Note, this interview was recorded before the National Budget was announced.
ELEANOR BECKER: Welcome to this Financial Advisor podcast, our weekly podcast where I speak to leading financial advisors. My guest today is Martin de Kock, a wealth manager and co-founder at Ascor Independent Wealth Managers. Hi, Martin.
MARTIN DE KOCK: Hi, Eleanor.
ELEANOR BECKER: Tell me, how did you end up in the financial advisory field and what are your fields of interest?
MARTIN DE KOCK: My profession is I’m an auditor, a chartered accountant. My passion is investments, financial planning. How I ended up in the field of financial planning and investments is initially we had to refer clients who needed assistance in life insurance and investments and so on to brokers, and I just realised that a lot of those brokers were not up to scratch in terms of qualifications and expertise and knowledge. Subsequently in 2007 and 2008 I did the Certified Financial Planner through the University of the Free State, and then in 2008 I did the Advanced Diploma in Investments and Asset Types. That was just to start assisting my audit and accounting clients with that advice and service that they needed, but also just making my service offering a more comprehensive and complete offering….
Expat tax: know the facts
ELEANOR BECKER: Just changing the focus to your relationship with your clients, with our current uncertain economic future and policies on the table such as expropriation without compensation, has financial emigration or at least the interest in it been increasing among your clients?
MARTIN DE KOCK: I would say so, it has definitely. But maybe something you didn’t mention is the new legislation with regard to tax on expats: so South Africans living abroad and earning income in places like the Middle East and other places where they are not being taxed there, so going forward from March 1 2020. In the past … if you complied with the rules in terms of 183 days in a year, of which 65 had to be continuous … all that income earned offshore would be exempt of tax. They have changed that legislation that the first
R1 million is tax-free and everything above that will be taxed locally. Now, that probably on its own I think would probably account for the biggest portion of people being interested in the financial emigration. But I think the points that you mentioned, the economic uncertainty and expropriation without compensation probably does play on people’s minds as well.
Death knell for ‘financial emigration’
ELEANOR BECKER: I would imagine that the tax implications are quite hectic if you are emigrating … for example, around your RAs (retirement annuities) and your other investments?
MARTIN DE KOCK: Yes, it is and what needs to be borne in mind is that you don’t have a one-size-fits-all [solution]. We need to actually look at each individual situation and circumstances to actually make an informed call. The big tax implication of financial emigration is that effectively when you do financially emigrate that is the deemed disposal, even though you don’t sell, but the deemed disposal of all your assets, excluding fixed property and the payment of capital gains tax on those assets, and that’s on worldwide assets, not just local assets. The problem with that is because you haven’t disposed of assets it could result in you being cash-strapped in terms of having to pay capital gains tax when you haven’t actually disposed of any assets.
The other thing that many people miss in actually giving the advice, as well as taking advice, is if you return to South Africa within a five-year period after having financially emigrated, from Sars side they will deem that to be an unsuccessful emigration.
If you have an unsuccessful emigration, for those years that your income wasn’t taxed in South Africa … Sars will then go back and reopen those tax assessments and tax you as if you haven’t emigrated.
A lot of people miss out on that five-year period that you’re not allowed to come back.
ELEANOR BECKER: So does that mean you are not allowed to come back, even for a holiday?
MARTIN DE KOCK: You can come back for a holiday. There’s a time limit that you’re not allowed to come back and spend more than 90 days in South Africa. But coming back for a holiday or a funeral or whatever the case may be is not part of that failed emigration.
ELEANOR BECKER: So would double tax agreements come into play there?
MARTIN DE KOCK: They can because it is a consideration … with the new legislation on expats effective from March 1, you do have double tax agreements that come into play. What it basically boils down to is that – because our bases of tax are based on worldwide income – you do your tax calculation locally and then whatever was taxed offshore. If there’s a double tax agreement, you get a credit for that tax and then you’ll end up having to pay the difference between what calculated here and what was paid.
Keep in mind that there are some jurisdictions where people work, specifically Dubai, where there is no tax. So then that full tax liability will then be incurred locally, and the taxpayer will have to pay that bill.
ELEANOR BECKER: It’s very interesting. [This article] says that it’s estimated that there are over 100 000 South Africans in Dubai alone who will be affected by that expat tax, so it’s quite significant.
MARTIN DE KOCK: Another thing that a lot of people don’t take into account is they just think of the salaries they earn, but most expats, especially Dubai expats, have free accommodation and free transport. Now, from a tax point of view in South Africa, free transport and free accommodation is deemed to be a fringe benefit. Currently it’s not shown anywhere on a pay slip or anything, it’s just in the agreement. If you just think of Dubai, your accommodation could end up exceeding the R1 million exemption, which would mean your total salary would be taxed and you wouldn’t qualify for the exemption, because the exemption’s been utilised already by your fringe benefit of free housing and travel.
ELEANOR BECKER: In general, for South Africans who are staying put, do you find that tax avoidance is increasing?
MARTIN DE KOCK: I think there is an inclination to avoid tax. Just keep in mind that avoiding tax is legal but evading tax is the illegal one. But with tax avoidance there are more and more attempts to use existing legislation to try and find loopholes to pay less tax. I think in general it’s probably a feeling of many taxpayers that just feel that their taxes are not being utilised by government to their benefit. So because of that and also the increasing tax rate for individuals because I think South Africa has one of the highest tax rates for individuals in the world and I think people are getting tired of seeing all the bad spending from government’s side and they are looking at trying to reduce their tax bill. I think also with the economy as it is, people are starting to struggle more and more because of the low growth.
ELEANOR BECKER: What are some of these loopholes that you can use to reduce your tax exposure?
MARTIN DE KOCK: I think Sars from their side, in terms of legislation, have closed most of the loopholes. I think the one glaring opportunity that’s still available, and is also legal, is your contributions to your retirement annuities because effectively your contributions to retirement annuities are partly subsidised by Sars, in that that if you are paying tax at a rate of, say, 40%, for every R10 000 you contribute to a retirement annuity, you’ll be saving the tax rate on that, being R4000. So effectively you are paying R6000 for a R10 000 investment. That is one of the obvious uses of tax legislation to reduce your tax bill: the contribution to retirement annuities. An additional benefit is…because it’s a retirement product, you have safety against the claims of creditors, excluding divorce, of course.
Another opportunity, which doesn’t save you tax as such, but the proceeds and growth on tax-free savings accounts are free of tax. So that’s another option you could look at to save a bit of tax, keeping in mind that you have an annual limit of R33 000 (now R36 000) that you can’t exceed, and then also you are looking at a total contribution in a lifetime per taxpayer of R500 000. So after a number of years you do hit that limit where you can’t contribute any further. Then the last one I can immediately think of in terms of saving tax is if your job requires you to travel for work, you could structure your salary to include a travel allowance. Just bearing in mind that for the claim against that travel allowance, you actually need to keep quite a detailed logbook that complies with the requirements of Sars.
ELEANOR BECKER: Moving slightly along to estate planning, do you find that people make enough provision for death taxes?
MARTIN DE KOCK: What we find in practice is that there are very few new clients who we actually engage with who have had their previous advisors do an estate liquidity calculation. And you don’t have any clue as to what the liquidity requirement is, should you pass away, if you do not do an estate liquidity calculation. So just to explain that in practical terms: you could have a number of assets in your estate and pass away, and …
because there’s no liquidity the executor could end up having to sell property and things like that to free up liquidity to cover estate expenses, which could be estate duty, executor fees, any outstanding debts and things like that.
So typically in a situation where you have sufficient assets, to address that problem is basically as simple as just changing a beneficiary on one of your policies, and not making it a direct beneficiary but making your estate the beneficiary of that specific policy and that’s very simple to then address, that liquidity shortfall, for any shortfalls that do exist at death.
The prescribed assets threat
ELEANOR BECKER: Have your clients been more concerned about retirement savings, given the volatile markets and talk of prescribed assets, among other things?
MARTIN DE KOCK: I think usually clients become concerned when markets don’t give good returns. Fortunately the 2019 calendar year [was] a good year in terms of returns. 2018 was terrible and we did find doing reviews for clients early in 2019 very difficult, because what tends to happen is when returns are gone, clients tend to start looking more critically at things like your underlying costs in managing investments, administrative costs and things like that. Those types of discussions fall away when you have quite decent returns, [as] was the case in 2019.
But I think, especially what you mentioned, the prescribed assets, that is a point of concern. I do think that before it would actually go there where they would maybe implement legislation like that there’s lots of consultation that would have to happen… because I think the knock-on effect in the market would be quite substantial.
Just think about it, if they were to say, as an example, 30% of retirement savings needed to be in bonds, that 30% would mean that asset managers and platforms would have to sell off any excessive assets like equities to up their bond holdings and that could lead to markets being depressed because of a lot of entities having to sell investments.
So I’m not sure if it will…it is talk, I don’t think it’s in the near future but I think it’s something that they are thinking about.
I think what one just needs to remember is that prescribed assets is not something new, it was also done previously, I think it came into effect in South Africa in 1986, if I recall, and up to round about 1994, I think … so it’s not going to be something new. But I don’t think it’s good for markets when the state starts prescribing as to what assets need to be held in retirement funds. I think your Regulation 28 already has a negative effect on potential growth, especially for investors who are still young and are very far away from retirement. To have caps on equity exposure and stuff for young investors in my mind is not good. But … consider the intention of Regulation 28 was to protect investors from so-called investment advisors who are not experienced enough to make the investment calls and allocate funds to appropriate risk-based underlying assets.
ELEANOR BECKER: The argument against Regulation 28 for young investors is that it’s too conservative?
MARTIN DE KOCK: Correct because for any of my investors who are at least ten years from retirement, you want to have as much as possible, as close to 100% of your underlying investments in your retirement fund in growth assets, because if you’re looking at a timeframe of longer than ten years to retirement, ten years is more than enough if there is any substantial market correction for that correction to reverse and to recover.
If one looks historically at market corrections in terms of if you look at bull and bear markets, your bear markets tend to be very much shorter than your bull markets.
So you could look typically at a bear market of 12 to 18 months, whereas your bull market, looking at the current one, since 2008 up until now, it’s been running close on 12 years, which is one of the longest bull markets that we’ve had to date.
Exceeding your required inflation growth is a safe bet
ELEANOR BECKER: Are there any local investment opportunities or sectors that have caught your eye or that are bucking the returns trend?
MARTIN DE KOCK: I think that currently because our local bonds are pricing in, well, according to most analysts and investors, our bonds are pricing in a downgrade later in March, you can earn easily inflation plus 4% to 5% and that is considered to be low-risk because that’s what the yield is on bonds. So typically just to exceed your required inflation growth that is quite a safe bet.
But on the other side you could look at sectors, I think in the last year probably one of the sectors that has come under severe pressure is listed property and also industrials and consumables, things like Woolworths, Mr Price, Shoprite and those types of companies, where there have been some quite serious re-ratings in those types of asset. What tends to happen is some of those re-ratings are overdone, where the prices fall below their net asset value of the underlying company. So there definitely are opportunities.
Where there’s been some serious re-ratings is where I think there are buying opportunities.
Look to the long term with investments
ELEANOR BECKER: What do you wish that your clients knew?
MARTIN DE KOCK: Probably one of the biggest challenges for clients is that when we invest it’s a marathon, it’s long term. So I think the industry probably has been a bit on the naughty side, if you look at a lot of your prizes, your raging bull awards and even your comparatives, when the different fund managers compare to others, they talk of long-term investing but when they compare they look at timeframes like one year, three years and five years. Now, typically you don’t encourage good investor behaviour if on the one hand you’re referring to long term but when you compare to other funds and when the competitions take place you’re looking at a three-year period, things like that.
Three years is short term, so it encourages bad investor behaviour.
What we also tell clients is if you know that you are emotional about losing money, don’t look at your investment statement on a monthly basis because you are going to have sleepless nights.
I think also what one needs to do is actually take your client through the whole investment strategy [so] that they know you are not doing things just off the cuff, you’ve got a plan that you are working according to, and your plan is to achieve a certain growth after a seven-year or ten-year period. There’s no point in changing strategy in year two or three because then you’ve got no chance of having achieved that initial…unless you have a change in…. Typically if you’ve been following a fund that has been performing extremely well because of a certain fund manager and then the fund manager moves to another company, that could be a reason to reconsider. But again, you don’t take long-term decisions based on what’s happening in the short term or in the interim.
I think one of the things that we try to teach clients is sometimes just sitting on your hand is also a decision and don’t just for the mere sake of doing something, do the wrong thing.
I think clients destroy capital by taking knee-jerk reactions and acting emotionally when things are up and down.
ELEANOR BECKER: Would you like to add anything else?
MARTIN DE KOCK: I think if you’ve found a decent or qualified and experienced financial planner and they have taken you through the process, I think what is very important is to at least understand the process the advisor is taking you through. Because your chance of sticking to a strategy if you don’t understand the strategy is much smaller and reduced, [compared] … to a strategy that you do understand. Have the advisor explain again and again until you do understand it.
Also, I think what’s very important is that your wealth that you accumulate is your responsibility: you never delegate that responsibility to your financial planner. You pull in the financial planner’s expertise to help you manage your responsibility with regard to your fund and your wealth. You don’t delegate that responsibility away.
ELEANOR BECKER: That was Martin de Kock, co-founder at Ascor Independent Wealth Managers.