South Africans received the budget speech gracefully on February 20 2019. Everyone who listened to the speech will, for a very long time, recall our new minister of finance moving with flair, courage and humour. One could hear a pin drop in Parliament and in the audiences streaming the live broadcast countrywide. The suspense of the ‘Eskom Tyrannosaurus’ was unbearable and everyone knew tax morality had declined. Minister Tito Mboweni emphasised a couple of traits about my beloved South African people:
- Explicitly – South Africans are resilient, perhaps more so than the aloe plant he symbolically presented;
- Explicitly – South Africans have a great sense of humour and religious history. Both of these qualities needs dusting off in the bigger scheme of things (budget shortfalls 2018 and beyond);
- Implicitly – Retiring in South Africa is going to be tax onerous (repaying state debt), especially if you have not timeously optimised your retirement tax planning.
A household perspective
Imagine your household financial dilemma if you had already spent 15% of your after-tax disposable income, purely on interest servicing (no capital repayment). In addition (due to weak financial discipline this year) you have another current budget shortfall, but you plan to pick this up with what is left on your credit card.
You and your spouse regroup and drink a cappuccino (or whiskey, now R4.60 more expensive) and start planning your coming year’s spending. Your spending (again) exceeds your earnings by ±15% for the next year, but you push through with your plans…. You assume that the economy will grow at 1.5% for 2019 and 2.1% for 2020, which makes you feel more confident. Economic growth normally translates into an annual salary increase that can help you to maintain a ‘debt to earnings ratio’ of ±60%, over the next two to three years.
Considerations you may be ignoring
- SA’s is a global economy, closely correlated to other developed- and emerging markets. We are in the tenth year of an international bull-market and interest rates on debt are still exceptionally low, compared with historical levels;
- Your real earnings (SA tax collections) could shrink during a global economic downturn by 20% to 30%;
- You have not taken into account that your financiers might adjust your interest rates upwards (downgrade), as your debt levels exceed the 60% point;
- Oil prices are currently at U$65 per barrel, down from well over U$80 pre-2014 levels – low oil prices act like a consumer tax-break.
You do, however, know that relief from the local drought, together with the new Total oil field find will contribute positively to future economic growth, but you are unsure of how long this might take.
South Africa’s debt can only be repaid by increased tax revenue collection – putting further pressure on already-tight household budgets. Successful retirement in South Africa will require individuals to increase their focus on tax-efficient investment.
Herewith a couple of examples on how to save and live tax efficiently:
- The big frenzy around retirement annuities (RAs) dies off largely after February 28 each year. RAs are not about selling products. Modern-day RAs are about setting up a tax-efficient solution through all phases of your economically-active life (tax deduction and tax-free growth), through retirement (tax-free growth), onto your successors (free from estate duty/executor’s fees).
- Think about a tax-free savings account (TFSA) before you consider any other investment vehicle, besides RAs. Tax-free investments are very flexible and can now be transferred between service providers. It can hold almost any listed instrument at a zero tax implication during your life. Although this instrument is crucial, it only forms one part of your tax-friendly solution. TFSAs are estate-dutiable at death and legislation poses strict limitations on contributions made.
- Endowments (including any listed asset class) are another tax-friendly investment vehicle for those in higher-income tax brackets. Income tax is capped at 30% (12% max CGT) while you can also preserve your annual exclusions (interest/CGT) for investments outside of endowments. Nominate a beneficiary and you will also save on executor’s fees at death.
- Make sure you are optimising your income tax structure and tax efficiency by speaking to a tax specialist. Also consider the nature of your investment income (outside of tax-efficient vehicles). On larger investment amounts, interest income poses a negative income tax implication for individuals (possible at 45%). Companies and trusts receive no annual exclusions, where dividends received by companies are dividend tax exempted.
- Alcohol, lattes and smoking. I am the last to suggest abandoning a daily treat that keeps you moving forward. Metaphorically speaking ‘watch what you spend your money on’. Fuel, electricity, municipal taxes, swimming pools, gardens (water), expensive imports – all of these carry increased taxes. VAT as a whole is going to be difficult to get away from, but if you are spending much less than you earn (and investing the difference) you are on the right track.
- Buy small houses in the right location and expand/improve your house over time. Moving house frequently will cost your dearly in taxes and other costs.
We all know we live in a fantastic country, with fantastic people – a real heaven for retirement. The reality is that it is going to cost more in taxes to enjoy the same quality of life going forward. It remains vital to optimise your retirement savings. Speak about ‘tax-friendly’ investment with your financial adviser.