly instalments to eventually buy a second motor vehicle for cash. Therefore, my savings term would be at least five years.

I have a money market fund with Allan Gray at the moment, but I find it difficult not to use these savings for other larger expenses. I would therefore prefer to use something that does not allow immediate and easy access to my savings. What would be best for this purpose?

The first step one should take is to identify the investment objective. In this case that is a car, with an assumed cost of R300 000 at the end of a five-year term horizon. It is important to understand this time horizon as well as your appetite for risk to decide on the most suitable investment vehicle.

Some of the most popular after-tax investment vehicles include endowments, unit trusts and the tax free savings accounts. These vary in terms of accessibility and tax implications and we would need to know the clients full financial situation before recommending a suitable product.

For a client who wants to lock their investment for a five-year period, an endowment would be a vehicle to consider. We do, however, have to take into account their marginal tax rate when making this decision.

This is because endowments are taxed within the fund at a set rate of 30%. This benefits investors who have a marginal tax rate greater than that, but can be prejudicial if their tax rate is lower.

Because the money in an endowment is taxed within the fund, your withdrawals are tax free. In order to get this benefit, however, endowments have a minimum investment time horizon of five years. At that point the money can be accessed or the investor can choose to extend the policy term.

You would be able to choose different underlying investments within the endowment, and given your time horizon, a moderate-to-balanced portfolio will most likely be appropriate. It is, however, important to take your risk appetite into account.

Property and tax

In this advice column, Wendy Foley from Citadel answers questions from a reader who is selling a house that he was renting out.

 

Q: I bought a house in Pretoria in December 2011 for around R1.1 million. I lived there until October 2013 but then moved to Johannesburg and decided to rent it out.

I did not buy a new place in Johannesburg as I intended to move back to Pretoria eventually. With the monthly rental income I received on my Pretoria property, I paid rates and levies of around R2 000 per month, although I did not pay any municipal rates.

In time, I realised that I was not going to move back to Pretoria again and decided in February 2015 that I wanted to sell my house and found a buyer for it.

My questions relate to how all of this should be reflected in my tax return.

For the last two years I have included the rental income in my return, whilst deducting items such as interest and levies. I paid the full outstanding municipal rates of around R30 000 when I sold my house in June 2015. For the 2016 tax year, can I deduct all of the rates for the period that I was renting out the property, which is about 18 months?

Secondly, when it comes to the proceeds of the sale, am I eligible for the R2 million exemption on capital gains tax for a primary residence?

 

To answer all of your questions, let us first consider the tax treatment of rental income. Any rental income you receive should be added to any other taxable income you may have, and assessed in its entirety.

The taxable amount of rental income may, however, be reduced, as you may incur expenses during the period that the property was let. Only expenses incurred in the production of that rental income can be claimed. Any capital and/or private expenses won’t be allowed as a deduction.

Expenses that may be deducted from taxable income are your rates and taxes, interest on the bond, advertisements, fees paid to estate agents, homeowners insurance (not household contents), garden services, repairs in respect of the area let, and security and property levies.

It is important that maintenance and repairs should be noted as specific costs and not confused with improvement costs. Improvements are a capital expense and cannot be claimed as an expense. They can, however, be included in the base cost of the property to effectively reduce the capital gain (or loss) on the disposal of the property, for capital gains tax (CGT) purposes.

To answer your first question then, the municipal rates were paid as a lump sum amount of R30 000 in June 2015 on the sale of the house. Assuming that the property was still being let during the 2016 tax year that runs from March 2015 until February 2016, the seller would be able to deduct the full amount of R30 000 in the 2016 tax year.

On the second question, current legislation entitles individuals to disregard any capital gain on the disposal of their primary residence if the proceeds do not exceed R2 million. In such event the individual does not need to determine the base cost of the residence.

In order to claim this exclusion we need to determine what qualifies as a primary residence.

To meet the requirements, it must be a structure (including a boat, caravan or mobile home) which is used as a place of residence by an individual. An individual or special trust must own an interest in the residence. And the individual with an interest in the residence, beneficiary of the special trust, or spouse of that person or beneficiary must ordinarily reside in the home and use it mainly for domestic purposes as his or her ordinary residence.