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SA’s largest export product: Rich people

Welcome to the land of the everything for free….

In an exchange in one of Nobel prize-winning author Ernest Hemingway’s many books, the rich are described as follows: “The very rich are different from you and me … Yes, they have more money”.

During a career in the money-world, now spanning more than 30 years, I’ve had the fortune of meeting and sometimes dining late into the night with many of the rich and once or twice with some very rich people.

The rich are not like you and me; they are smarter than the rest of us. Or at least that’s how I feel every time I spend time with some rich people. The rich people I’ve met have always left me feeling slightly inadequate, inferior. Not because they had more money than me, but because they were smarter than me, or knew something or spotted some gap in the market place which they exploited for their enduring financial benefit. 

Heaven forbid that I actually meet someone like Elon Musk: SA-born founder of Tesla, SpaceX and Solar City. Who knows, I might have even brushed past him in the Fourways area where he grew up before he moved, first to Pretoria, and then to the US where he made his name and fortune. What would I say to him? What would I discuss?

I always made a point of asking these rich people for their secret to success. Many of these nuggets of wisdom I’ve remembered.

“Know more than anyone else about the industry that you are operating in, and you will succeed,” was something the late Anton Rupert, founder of the Rupert empire once said to me during a day-long session I had with him at his home in Sandhurst, called the White House. Rupert was known to be a stickler for details and had a memory like an elephant.

Another memorable, late-night dinner was with the very low-key and almost invisible billionaire Jonathan Beare, whose global wealth probably equals that of the Ruperts, but of whom virtually no one in South Africa knows about, or has even seen a photograph of in any media, locally or elsewhere. “Treat and respect your money as if it can be taken away in the morning,” he said … or something along those lines.

Who are the rich?

Rich people, also described by the acronym HNWIs (high net worth individuals) are universally defined as anyone who has $1 million in assets in addition to their primary residence. They also, for inclusion in the head-count in South Africa, need to live and work here as well.

The uber-rich have left South Africa a long time ago. I include amongst this group people such people as Donny Gordon (founder of Liberty Life), the Oppenheimers, Nathan ‘Natie’ Kirsh, the Menells and others. How they managed to get their vast fortunes out of the country under exchange controls, I do not know. I think many people just moved so much money offshore and simply one day hopped onto a plane and said goodbye to SA and hugged their money on arrival. Foreign exchange controls have always been for the lesser rich, I always say.

The rich in South Africa, more than anyone else, have a lot to worry about at the moment. Their assets – perhaps hidden offshore and/or  seemingly protected in trusts in South Africa – are already very much on the radar of the SA tax authorities, who are desperately looking for additional revenue as the traditional gushers of tax receipts start running empty. 

The Davis Tax Commission, under the chairmanship of Judge Dennis Davis, has completed its final report and it’s clear to me that  South Africa’s 330 000-odd trusts are very much the target. If some of the recommendations of the DTC are accepted, it will be a serious blow to the careful estate planning strategies of a great many people over many generations. More about this in a future column.

Auditors and tax lawyers who have made fortunes over many years, advising their clients to transfer assets into trusts, will no doubt make even more money advising their clients how to get money out of these structures again in future. 

Special voluntary disclosure programme

And then there is the Special Voluntary Disclosure Programme (SVDP) which runs from October 1 to end June 2017. The SVDP, announced in the 2016 Budget earlier this year, differs from the amnesty on illegal offshore money (which took place in 2003/004_ in the sense that it’s not an amnesty. For many rich – and even not-so-rich – South African taxpayers the SVDP is literally a ‘last chance saloon’.

The driving force behind the SVDP is the Common Reporting Standards (CRS) now being rolled out amongst Organisation for Economic Co-operation and Development-countries and something called the ‘automatic exchange of information’.

In short, this means that over the next couple of years, every country in the world (except the US and possibly one or two rogue states such as North Korea and Somalia) will in future automatically exchange to all other countries information about the financial status of bank accounts, investment portfolios and trusts, even down to the beneficiaries of assets held in trust accounts.

Let me repeat: automatic exchange of information. If you make an acronym of this term it will read as AEOI…and if you pronounce it out loud it comes across as something that is hurting you.  

Whichever way you pronounce it, if you have undeclared offshore assets anywhere in the world, this will come and bite you one day. If not you, then your children or their children.

My discussions with some potential culprits highlight a serious misunderstanding of this issue. But again this topic is for a future column.

The relevance of this is that rich in SA, already under immense pressure from other sources, are facing a two-pronged approach by the authorities to get hold of some more of that wealth.

Free. Mahala. Verniet

Not unsurprisingly, there comes another threat in the form of the #FeesMustFall campaign, which dominated the news last week as it did in December 2015. Against the backdrop of increasing student unrest and campus closures last week, up popped an ‘academic’ study by a group of social science lecturers offering their solution to solving free university.

It’s simple, said the group on The Conversation website here, just tax the rich. The group, consisting of Salim Vally, Enver Motala (not that one), Leigh-Ann Naidoo, Mondli Hlatshwayo and Rasigan Maharajh….all academics in the field of education (it shows) has the following to say: “There are revenue sources that can be examined carefully and accessed to fund free education for all, at all levels. This can happen while other social needs are simultaneously met. The most important of these sources is raising more tax from the super rich and stopping the illicit outflow of capital.”

And when they say ‘free education’ they mean it well: all costs, including boarding, lodging, tuition fees, transport, books and even spare cash for entertainment. Note the reference to “other social needs” that can still be met. That surely must be universal access to free medical care and minimum wages, for a start.

The taxes will come from an extra tax on the top 10% of taxpayers as well as the HNWIs, defined by the academic group as people earning more than R7 million per year and/or who have assets of more than R70 million (they have simply reduced the barrier to being called a HNWI to about $500 000). Bob’s your uncle and all that. In one stroke we can become the most socialistic country in the world – even surpassing those great socialist (but very wealthy countries) such Sweden, Norway and Denmark, which don’t provide free university education to all.

So what will the rich people of South Africa do, confronted by all these threats to their wealth?

Here’s the current problem: rich people are leaving South Africa in droves. I think the number is somewhat understated, but New World Wealth (NWW) reckons we only have 38 500 HNWIs left in South Africa. Last year (2015) was a particularly bad year as 980 HNWIs packed their bags and headed out, according to the calculation by NWW, as a result of the poor economy, declining currency and increasing political interference in business. Together with the 8 000-odd rich who have left South Africa since 2000, again according to NWW, this indicates a massive out-flow of rich people and their families, their assets and also their current and future income-tax they would have paid.

Where they went: 36% to the UK, 15% to Australia, 11% to the US, 8% to Canada, 5% to Mauritius and 4% to Israel.

Countries with biggest outflows of HNWIs

screen-shot-2016-09-25-at-4-24-16-pm

Source: New World Wealth

In the bigger scheme of things these are not huge numbers by themselves, but if you consider that more than 62% of all personal income taxes are paid by just over 100 000 taxpayers, then you can start realising the severity of the problem.

It’s long been a feature of our personal income tax that a declining percentage of taxpayers are paying more and more taxes.

I think several thousand more HNWIs will pack up and leave over the next couple of years. Some will leave to join their money held in offshore trusts, so as to escape declaration of their assets to the South African Revenue Service (Sars) in terms of the AEOI. Others will simply take what wealth they have via the R10 million offshore allowances over a year or three (R22 million per couple per year legally) and start a new life somewhere else, while they still can afford to do so. The internet has changed the way the world works and many people need little more than a computer, cellphone and internet connection to create and run a business.

I still feel that the R10+1 million offshore allowances per taxpayer per year could come under threat one day if the outflow of money accelerates again when the next financial crisis hits, which it will.

Mauritian invasion

On a recent to Mauritius I was astounded to see the ever-increasing number of South Africans, especially in the field of tax advisory, asset and trust management and property developers, who have set up camp on the island state. The South African presence is hard to overlook. Wherever you go you see signs of the South African ‘invasion’: Pam Golding, Seeff, Shoprite, Atterbury, Highveld Mushrooms, Pick n Pay, Nando’s and many more.

Mauritius would love to accept more rich South Africans on the island. Its recent budget announced significant tax-reductions for a range of companies, with zero tax rates for five years and in some cases eight years. The country’s investment promotion arm the Board of Investment has just opened a permanent office in Sandton, already host to the local offices for AfrAsia Bank and the Mauritian Commercial Bank, the largest bank on the island.

According to the latest Free Market Foundation survey, in conjunction with the Fraser Institute in Canada, South Africa has slipped, once again, on the list of countries on the Economic Freedom Index. We are now ranked at 105 out of 159 countries in terms of economic freedom and ease of doing business.

As recently as 2000 it was 42nd on the list.

Rich people, I dare say, will have taken their time reading this report (www.fmf.co.za), digesting the implications of it all. The not-so-rich would have been discussing and dissecting the implications of the break-up of Angelina Jolie and Brad Pitt. Perhaps that’s why the rich are rich….

 *Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached at magnus@brenthurstwealth.co.za  for ideas and suggestions.

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having just read “the panama papers” and watched this:

http://topdocumentaryfilms.com/tax-free-tour/

thought I may have some answers – but frankly I have none. I also have a question of “what is rich”. if I were to return to sa I could live like a king (or a zuma) on my uk and aus pensions alone!! yet in aus I barely make the top 10% of wealth and income deciles. something I learnt a long time was that the rich make their own rules – as magnus has pointed out. for the rest of us – the vast majority – we have to get by with what we are given or can get. one needs minimise taxes paid – make sure that you live in a country that offers decent age pensions and even better medical care. finally of course somewhere which is safe and secure and offers sunshine. remember having very similar discussions in 1986 just as were leaving sa (when R1 = US$1) – that was when emigrating was relatively easy. those days are long gone. those left behind -and who have not “Schleped” -their money only have more of the same to look forward to.

Good morning Magnus and “Mini me Robert” – Yes wonderful 1st world countries – So where does all the money go – It goes to offshore tax dodge centers – So nobody wants to pay tax and all these awesome 1st world countries allow you not to pay tax – Most of the HNWI moved their money ages ago – The are probably more worried about the automatic exchange of information legislation then anything else – So the “effective place of management” is never SA – Yet you want all the benefits of staying in SA but none of the taxes – Unfortunately that is the story of most of Africa – Corrupt power hungry rulers and businessmen aided by holier than though offshore trust and tax companies – So take everything you can from a country and then run away to a 1st word country.

@Gemini….your Utopian view of what should be is why you are whining.

Join the clever people and get your money offshore but to whinge about those that have made money and left will not get you credits as a wise-man.

very enlightening article- a gold star for Magnus

I fully agree with this article.

Last month I were on a business trip in SA and during a discussion with a private banker in SA, he mentioned that one of their growth areas the past few years has been (and still is), helping their clients to move their wealth offshore.

South Africa has enough wealth, it is just that the wealth is no longer in SA. This is true of businesses and individuals.

When will South Africans start talking about positive things or seeing the good things in our country? and there are many reasons to be happy living in S.A.
We must be one of the most negative people on this planet,
when overseas I can spot a South African a mile away at any airport.
It is a very unique sad look, as if the world owes us something or as if we know it all.
Also, I have been wanting to ask this question for a long time, how many rich people worldwide have earned their money through hard work and honesty?
If we as South Africans we start being more positive and spread the good news of our great country we can reap more rewards.

I think you are missing the point of this article.

I also think SA is a beautiful country with breath-taking natural beauty and some very clever people.

Unfortunately, the ANC Government is destroying the potential of SA with their complete lack of leadership and lack of nation-building.

“……. reap more rewards.”

The only people reaping more rewards is the ANC cadres stealing them selves silly from the taxes paid by hard working people.

What do you call hard work and honesty? Would Bill Gates, Elon Musk or Warren Buffett fall into this category?

@TheSpeculator….a-frog-in-a-pot comment.

All who have made their wealth through effort on an idea or merit, have had to claw their way up, often not being very nice at the same time, “Can’t make an omelet without cracking a few eggs”

And your observation on unhappy South Africans having left? Perhaps but many I have met that are happy are those in big country with sunny weather and in the company of other South Africans and locals…and doing well enough.

@Jerimiah … sheep-on-a-farm observation.

I have many options open to me as to where I want to live or work,
and I still chose South Africa.
I have many options open to me as to where I want to invest my wealth and I still chose South Africa.
I have seen many friends leave for Europe and they are worse off today.

Too many people get emotional, pay a high premium to put their
hard-earned money overseas, get a piece of paper in exchange for their life savings, and then lose it all or bring it back again at a high premium. Some would call it full-circle?

Don’t believe everything you hear or see on the Telly or paper.

@TheSpeculator – agree with you, I think the problem is a very negatively focussed media together with some very real problems that are not insignificant. It would be naive to think these will go away, or even that anyone has any real control. My feeling is that everyone must do what they think is personally best for themselves, it would be great though if we could focus our efforts and complaints as a nation towards helping uplift each other instead of marginalising the poor and hating those in governance.

While students (actually criminals) continue to destroy the campuses and anything else they can get their hands on, and while others burn schools, trains, buses and other infrastructure, while insisting on everything for free, and demanding that what they destroy must be replaced so they can smash it again, I will do everything to minimize the tax I pay.

Nice story about rich people, but offers very little advice for the average investor. A focus on how the average investor could follow in the footsteps of the rich in a way that makes financially sense would be more beneficial. In all honesty, I couldn’t care less about the ultra rich, or the Brad and Jolina’s of this world. My concern is my retirement in SA 25 odd years from now when I would need to sponsor everything myself for any quality of life. My advice to the average investor right now is to use low interest rates to service debt as quickly as you can, buy ZAR hedge shares whenever the ZAR strengthen. Get ready to invest in power supply to your homes when SA goes nuclear, unless you want to fund this abortion in the making and pray.

I agree Koos!! Especially with the fund your own energy part.

One last piece of advice is not to move to lifestyle estates if you can’t afford the “lifestyle”. So you like the area but can’t afford the private school across the street, or the Woolies food from the store around the corner. You don’t want to break your back paying the house, and suffer the inconvenience to drive your child 10km to the nearest affordable school or 8km to the nearest Checkers. Just use common sense when you plan 30 years ahead. Put your ego away when you think financially and **** what other people think. This is about your prosperity and happiness.

just remember to carry on, save, invest and build the future. SAfricans are still richer now than 20 years ago and will continue to do so over the next 20.
As a poor country nation-building is important and helping raise the majority is good for all.

At the same time, risk management and diversification of your assets is key, but there isn’t any reason to make yourself unhappy and hopeless over things you have no control over in the news. You can build a great future/business pretty much in any country if you have a positive outlook and fight for those things you can control.

So which of the two is it?:
“Rich people, also described by the acronym HNWIs (high net worth individuals) are defined as anyone who has $1 million in assets in addition to their primary residence.”

“…HNWIs, defined as people earning more than R7 million per year and/or who have assets of more than R70 million.”

Hi Darwin. Thanks for your query. Magnus has since updated the article to clarify that the $1 million definition is a universal one; the R7m/R70m definition is that of the academic group referred to, who have reduced the barrier to being called a HNWI to about $500 000.

Getting your money out of the country:
Perhaps some smarter readers than I am could comment.

Use your foreign currency allocation to buy a small well-managed business and along with it, citizenship. Portugal, Malta, Mauritius, Australia and now Florida USA.

Your overseas travel is now tax-deductible as you are “on business”. Expand the business with surplus income (acquisitive growth) and purchase other similar businesses until you are effectively earning more overseas than in SA.

Pack your bags ….

Isn’t this what Markus Jooste (Steinhoff) et al have done?

Even better – dont be beholden to any country’s fortune by starting/buying an online business, travel globally tax deductible, earn in hard currency and switch countries when you no longer like the local scene..

that is exactly what they have done because they know their profits in Rands will soon be worth s***- or they have to share 26-51% with the likes of Ramaphosa or Sexwale to be BBEEE compliant and keep growing.

Perhaps a good strategy is to live nicely in SA and keep shipping all your wealth offshore (not feeder Funds) so when the end does come (not long now) your family will have a nice nest egg in safe haven ? btw A 2nd passport is a must no matter what the cost me thinks.

Yes put all your money overseas and risk losing it.
How many Banks and Investment companies have gone bankrupt in the USA and EU? and then tell the families that lost it all, sorry it was the markets?
How many Banks or Finance institutions have failed in South Africa?
South African banks and Finance institutions are well managed and might be more honest than their counterparts overseas.
The Rand losing value is not a one way bet.

don’t have to invest in off shore banks or investment companies. had a south african bought us treasury 10 year bonds a year ago – would be up 50%!!!! in rand terms

“live nicely in sa”. excuse me I thought you guys were facing a downgrade to junk, that you had the HIGHEST murder rates in the world – and now the universities are involved in on-going protests and could be closed. all you are saying “its all too hard – yes having a 2nd passport wld be nice etc – but worry about it later”

correction to my comment – the 10 yr bond price is up 25% in us$ and year on year. the rand is where it was a year ago. had a sa sold in june (when rand was low) return would have been 70%!!

It might not look like it right now, but when SHTF, you will want to be in South Africa. It will be worse elsewhere.

Agree when SHTF I would like to be in familiar territory so I can duck and dive with ease.

It’s going to be difficult, but I believe that once Zupta and cohorts are gone (and it can’t be too long now, because he’s due to make another major cock-up soon, or 2107 whichever is the sooner) SA can rebuild itself. We have the people, who are beginning to see the light, given the ANC’s bloody nose after the municipal elections. I cannot see that a successor will be so illiterate and innumerate as he is. Someone with a sense of patriotism, who thinks about country first (like Mandela, but we aren’t going to get another one of those) will emerge to take the country forward. Well, I hope so.

Gemini, I’D Love to know what “Yet you want all the benefits of staying in SA” all these benefits are:
>is it the crime free environment, that necessitates all the costs;
>it the high health care cost that i pay for;
>is it the high cost of electricity & water because of no planning and or mining polluters, for which we now need to pay;
>is it the VAT that i paid on my new car that got stolen and never got refunded;
>is it our lovely leadership that don’t have solutions and keep on blaming the past;
PLEASE ADVISE US WHAT THESE BENEFITS ARE, PERHAPS WE MISSING IT

What does this article have to do with the Investec Value fund?
And it is “clients” not clintes, you cnut.

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