Monthly Archives: August 2016
July is savings month in South Africa. This is an initiative that is meant to encourage us all to be more serious about putting away money for our futures.
The premise is obvious. South Africa’s savings rate is abysmal and we need to do something to fix that.
However, many of the messages coming from financial services companies this year have not focused on the country’s savings habits. They have rather been about our spending habits.
Sanlam, for instance, has collaborated with rapper Cassper Nyovest and actress Pearl Thusi on a project called #ConspicuousSaving. The two, who are usually known for their big spending, have been posting on social media about doing things like home facials, clothes swapping or a haircut at a roadside barber to save money.
At a media luncheon in Cape Town on Thursday, Liberty also looked at ways in which South Africans might try to moderate their spending. Based on the findings of a survey conducted by Alltold, Liberty showed where consumers look to cut back to make their money go further.
The primary lesson from the study, entitled The Frugality Report, was that South Africans don’t like to compromise on their lifestyles. Even when they are spending less, they don’t want to cut anything out. They just look for more cost-effective ways of doing the same things.
This suggests that South Africans are probably too attached to the kinds of lifestyles they want to lead. They aren’t willing to seriously assess what they spend their money on and how much of it is really necessary.
In isolation, there is nothing wrong with highlighting these issues and questioning our spending habits. The first step towards financial freedom is always spending less than you earn.
However, it is only that – a first step. Only encouraging South Africans not to spend so much doesn’t really address the key issue of savings month, which is how to get more people to save more of their income.
Even if one of Thusi’s Twitter followers does heed the message and saves money by doing her own nails, buying second-hand clothes and turning down the temptation to buy a new handbag, what then? What does she do with the extra money that she now has?
This is where the financial services industry itself needs to do some serious introspection. It is simply not doing enough to make it easy and cost-effective for South Africans to save and invest.
Even acknowledging that this is not a simple thing to do, it doesn’t feel like too many companies are really trying very hard. The level of innovation in building simple, appropriate and appealing products is poor.
Even some firms that already have options that could be used to attract first time investors don’t market them as such. For instance, the Stanlib Equity Fund may be the only unit trust in the country that accepts debit orders of just R50 per month, yet I am not aware of any advertising from the company that has ever centred on this fact.
Easy Equities is a rare exception trying to make investing exciting and accessible, but why has it remained an outlier? Why aren’t more companies looking at ways to do similar things?
Many of them will say that it’s not easy when faced with the amount of regulation involved, and there is truth to that. However, this is not insurmountable. There are already online platforms that allow an investor to complete, sign and submit all the documentation they need for an investmentment online and simply upload their Fica documentation. It’s a process that needn’t be burdensome on the consumer.
South Africans often don’t see the need to draft a will, especially when they are relatively young or don’t have a significant asset base.
It is estimated that at least half of the estates reported at the Master’s Office each year are of people who died intestate (without a will).
In celebration of Women’s Month, the Fiduciary Institute of Southern Africa (Fisa) discusses some financial planning considerations women should take note of.
You need your own will and have to understand the implications of your partner’s estate planning
Chairperson Ronel Williams, says in practice, Fisa often finds that where a woman does not have a lot of assets, or leads a busy life, proper estate planning is neglected.
This could have far-reaching consequences.
Where estate planning is done, it is important to not only consider current circumstances, but to plan for the future, should the situation change, she says.
One example is in cases where a woman’s husband passes away, leaves the bulk of the estate to her and she dies shortly thereafter.
“So then suddenly she does end up with having quite a sizeable estate and her will actually doesn’t reflect the position for her changed financial circumstances.”
She could for example have provided in her will that her estate devolves on her children. If they are still minors (under 18 years) and inherit small amounts, this does not necessarily pose a problem. If, however, her estate is sizeable, the children’s inheritances have to be paid to the Guardian’s Fund unless her will provides for a trust.
While the law allows parties to have a joint will, Fisa usually advises against it, Williams says, mainly for practical reasons. There have been isolated instances where the surviving spouse dies and the Master’s Office battles to trace the original will that also applies to the surviving spouse.
Men and women living together are not automatically treated as ‘married’ under the law in case of intestacy
The Intestate Succession Act applies to every South African who dies without a will and stipulates that the estate should be divided according to a specific formula. If the person was involved in a relationship other than marriage, the type of relationship will determine whether the partner will be allowed to inherit.
Williams says in terms of the Act partners need to be regarded as a “spouse” in order to inherit in the case of intestacy, but the term is not defined in the Act. As a result, other legislation and court cases have to be consulted for an explanation.
Historically, a marriage entered into in terms of the Marriage Act was the only recognised spousal relationship, but with the introduction of the Constitution, the legal system acknowledged that people in other types of relationships were entitled to protection.
Williams says as a start, legislation was passed in the form of the Customary Law of Succession Act and parties to traditional marriages under black customary law are now regarded as spouses when dealing with an intestate estate.
Court cases have also extended the definition of a spouse in this context to include monogamous Muslim and Hindu marriages and polygamous Muslim marriages.
In terms of a Constitutional court ruling, same-sex partners are also regarded as spouses for purposes of intestate succession.
While men and women who live together without getting married often assume that the law treats them as married, this is not necessarily the case.
“Partners in such relationships do not automatically qualify for spousal benefits.”
A proposal by National Treasury, that aims to address the avoidance of estate duty by moving assets to a trust, could have significant tax implications for individuals involved.
The draft Taxation Laws Amendment Bill that was published for public comment in July, includes a provision that aims to make it detrimental for an individual to sell assets to a trust to which he or she is a so-called ‘connected person’ (typically family of the founder or beneficiaries of the trust) and extending a low- or interest-free loan to the vehicle.
Louis van Vuren, CEO of the Fiduciary Institute of Southern Africa (Fisa), says National Treasury has for some time held the view that South Africans move assets into trusts to avoid estate duty.
A common practice has been for individuals to sell their assets to a trust they have set up, but instead of the trust paying for the assets, the individual extends an interest-free or low-interest loan to the trust to enable the trust to finance the transaction.
Up until now, there have not been any problems with this type of structure. The common law position has always been that no loan bears interest unless interest is explicitly specified, he says.
But Treasury has argued that this makes it too easy for people to divest themselves from their assets by transferring it to a trust. This practice allows the assets to increase in value outside the estate of the original owner. When the individual eventually dies the only asset in the estate is the outstanding loan.
Van Vuren says this effectively pegs the value of the assets at the date of the sale, as there is no further growth of those assets in the estate of the founder.
“So what Treasury and the minister are saying is that this robs the State of estate duty, because those assets would have stayed in the estate and at death would potentially be susceptible or liable for estate duty,” he says.
The draft legislation proposes to curb this practice by charging income tax on deemed interest.
Should the new provisions take effect in their current form on March 1 2017 as proposed, any individual who sells assets to a trust in relation to which he or she is a connected person and finances those assets by way of a loan at an interest rate that is less than the official interest rate (currently 8% in terms of the Seventh Schedule of the Income Tax Act), will be subject to income tax on the deemed interest.
The deemed interest will be the difference between interest on the loan at 8% (the official rate) and the actual interest rate charged (in the case of an interest-free loan this will be 0%).
Thus, if an individual sells assets to the value of R10 million to a trust that he sets up and extends an interest-free loan to the trust to finance the assets, the individual will be taxed on R800 000 of deemed interest (8% of R10 million) even though this is a fictitious amount. This is the result of a proposed new section 7C of the Income Tax Act.