BUDGET SPEECH 2020 WEALTH - Old Mutual Wealth
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BUDGET SPEECH 2020
WEALTH
1
CONTENTS
01
JOHANN ELS
3
BUDGET: LIFTING SENTIMENT, BUT DOWNGRADE STILL A REALITY
02
FARHAD SADER
5
BRIGHT YOUNG MINDS WANT GOVERNMENT TO ACT NOW
CHRIS POTGIETER
03 FINANCIAL EMIGRATION – DO THE COSTS AND COMPLEXITIES WARRANT THE
BENEFITS?
7
04
WIKUS FURSTENBERG
9
POSSIBLE MOODY'S RATINGS ACTION – A QUICK TAKE
05 ELIZE BOTHA
USE THE TAX CUTS TO STAY ON COURSE
15
06 TAX TABLES 17
3
BUDGET: LIFTING
SENTIMENT, BUT
DOWNGRADE STILL A
REALITY
AUTHOR
JOHANN ELS
CHIEF ECONOMIST: OLD MUTUAL
INVESTMENT GROUP
T
he 2020/21 Budget shows that National Treasury Another risk going forward – and an aspect to feature
is willing to make hard choices during diff icult on the radar of rating agencies – is that any expenditure
times. It may not have done enough to avert a savings will be “eaten up” by the growing interest rate
downgrade, but Minister Mboweni’s focus on bill. Interest payments will increase on average by 12%
expenditure cuts rather than tax hikes will lift sentiment a year over the next three years.
and ease some pain for long-suffering consumers.
Equities are expected to react positively to the news
NO NET TAX INCREASES that there will be no net tax increases, apart f rom the
While the absence of net tax hikes is good news for usual “sin” taxes, while bonds could respond more
consumers, risks remain around the ambitious plans to negatively to the very large deficit, rising debt ratio and
cut expenditure on the wage bill, as this still needs to risks associated with achieving the wage bill savings.
be negotiated with unions. Mboweni also announced Old Mutual expects a neutral inflationary effect.
baseline spending reductions of R261 billion with
adjustments on the wage bill penned in at about R160 In a surprise move, individual income tax brackets were
billion over the medium term. adjusted by more than inflation (5.2% versus expected
4.4% inflation). This provides for total personal income
BETTER THAN EXPECTED, BUT NOT tax relief of R2 billion, compared with a potential extra
GOOD ENOUGH FOR MOODY’S R12 billion had there been no tax bracket adjustments.
Despite huge def icits and no debt stabilisation, the
From an inflationary perspective, there will likely be
Budget was on balance better than expected, given
minimal impact as the increases in fuel and excise
the emphasis on expenditure reduction and not tax
taxes are generally lower than last year. It is still a very
increases. But the large def icit, debt ratio and primary
deflationary environment.
def icit, combined with still weak economic growth
and the risks around the wage bill savings could still BUDGET DEFICIT TO DECLINE
lead to a Moody’s downgrade in March. As expected, While the Budget def icit is expected to decline over
Moody’s highlighted these risks in their post-budget the next three years, it will explode to -6.8% in 2020/21
commentary. f rom -6.5%, which had been expected in October. The
3
def icit is, however, expected to recede a little f rom not come at the expense of removing incentives in
there and is seen unchanged at -6.2% in 2021/22 and areas that have a proven history of working, like in the
-5.7% in 2022/23. automotive industry.
A def icit as high as -6.8% high will, however, clearly FUTURE CUT IN CORPORATE TAX
be seen as a risk for Moody’s. Although the very large It was announced in the Budget that government intends
deficits might seem like this is an expansionary budget, to restructure the corporate income tax system over the
that is not true to the full extent as these def icits might medium term by broadening the base and reducing
imply that expenditure excluding wages and interest the rate. Broadening the base will involve minimising
payments only rise by 4.5% on average over the next tax incentives and introducing new interest deduction
three years. That is slightly below expected inflation and assessed loss limitations. South Af rica’s corporate
over this period. income tax rate has remained unchanged at 28% for
more than a decade.
The envisioned lower corporate tax rate in future is
a positive signal as this will encourage investment In summary, the positives outweigh the negatives in
and help expand production. However, this should this Budget, but the jury is out on the wage bill.
4
BRIGHT YOUNG MINDS
WANT GOVERNMENT TO
ACT NOW
AUTHOR
FARHAD SADER
MANAGING DIRECTOR: OLD MUTUAL WEALTH
This was what I gathered while reading through essay
submissions to the annual Nedbank and Old Mutual Budget
South Af rica’s top young thinkers are Speech Competition, which announced its 2019 winners
most concerned about high levels of on 26 February. Bekithemba Qeqe, University of Fort
corruption in government and the barriers Hare and Matifadza Bingudza, University of Pretoria, were
this creates in attracting investment. adjudged winners of the postgraduate and undergraduate
competitions respectively.
Yet the best and brightest young talent
in the f ield of economics are cautiously The most ardent recommendation by tomorrow’s economic
optimistic about the potential for the leaders was to root out corruption by any means necessary.
South Af rican economy to recover. For the f inalists, the number one barrier to attracting
investment and fostering economic growth is corruption. All
the entrants cited this as a signif icant obstacle to creating
a supportive business environment and securing the
A
stability required to allow for the effective implementation
head of the 2020 Budget Speech, the leaders
of macro-economic policies.
of tomorrow called on Finance Minister Tito
Mboweni to act decisively, imploring the Tasked with evaluating President Cyril Ramaphosa’s
government to take the necessary action to economic stimulus package, jobs summit initiative and bold
repair the country’s purse. USD 100 billion investment target, competition participants
5
are understandably pessimistic about the possibility of short- well as political risk and instability were f requently
to medium-term gains. Citing government ineff iciency, mentioned by students as barriers to investment.
corruption and the lack of a skilled workforce, all f inalists One argued that poor governance structures create
agree that these reforms are unlikely to meet their goals uncertainty around the safety of investments.
unless the problems at the root of the economic turmoil 5. The high cost of labour and restrictive labour regulations
are addressed. were argued by a number of students as a barrier to
investment. However, one student made the case that
Even so, these outstanding young thinkers remind us not to
high unemployment makes labour relatively inexpensive
overlook the reasons for optimism in these troubled times.
compared to some other emerging economies.
Most students highlighted South Af rica’s robust f inancial 6. The instability in society as a result of inequality and
services and banking sector as a key asset in attracting poverty also reduces investor confidence, according to a
investment. The independence of the Reserve Bank and few students mentioning crime and theft in particular.
our stable monetary policy were also frequently mentioned 7. Other barriers specifically mentioned were the difficulty
of doing business and low business confidence; exchange
by f inalists as a draw for investors. After all, South Af rica
rate instability; challenges to the rule of law; infrastructural
boasts some of the most sophisticated and sound financial
challenges as well as the low-skilled labour force.
institutions in the world.
On the whole, the finalists see the country’s strong regional,
continental and global trade networks — particularly our
role as a gateway into emerging Af rican markets — as a
key factor in favour of attracting investment. The views
expressed by the f inalists echo the calls f rom broader
society for decisiveness and action. Hopefully, these views
are not falling on deaf ears. Their ideas aside, every year,
these bright young minds remind us that we have a whole
new generation of talented and innovative leaders in our
country eager to make a difference. Just listening to the
enthusiasm with which they debate opportunities and
ideas f ills me with hope and optimism for the future.
Other f indings include:
1. All the students cited high levels of corruption as a
barrier to investment, particularly in relation to State-
Owned Enterprises (SoEs).
2. The mismanagement and decline of SOEs were also
often mentioned as a barrier, in particular Eskom,
because of the harm of unreliable energy supply to
the industry as well the bailouts putting enormous
pressure on the f iscus.
3. Students f requently mentioned a threat to property
rights and the rule of law as well as political interference
with institutions as undermining the likelihood for
investment. In particular, land reform, mining and
reform in SOEs were a concern.
4. The budget deficit was mentioned as being a deterrent to
investment because it makes the country look financially
unstable. Government ineff iciency and instability as
6
FINANCIAL EMIGRATION
– DO THE COSTS
AND COMPLEXITIES
WARRANT THE
BENEFITS?
AUTHOR
CHRIS POTGIETER
MANAGING DIRECTOR: OLD MUTUAL WEALTH TRUST
COMPANY | PRIVATE CLIENT SECURITIES | TREASURY
ADVISORY FIDUCIARY
S
outh Af rica’s “expat tax” and its potential South Af rican tax residents was fully exempt f rom tax
implications have caused a great deal of hype in South Af rica, provided certain requirements were
(largely based on inaccurate information), met. Importantly, the amendment only affects income
resulting in many clients looking to f inancial received f rom employment and does not affect those
emigration as a means of resolving their issues around earning foreign investment income (which is already
paying tax in South Af rica on income earned offshore. taxed) or individuals who are no longer residents of
Financial emigration is the application, as part of a South Af rica for tax purposes.
formal emigration process, to the South African Reserve
Bank to change f rom a resident of South Af rica to a Much of the misunderstanding around this topic stems
non-resident for exchange control purposes. It does not f rom the fact that f inancial emigration is a colloquial
by itself impact one’s tax residency, but can be seen term that does not exist in any legislation. Rather, the
as a related process. Formal emigration and changing key issues are formal emigration and tax residency,
tax residency are complex processes and may well be which are two separate (often linked) processes. Formal
the desired outcome for individuals seeking to live emigration entails physically relocating from one country
permanently in another country, but it is certainly to another country. Formal emigration will typically
not a quick f ix for tax relief. Furthermore, changing also involve f inancial emigration i.e. changing one’s
tax residency status could result in immediate tax status to non-resident for exchange control and tax
consequences in the form of exit charges. purposes. The entire process is lengthy and includes
REVISED LEGISLATION rigorous audit, and upon SARB and SARS approval, the
The revised Income Tax Act (effective 1 March 2020) individual will be issued with an Emigration Tax Clearance
will result in South Af rican tax residents working Certificate. Sometimes, financial emigration needs to be
abroad temporarily being exempt f rom paying tax on done retrospectively when people physically emigrate
the f irst R1 million they earn abroad. Thereafter they and only subsequently recognise the requirement to
will be required to pay tax on any foreign earnings. regularising their status as non-resident for exchange
Previously, the foreign employment income earned by control and tax purposes.
7
SUBSTANTIAL EXIT CHARGES for no more than 91 days in total during the current
Changing your tax status to non-resident could have assessment year; 91 days in total during each of the f ive
signif icant capital gains tax consequences, as your years of assessment preceding the current assessment
worldwide assets (with the exception of f ixed property year; and 915 days in total during those f ive preceding
situated in South Africa) are deemed as being disposed years of assessment. Contravening any of these periods
of at market values. Therefore, 40% of any gain would will result in an individual’s tax status being reverted to
be included in your income and you will be taxed at a South Af rican resident. So, one could have formally
your marginal tax rate. This ‘exit charge’ can be quite emigrated, changed your tax residency status and then
substantial and you may need to raise liquidity to settle subsequently be classif ied as a SA tax resident again.
your affairs with SARS.
BE CLEAR ABOUT YOUR
It is important to ensure that your intention to relocate OBJECTIVES; SEEK PROFESSIONAL
and your affairs are fully disclosed in your tax returns in ADVICE
the year of your emigration as well as in the proceeding In conclusion, it is clear that f inancial emigration is
f ive years. These disclosures could be key if, at a later a highly complex, costly and long-term decision and
stage, your tax residency or ability to exit funds were pursuing this path solely to avoid tax is ill advised.
to be examined. Investors should bear in mind that all South Af ricans
have an annual R1 million single discretionary allowance
COMPLEX RESIDENCY TESTS and R10 million foreign investment allowance - both
South Africa’s tax regime is based on a residence-based of which can be used for foreign investment and asset
system and one’s tax residency status is determined by transfer without having to change tax residency.
how much time you spend in the country, where your
assets are based, where your family resides most of the While everyone’s circumstances are different, there
time, and the location of your primary residence. In are numerous factors to consider and it is important
order to become non-resident, individuals must prove to understand the real cost and lifestyle implications
their intention to become ordinarily resident in another before deciding to f inancially emigrate. As with any
country and demonstrate the steps they have taken major f inancial decision, it is always advisable to seek
(or are taking) to carry out this intention. professional advice to ensure that your actions and
objectives remain aligned and that your investment
Finally, they will then need to meet requirements of plan is optimally structured.
the physical presence test by being in South Af rica
9
POSSIBLE MOODY'S
RATINGS ACTION – A
QUICK TAKE
AUTHOR
WIKUS FURSTENBERG
PORTFOLIO MANAGER & HEAD OF INTEREST RATE
PROCESS: FUTUREGROWTH ASSET MANAGEMENT
M
uch had been written since late 2018 In some cases, mandates require investors to invest in
about a possible rating action by Moody’s bonds with a so-called investment grade rating only,
Rating Agency (Moody’s). In this article, where the lowest investment grade rating is BBB- (or
we share some thoughts on the possible Baa3 in the case of Moody’s). In the case of the Republic
impact on fund returns, should the South Af rican of South Africa, Moody’s is the only rating agency that is
nominal bond yield curve steepen in response to a still rating the country as such. The other two agencies
downgrade. We wish to reiterate that this analysis is have downgraded South Af rica to a sub-investment
not a forecast, but merely intends to give investors a rating of BB+ for local currency denominated debt.
feel for how these funds may behave in the particular Moreover, for inclusion in certain global bond indices,
scenario highlighted below. a minimum investment rating of BBB- is required.
WHAT EXACTLY IS THE HYPE GRAPH 1: SOVEREIGN CREDIT RATING SCALE
ABOUT MOODY’S? MOODY'S S&P FITCH
This is nothing new, really. Moody’s is one of the three Aaa AAA AAA Prime
major international rating agencies (the other two are Aa1 AA+ AA+
Aa2 AA AA High grade
Standard & Poor’s and Fitch). These rating agencies
Aa3 AA− AA−
issue a credit rating to bond issuers (at a fee). Their A1 A+ A+ Upper
client base ranges from private sector firms to countries, A2 A A medium
A3 A− A− grade
like the Republic of South Af rica. The credit rating is
Baa1 BBB+ BBB+ Lower
basically a reflection of the rating agency’s estimate of Baa2 BBB BBB medium
the default probability of the borrower. The higher the FC Baa3 LC BBB− BBB− grade
rating (AAA), the lower the default risk and vice versa. In Ba1 BB+ LC FC BB+ LC Non-
Ba2 FC BB BB investment
determining the rating, the agency takes into account grade
Ba3 BB− BB− (speculative)
a myriad of factors, including mostly macroeconomic
B1 B+ B+
and f inancial variables, as well as political risk. Most Highly
B2 B B
speculative
investors tend to at least partially base their investment B3 B− B−
decision (which would include the pricing of these
SA Foreign currency sovereign rating
bonds) on these “independent” ratings.
SA Local currency sovereign rating
Source: Futuregrowth
9WHY IS THIS SO “NEWSWORTHY”? HOW NEWSWORTHY IS A
The widespread and lingering concern is that Moody’s POSSIBLE MOODY’S DOWNGRADE
will f inally “see the light” and follow the other two
REALLY?
It most certainly is not f resh news, since the possibility
rating agencies, which will cause the country to lose
has been telegraphed way in advance. Of course, the
its last investment grade rating. This, in turn, will force element of uncertainty is whether the agency will
passive or benchmark driven global investors to sell actually act on the negative outlook or surprise most
their rand-denominated South Af rican government by once again holding off, the way they have done over
the past year or so. We would refrain from guessing the
bonds they currently hold in their portfolios. At the
outcome. Suff ice to state that, in our view, the agency
time of writing, foreign investors owned about 37%
is behind the curve and should have acted already.
of South Af rican government bonds. This equates to
More interesting is the way markets are currently priced.
roughly R800 billion. That said, it is important to note
It comes as little surprise that both US dollar- and
that not all of it is actually owned by passive or index
South Af rican rand-denominated government bonds
tracking investors. A signif icant portion of emerging have been trading as sub-investment graded debt for
market bonds, including those issued by South Af rica, a while (see Graph 3 on the next page). It follows that
is owned by the so-called “unconstrained” foreign markets should not be surprised by a downgrade, as
a fair amount of the “bad’ news has been discounted
investors. These investors are not constrained by credit
and may at least in terms of this be trading close to
ratings, indices and other limitations, but would base fair value.
their investment decisions on their internal fundamental
That said, most of the time markets tend to overreact
analysis and relative valuation. Even so, it is reasonable
and thus trade around fair value estimates. So, with
to assume that some selling may either pre-empt (the this in mind, we cannot overlook the probability that
active investors) or follow (the passive managers) the bond yields may still spike in response to an actual
rating change. downgrade and thus cheapen more.
GRAPH 2: FOREIGN OWNERSHIP OF RAND-DENOMINATED BONDS ISSUED BY THE RSA GOVERNMENT
(NOMINAL AND INFLATION-LINKED)
45.0%
43.0%
41.0%
39.0%
Holding (%)
37.0%
35.0%
33.0%
31.0%
29.0%
27.0%
25.0%
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
May-17
Nov-17
May-18
Nov-18
May-19
Nov-19
Sources: SA National Treasury, Futuregrowth
10GRAPH 3: LOCAL CURRENCY DENOMINATED 10-YEAR TREASURY YIELDS AND S&P CREDIT RATINGS
13
Turkey
11
South Africa
9
Mexico
10y YTM (%)
Brazil
India
7
5
Malaysia
Poland
Singapore
3
Norway
Canada
Australia
USA
Netherlands
Sweden
Italy
Spain
Switzerland
Belgium
Denmark
Germany
Ireland
Finland
France
1
UK
Japan
Austria
-1
AA+
AA+
AA+
AA-
A+
A-
A-
BBB+
BBB
BBB-
BB
B+
B+
AAA
AAA
AAA
AAA
AAA
AAA
AAA
AAA
AAA
AA
AA
AA
A
S&P Foreign Currency Ratings
Sources: Bloomberg, Futuregrowth
IS THIS INCORPORATED INTO time soon. The steep slope of the nominal bond yield
OUR INVESTMENT VIEW AND curve is another indicator of how much bad news had
STRATEGY? been discounted for. Sitting on the fence (on cash) thus
Indeed it is. Our investment philosophy at Futuregrowth implies an opportunity cost the investor can ill afford.
is never to rely on the input from official rating agencies
HOW ARE OUR FUNDS POSITIONED
but to allow our fundamental analysis to lead us to
IN LIGHT OF THE ABOVE?
our own conclusions and, in this case, our ratings. In
The four Old Mutual unit trust funds managed by
this sense, our investment theme and strategy have
Futuregrowth are strictly managed to mandate and
incorporated concerns about sustained f iscal slippage
thus a carefully pre-determined risk prof ile. In the case
and its impact on the country’s sovereign credit
of the Money Market and the Interest Rate Plus funds,
worthiness for more than two years. From a valuation
the impact of a downgrade will be limited, since their
perspective, various indicators point to the probability
respective mandates limit the extent of interest rate
that a fair amount of this fear is already in the price.
risk and therefore the holding of longer-duration bonds.
We also have to consider other drivers, such as very
depressed global bond yields, strong disinflationary In the case of the Income Fund, the higher risk allowance
forces and a repo rate that is unlikely to increase any afforded by the fund’s mandate will put it more at
11GRAPH 4: FOREIGN OWNERSHIP OF EMERGING MARKET LOCAL CURRENCY BONDS
Benchmark Driven Investor Unconstrained Investor
100%
Weighted allocation of foreign holding
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Brazil
Mexico
Poland
Turkey
Russia
Malaysia
Indonesia
South Africa
Hungary
Thailand
Peru
Romania
Columbia
Sources: IMF, Futuregrowth
risk in case of a bond yield spike. However, it should By design, the Old Mutual Bond Fund will be most at
be borne in mind that, even in this case, the lasting risk in the case of a sudden spike in yields. To this end,
impact should be limited - considering the diversity of the fund is currently managed with a neutral modif ied
return sources in the fund and the modif ied duration duration position relative to its benchmark, the ALBI. In
cap of two years. (For some perspective, the modif ied addition, we have a very active yield curve position where
duration of the JSE All Bond Index or ALBI is around we favour bonds with a remaining term to maturity of
7). Currently, the fund modif ied duration is even lower 8 to 20 years. This is offset by a signif icant underweight
than the cap at 1.6. More importantly, the fund has position to bonds with a maturity longer than 20 years.
no holdings of nominal RSA Government bonds with Since we believe that the ultra-longer-dated bonds are
a maturity longer than ten years. The single biggest most at risk in the case of a Moody’s downgrade, the
exposure is to the R186 (maturity 2026). Relative to underweight 20+ year position should mitigate some
longer-dated bonds, the R186 offers some protection of the risk of capital loss relative to the ALBI. Let’s be
in case of a sell-off, in light of its position on the yield clear, in a scenario of rising yields it will be impossible
curve as well as its relatively high running yield (partly to completely avoid capital loss, considering the risk
due to the high coupon rate of 10.5%). allowance of this particular portfolio.
12ESTIMATING THE IMPACT OF FUND hold these longer-dated bonds. It is assumed that
RETURN IN CASE OF A YIELD SPIKE this happens in one day. The outcome of this scenario
on the same day total returns of the individual stocks
We have used the same scenario to conduct stress
across the yield curve is illustrated in Graph 5 below.
testing on the four funds. We opted to pick a simplistic,
yet realistic scenario of bearish yield curve steepening. The next step was to apply this simulation to the
In this scenario, the f ront end of the yield curve stays four funds. The impact on absolute fund return is
anchored. This is based on our base case view that the summarised below. The outcome is exactly what the
South Af rican Reserve Bank is likely to keep the repo various risk prof iles of the various funds intended. The
rate unchanged in light of weak economic growth, a low risk funds would offer signif icant partial capital
benign inflation outlook and the fact that the f ree- preservation, while the Old Mutual Bond Fund will
floating exchange rate regime will be allowed, as it reflect the greatest loss on the day.
has in the past, to serve as a pressure valve. At the It is important to note that the fund returns below are
back end of the yield curve, we allowed the yield of for same day only. This does not consider base accrual,
the longest-dated nominal bond (R2048) to rise by which over time will offset some of the unrealised capital
100 basis points. This allowed for simple interpolation “loss” on the day. It also does not take into account any
of the yield curve points in between. The sharp rise at pull-back in yield that may follow in the days afterwards
the back end reflects the reality that foreign investors – which is what we would expect.
GRAPH 5: TOTAL STOCK RETURN IN THE CASE OF BEARISH YIELD CURVE STEEPENING (STABLE
CASH RATE, THE R2048 YIELD RISE BY 100BPS)
0.00% CASH +
R2040
R2044
R2048
R2030
R2023
R2037
R2032
R2035
MMK
0.00% R208
R209
R186
R214
R213
0.00%
-0.18%
-1.00%
-1.00%
-2.00%
-2.07%
-3.00%
-2.44%
-2.75%
-4.00%
-3.69%
-5.00%
-4.46%
-4.61%
-6.00%
-5.68%
-6.24%
-7.00%
-7.18%
-8.00%
-8.26%
-9.00%
Source: Futuregrowth
13CHART 6: ESTIMATED TOTAL ABSOLUTE FUND RETURN FOLLOWING A 100BPS YIELD CURVE BEAR
STEEPENING
0.00%
0.00% -0.02%
-0.50% -0.33%
-1.00%
-1.50%
-2.00%
-2.50%
-3.00%
-3.50%
-3.45%
-4.00%
Money Market Interest Plus Income Bond
Since our positioning is relatively defensive, a market movement as per our scenario above will benef it the funds,
with the exception of the Interest Plus Fund, relative to their respective benchmarks. The table below summarises
the relative performance of the four funds.
TABLE 1: SAME DAY FUND RETURNS VERSUS BENCHMARK
FUND BENCHMARK RELATIVE
Old Mutual Money Market Fund 0.00 0.00 0.00
Old Mutual Interest Plus Fund -0.02 0.00 -0.02
Old Mutual Income Fund -0.33 -0.75 0.42
Old Mutual Bond Fund -3.45 -3.73 0.28
Published on www.futuregrowth.co.za/newsroom.
Futuregrowth Asset Management (Pty) Ltd (“Futuregrowth”) is a licensed discretionary f inancial services provider, FSP 520, approved by the Registrar of the
Financial Sector Conduct Authority to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002.
The fund values may be market linked or policy based. Market fluctuations and changes in exchange rates may have an impact on fund values, prices and
income and these are therefore not guaranteed. Past performance is not necessarily a guide to future performance. Futuregrowth has comprehensive crime
and professional indemnity in place. Performance f igures are sourced f rom Futuregrowth and IRESS.
15USE THE TAX
CUTS TO STAY ON
COURSE
AUTHOR
ELIZE BOTHA
MANAGING DIRECTOR: OLD MUTUAL UNIT TRUSTS
T
he personal income tax rates announced in 1. A SOUND FINANCIAL PLAN HELPS
this year’s Budget provides consumers with BUILD CONFIDENCE
some breathing space and added cause Start by reviewing your financial goals and assessing
to review their investment strategies with your circumstances. Your financial plan should
more optimism. reflect your needs and risk profile and will take into
consideration your current financial position and the
Perceptive investors should use the welcomed opportunity
time horizon you have available.
to recommit themselves to their long-term investment
strategy, making prudent use of the extra cash in their Once you’ve established your plan, review this annually
pockets to make their financial goals a reality. with the help of a certified financial planner. Regular
reviews will help set your mind at ease knowing that
A well-balanced and diversified portfolio with a long-
your plan is still working as expected, despite any
term perspective serves investors in both good and bad short-term volatility.
times. If you are constantly changing your investment
strategy and time horizon based on your gut feeling, 2. A DIVERSIFIED PORTFOLIO WILL
you are unlikely to achieve your desired result over the SPREAD YOUR RISK
long term. A sound financial plan will give you exposure to a
good mix of asset classes, including local and global
Similarly, if you don’t have a plan in place, staying focused shares, bonds, cash and property.
when markets are consumed by noise in the local and
A well-structured portfolio offers a balance between
global economies will be a challenge.
inflation-beating returns and the stability of fixed
Here are eight considerations that will help you stay income assets. This should give you the confidence
on course. that you’re still on track to meet your long-term goals.
153. THE WHOLE IS GREATER THAN THE 6. KEEP AT IT
SUM OF ITS PARTS The best results are achieved by those who are in
One of the advantages of properly structuring your the market for the long term. Saving from a young
diversified portfolio is that a rise in one asset class age is beneficial as is making regular contributions.
may offset a decline in another.
If you intend building your long-term wealth, you
Staying the course means taking a view of the total need to disregard short-term volatility. Staying the
return over the long term. Being distracted by market course means investing through dips in the market
noise or the performance of only one aspect of your in the knowledge that the cheaper you buy, the
portfolio may easily cause you to make unwise decisions. greater the potential gain.
4. DON’T TRY TO TIME THE MARKET 7. FIND THE RIGHT PARTNER
Research by Old Mutual shows that investors could Old Mutual has been around for 175 years and is a
have lost out on as much as 44% growth in investment major global financial services company with the
returns if they had missed only the ten best days of tools, experience and people to help ensure that
the JSE All Share index from 1999 to 2019. your investments match your needs and goals. It’s
easier to stay the course when you have a trusted
A similar study in the USA showed that six of those
adviser on your side.
best ten days of growth followed soon after the ten
most volatile days by two weeks. This means that
8. DO WHAT’S BEST FOR YOU
markets can turn very quickly and its best to rather
Removing the emotion from your investment decisions
stay the course than trying to make a calls by timing
is never easy. Drawing on the expertise of a financial
the market.
planner is a great way to do that when setting your
financial plan in motion.
5. YOU CAN’T COUNT ON CASH
Taking money out of the market into cash may Having an experienced and trusted planner at your
seem like a safe bet in uncertain times, but your side also makes it easier for you stay on track with your
long-term returns will be stunted. Cash is unlikely investment plan.
to offer you above-inflation returns, and well below
that of equities, and even bonds.
Unless you have an urgent need for liquidity, cash
is not a prudent long-term option if you want your
money to appreciate in value.
17RATES OF TAXES
Individual, special trusts, insolvent and deceased
estates
Year of assessment ending 28 February 2021
Taxable Income (R) Rate of tax (R)
1 – 205 900 18% each Rand
37 062 + 26% of taxable
205 901 – 321 600
income above 205 900
67 144 + 31% of taxable income
321 601 – 445 100
above 321 600
105 429 + 36% of taxable
445 101 – 584 200
income above 445 100
155 505 + 39% of taxable
584 201 – 744 800
income above 584 200
218 139 + 41% of taxable income
744 801 – 1 577 300
above 744 800
559 464 + 45% of taxable
1 577 301 and above
income above 1 577 300
Year of assessment ending 29 February 2020
Taxable Income (R) Rate of tax (R)
0 – 195 850 18% of each Rand
35 263 + 26% of the amount
195 851 – 305 850
above 195 850
63 853 + 31% of the amount
305 851 – 423 300
above 305 850
100 263 + 36% of the amount
423 301 – 555 600
above 423 300
147 891 + 39% of the amount
555 601 – 708 310
above 555 600
207 448 + 41% of the amount
708 311 – 1 500 000
above 708 310
532 041 + 45% of the amount
1 500 001 and above
above 1 500 000
2
17RATES OF TAXES
Retirement fund lump sum withdrawal benefits
Year of assessment ending 28 February 2021
Taxable Income (R) Rate of tax (R)
0 – 25 000 0% of each Rand
25 001 – 660 000 18% of the amount above 25 000
114 300 + 27% of the amount above
660 001 – 990 000
660 000
203 400 + 36% of the amount
990 001 and above
above 990 000
Retirement fund lump sum benefits or severance
benefits
Year of assessment ending 28 February 2021
Taxable Income (R) Rate of tax (R)
0 – 500 000 0% of each Rand
18% of the amount above
500 001 – 700 000
500 000
36 000 + 27% of the amount above
700 001 – 1 050 000
700 000
130 500 + 36% of the amount
1 050 001 and above
above 1 050 000
TRUSTS (OTHER THAN SPECIAL TRUSTS)
Years of assessment ending on 28 February 2021
2021 2020
Trusts 45.0% 45.0%
Effective Capital Gains Tax Rate 36.0% 36.0%
3
18USEFUL INFORMATION AT A GLANCE
Rebates and threshold 2021 2020
Primary rebate for individuals R14 958 R14 220
Secondary rebate (65 years of age R8 199 R7 794
or older) in addition to primary
rebate
Tertiary rebate (75 years of age or R2 736 R2 601
older) in addition to primary and
secondary rebate
Tax threshold for individuals
R83 100 R79 000
under 65 years of age
Tax threshold for individuals
65 years of age to below 75 years R128 650 R122 300
of age
Tax threshold for individuals
R143 850 R136 750
75 years of age or older
Interest exemption 2021 2020
Interest exemption for individuals
R23 800 R23 800
under 65 years of age
Interest exemption for individuals
R34 500 R34 500
65 years of age or older
Donations tax and estate duty 2021 2020
Donations tax rate – first R30 m 20% 20%
Donations tax rate – amount
25% 25%
above R30 m
Donations tax – annual exemption
R100 000 R100 000
(individuals only)
Estate duty rate – first R30 m 20% 20%
Estate duty rate – dutiable estate
25% 25%
above R30 m
Estate duty abatement (N1) R3.5 m R3.5 m
(N1) If, at the time of death, the deceased was widowed, the estate
duty abatement is equal to R7 m, less the abatement that was
applied to the estate of the first deceased spouse.
4
19Capital Gains Tax-Individuals 2021 2020
Annual capital gain/loss
R40 000 R40 000
exclusion
Primary residence exclusion R2 m R2 m
Exclusion on death R300 000 R300 000
Once-off relief for disposal
of qualifying small business R1.8 m R1.8 m
assets(N1)
Effective CGT rate – individuals
0 - 18.00% 0 - 18.00%
and special trusts
TRAVEL ALLOWANCE
2021 2020
Travel allowance subject to
80% 80%
PAYE(N2)
Travel allowance – maximum
R665 000 R595 000
vehicle value (N3)
(N1) When a small business with a market value not exceeding
R10 million is disposed of.
(N2) If the employer is satisfied that at least 80% of the use of the
vehicle will be for business purposes, then PAYE may be based
on 20% of the travel allowance.
(N3) In terms of both the deemed and actual cost reduction
methods, the value of the vehicle is capped at this amount.
In respect of the actual cost reduction method, the capping
applies in respect of wear and tear or lease payments and
finance charges. To claim against a travel allowance received, a
log book needs to be maintained.
5
20Travel allowance – Cost Scales
Year ending 28 February 2021
Main-
Value of the vehicle Fixed Fuel
tenance
(including VAT) (R) Cost (R) Cost (C)
Cost (C)
0 – 95 000 31 332 105.8 37.4
95 001 – 190 000 55 894 118.1 46.8
190 001 – 285 000 80 539 128.3 51.6
285 001 – 380 000 102 211 138.0 56.4
380 001 – 475 000 123 955 147.7 66.2
475 001 – 570 000 146 753 169.4 77.8
570 001 – 665 000 169 552 175.1 96.6
> 665 000 169 552 175.1 96.6
Reimbursed travel
If an employee is reimbursed for business kilometres
travelled at a rate not exceeding R3.98 per kilometre, no tax
will be payable provided:
• the reimbursement is based on actual business kilometres
travelled; and
• no other compensation in the form of a further travel
allowance or reimbursement is paid by the employer to
the employee.
The reimbursement exceeding a rate of R3.98 per kilometre
must be included as remuneration to calculate the amount
of employees’ tax to be withheld.
6
22COMPANY CAR
Taxable value per month 2021 2020
First company car:
• If subject to maintenance plan 3.25% 3.25%
• If no maintenance plan 3.50% 3.50%
Second and subsequent company cars (not used
primarily for business)
• If subject to maintenance plan 3.25% 3.25%
• If no maintenance plan 3.50% 3.50%
NOTES:
1. The above monthly rates apply to the determined value
of the vehicle. From 1 March 2011, VAT is included in
calculating the determined value.
2. From 1 March 2011, reductions to the fringe benefit value
for private travel and/or costs borne by the employee for
insurance, maintenance or fuel for private travel are only
made on assessment. In order to claim a reduction, a
logbook needs to be maintained.
3. 80% of the fringe benefit value, not reduced for private
use or costs above, is subject to PAYE. Where the employer
is satisfied that at least 80% of the use of the vehicle will
be for business purposes, then PAYE may be based on
20% of the fringe benefit value.
4. Where the employer holds the vehicle under an operating
lease, as defined in the Income Tax Act, the fringe benefit
value is not calculated on the percentage method per the
table above, but is the sum of the actual lease costs and
the cost of fuel.
7
23OFFICIAL RATE OF INTEREST
The official rate of interest is:
• Loan in Rands: 100 basis points above the repurchase
(repo) rate.
• Loan in foreign currency: 100 basis points above the
equivalent of the repo rate for that currency.
If the repo rate changes, the official rate changes from the
commencement of the following calendar month.
The current official rate is set at 7.25% with effect from
1 February 2020.
DEDUCTIONS FROM INCOME – INDIVIDUALS
Retirement funds
The deductible amount for current contributions to
pension, provident and retirement annuity funds in a
year of assessment is limited to 27.5% of the greater of
the person’s remuneration for PAYE purposes or taxable
income (excluding any retirement fund lump sum benefit,
retirement fund lump sum withdrawal benefit and
severance benefit).
The deduction is further limited to the lesser of R350 000
or 27.5% of taxable income prior to the inclusion of a
taxable capital gain. Any contributions exceeding the
limitations are carried forward to the immediately following
year of assessment and are deemed to be contributed
in that following year. The amounts carried forward are
reduced by contributions set off against retirement fund
lump sums and retirement annuities.
8
24TRANSFER DUTY
With effect from 1 March 2020 the rates are as follows
(acquisition is not subject to VAT):
Property value (R) Rate of tax (R)
1 – 1 000 000 0%
3% of the value above
1 000 001 – 1 375 000
R1 000 000
R11 250 + 6% of the value above
1 375 001 – 1 925 000
R 1 375 000
R44 250 + 8% of the value
1 925 001 – 2 475 000
above R 1 925 000
R88 250 +11% of the value
2 475 001 – 11 000 000
above R2 475 000
R1 026 000 + 13% of the value
11 000 001 and above
exceeding R11 000 000
MEDICAL EXPENSES
2020/2021 year of assessment
Medical aid contributions or qualifying medical expenses
are not claimable as deductions. A credit-only (tax rebate)
system applies.
If the taxpayer is younger than 65 and is not disabled
and has no disabled dependants:
In respect of medical aid contributions, the amount of the
credit is limited to:
• R319 if the contributions are in respect of the taxpayer only
• R638 in respect of the taxpayer and one dependant
• R215 in the case of each additional dependant
In determining the tax payable, individuals younger than
65 are allowed to deduct 25% of an amount equal to the
sum of qualifying medical expenses paid and borne by
the individual and an amount by which medical scheme
contributions paid by the individual exceed 4 times the
medical scheme fees tax credits for the tax year, limited
9
25to the amount which exceeds 7.5% of taxable income
(excluding retirement fund lump-sums and severance
benefits).
If the taxpayer is younger than 65 and is disabled or
has a disabled dependant or, alternatively, is 65 and
older:
An additional credit is allowed and is calculated as 33.3%
of the sum of qualifying medical expenses paid and borne
by the individual and an amount by which medical scheme
contributions paid by the individual exceed 3 times the
medical scheme fees tax credits for the tax year.
Donations to certain Public Benefit Organisations (PBOs)
The deduction is limited to 10% of taxable income
calculated excluding retirement fund lump sums and
severance benefits. The deduction claimed must be
supported by a Section 18A certificate issued by the PBO.
COMPANIES AND CLOSE CORPORATIONS
Normal tax on taxable
2021 2020
income
Companies (other than
28.0% 28.0%
entities below)
Companies (other than
entities below) effective 22.4% 22.4%
capital gains tax rate
Turnover based presumptive tax system (elective) for
micro businesses (turnover not exceeding R1m):
R1 – R335 000 0.0%
1.0% of the amount above
R335 001 – R500 000
R335 000
R1 650 + 2.0% of the
R500 001 – R750 000
amount above R500 000
R6 650 + 3.0% of the
R750 001 and above
amount above R750 000
10
26Non-resident companies
with a branch in the
28% 28%
Republic on SA source
income
Personal service providers 28% 28%
Income Tax on Small Business Corporations for financial
years ending between 1 April 2019 to 31 March 2020 (N1):
R1 – R83 100 0%
7.0% of the amount above
R83 101 – R365 000
R83 100
R19 733 + 21.0% of the
R365 001 – R550 000
amount above R365 000
R58 583 + 28.0% of the
R550 001 and above
amount above R550 000
Public benefit organisations
and recreational clubs 28.0% 28.0%
(trading income only)
(N1) Primary requirements to qualify as a small business corporation:
all the shares are held by individuals, none of whom hold shares
in any other company (other than listed shares, unit trusts and
shares in certain tax exempt entities); the gross income of the
corporation may not exceed R20m for the year of assessment;
not more than 20% of the gross income of the company may
comprise investment income and income from rendering
a personal service and the company is not an ‘employment
company’ or a ‘personal service provider’.
WITHHOLDING TAXES
A withholding tax is levied in the Republic on the following
amounts (subject to double tax treaty relief):
Dividends tax
Dividends tax is a tax on the beneficial owner of a dividend
at the standard rate of 20%. The taxation of the dividend
may be subject to numerous exemptions, including
dividends paid to South African resident companies and
Public Benefit Organisations as beneficial owners and
where the dividend is taxed in the hands of the recipient. In
the case of dividends in kind (other than in cash) the tax is
11
27borne by the company that declares and pays the dividend.
REITs dividends remain fully taxable for South African
residents and non-residents are only subject to dividends
tax.
Foreign dividends
Foreign dividends received by individuals from foreign
companies (shareholding of less that 10% in the foreign
company) are taxable at a maximum effective rate of 20%.
No deductions are allowed for expenditure to produce
foreign dividends.
Interest
A final withholding tax on interest paid to non-residents
is levied at 15%. Numerous exemptions apply, including
interest arising from banks, government debt and listed
debt.
Royalties and similar payments to non-residents
A final withholding tax at the rate of 15% of the gross
royalties payable in respect of royalties paid to non-residents
for the use of patents, designs etc. in the Republic.
Disposal of immovable property
A withholding tax in advance of a non-resident’s capital
gains tax liability must be withheld by the purchaser in
respect of the disposal by a non-resident of immovable
property with a value in excess of R2m.
The rates are: 7.5% of the purchase price if the seller is a
natural person, 10% if the seller is a company and 15% if the
seller is a non-resident trust. A lower withholding rate than
those set out above may be granted on application.
12
28Foreign entertainers and sportspersons
A final withholding tax of 15% of the gross revenue is
payable.
INTEREST RATES PAYABLE/RECEIVABLE
1 Nov 2019 1 Mar 2019
Late or underpayment of tax 10% p.a. 10.25% p.a.
Refund of overpayment of
6% p.a. 6.25% p.a.
provisional tax
Refund of tax on successful
appeal or where the appeal 10% p.a. 10.25% p.a.
was conceded by SARS
Refund of VAT after
10% p.a. 10.25% p.a.
prescribed period
Late payment of VAT 10% p.a. 10.25% p.a.
Customs and Excise 10% p.a. 10.25% p.a.
VALUE-ADDED TAX (VAT)
VAT is levied on taxable supplies by registered VAT vendors
at the standard rate of 15%. The compulsory VAT registration
threshold is a turnover of R1 million per annum and for a
voluntary registration, the threshold is a turnover of
R50 000 per annum. A number of supplies are zero rated,
for example exports from the Republic and other supplies
are classified as exempt, for example financial services and
residential accommodation.
Non-resident suppliers of ‘electronic services’ as prescribed
by the Minister by regulation, will be required to register
for VAT at the end of any month where the total value of
the taxable supplies exceeded R1 million in the previous
12-month period.
13
29SECURITIES TRANSFER TAX (STT)
STT is levied at a rate of 0.25% on the higher of the
consideration paid and the market value in respect of
the transfer or redemption of listed or unlisted securities,
including that of members’ interests in close corporations.
SKILLS DEVELOPMENT LEVY (SDL)
Employers with a payroll of R500 000 or more per annum
must account for SDL. SDL is calculated at 1% of the leviable
amount of the monthly payroll including directors’ fees.
UNEMPLOYMENT INSURANCE FUND (UIF)
Unemployment insurance contributions are payable
monthly by employers on the basis of a contribution of
1% by the employer and 1% by the employees, based on
employees’ remuneration below a certain amount. The
employer and employee contributions are both calculated
at a rate of 1% of the employee’s gross remuneration up to
a prescribed remuneration threshold (before the deduction
of pension fund, retirement annuity fund and qualifying
medical aid contributions), where applicable. The maximum
remuneration on which UIF contributions are calculated is
R14 872 per month or R178 464 per annum. Note that the
remuneration threshold is subject to change from time to
time.
Foreign nationals employed on a temporary basis in South
Africa are also liable to contribute towards UIF.
14
30OMBDS 02.2020 C721
With compliments from Old Mutual
in association with BDO.
Copyright of this publication rests with BDO Tax
Services (Pty) Ltd. All rights reserved.
Copying of this information, in whole or in part, is
prohibited without prior written permission.
For more information, please contact
your financial adviser, broker or visit
www.oldmutual.co.za
Old Mutual Life Assurance Company (SA) Limited is a licensed FSP.
31IMPORTANT INFORMATION Old Mutual Wealth is brought to you through several authorised Financial Services Providers in the Old Mutual Group who make up the elite service offering. This document is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein. Old Mutual Wealth and its directors, officers and employees shall not be responsible and disclaims all liability for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of or which may be attributable, directly or indirectly, to the use of, or reliance upon any information contained in this document. WEALTH
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