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Ok. Got itGo beyond the noise and focus on what you can control in order to build your financial wealth.
By Tracy Muller; Head of Fiduciary Advice at Nedbank Wealth Management
While the assets making up each person’s financial wealth may differ, most high net worth individuals in South Africa share similar concerns over what appear to be increasing risks to that wealth. These fears have been fuelled in recent times by a plethora of news reports ranging from the possible implementation of prescribed assets legislation to appropriation of land without compensation, and even the regular calls for government to disrupt intergenerational transfers of wealth and also take a more stringent approach to levying wealth taxes as a means of funding the country’s many responsibilities to its poor and vulnerable citizens.
While media reports and public speculation have never been reliable sources of financial and investment guidance, these commentaries invariably create fear and uncertainty. Which is why it is so important for each of us as individuals to focus less on sensationalism and speculation and more on clearly discerning between the factors that we can, and cannot, control when it comes to effective financial planning.
Obviously, as individuals none of us is able to control changes in legislation, economic growth rates (or lack thereof), tax policy, market movements or even, in the modern context, the rollout of an effective Covid-19 vaccination programme.
However, while there will always be wealth influencing factors like these that are out of our control, many of these factors also have an opportunity ‘flipside’ that we need to be ready to take advantage of. A prime example of this occurred in 2020 when fears fuelled by Covid-19 created massive distortions in market values. This, in turn, generated significant opportunities for those investors who remained in control of their emotions and reactions to the pandemic and its short-term economic impacts.
With that in mind, it is worth taking a closer look at some of the key factors that could influence financial wealth in South Africa going forward, and assess whether these are merely ‘noise’ or if they present real risks or opportunities for high net worth individuals.
The first of these is undoubtedly the recent national budget presented by the Finance Minister at the end of February. The Minister’s speech announced a number of government plans and considerations that could potentially impact (in some instances positively impact whilst in others not so positively impact) financial wealth. These included a reduction in the corporate tax rate, which is naturally an opportunity for anyone who owns or manages a business. Then, the budget also highlighted draft amendments to Section 28 of the Pension Funds Act, which will enable greater investment by retirement funds into infrastructure, but not on a prescribed basis. This, too, is good news for anyone invested in an employer-offered retirement fund.
But there were also points raised by the Minister around government’s far more intensive focus on tax collection, which should raise concerns amongst those individuals that are not paying tax (and should be) or those who are paying tax but are not making full disclosures (and should be). These included a determination to identify and prosecute those guilty of tax evasion, as well as a commitment to more effectively locate and tax undeclared offshore assets.
Interestingly, for any high net worth individual who is complying with tax requirements, these developments actually present an opportunity for financial wealth building rather than a threat. That’s according to Judge Dennis Davis, who chairs the Davis Tax Committee and who was kind enough to join me on a recent Nedbank Private Wealth webinar to share his insights.
According to Judge Davis, the key focus of SA’s tax authority (ie SARS) in the coming years will be on broadening the country’s tax base, improving collections efficiency, and plugging holes in the existing tax system, notably obvious under-declaration of actual income, extensive VAT fraud, and customs failures that are costing the country hundreds of billions of rand every year.
Essentially, what this means is that SARS is not ‘gunning’ for high net worth individuals as many people in this income bracket fear. In fact, according to Judge Davis, the current tax regime in our country provides very little scope for personal tax increases or even for the much-feared wealth tax. All of which means that, provided you are tax compliant, there is nothing to fear.
Judge Davis also provided valuable insights into the contentious issue of estate duty, which has long created concerns amongst high net worth South Africans who feared the possible negative impact that a change in this tax regime could have on the financial legacy they leave to their loved ones. Here too, according to Judge Davis, the focus of government in the future is likely to be on optimising tax structures only on very large estates, where higher tax rates would not likely have any negative impact on the quality of life of the beneficiaries.
These are just a few examples of how listening to the ‘noise’ that is generated around an issue can make it difficult to recognise that there are in fact a lot of financial wealth factors that we as individuals are able to control. Arguably, the most important of these is how well we plan for the future we desire, irrespective of what is happening – perceived or real – in the present. This is why planning for the unknown, throughout life's journey, remains one of the key cornerstones of sound financial planning.
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