New millennium millions create taxing challenge

A WEALTH structuring challenge is looming as Capital Gains Tax (CGT) and other costs take toll of 'the new millennium millions' currently accruing to high performing executives and entrepreneurs.

The new money has been produced by South Africa's corporate, property and equity market boom and is now being put to work in a variety of structures, says BJM Private Client Services, a leading wealth manager and adviser to high net worth individuals, families and trusts.

The question is which structures work best the subject of an in-depth study by the nationally represented wealth manager.

Comparisons at BJM PCS indicated that cost and tax-efficiency have to be assessed on a case-by-case basis and that a one-size-fits-all solution is impossible in dynamic, high-growth South Africa.

One conclusion was that endowment structures, often marketed for CGT efficiency, can sometimes attract  higher overall costs than some alternatives.

Tony Barrett, head of wealth management at BJM PCS, notes: "We made largely conservative assumptions that may have favoured endowment structures, but results indicated that an endowment 'wrapper' is not the best shield against GCT in all cases.

"High net worth individuals should request an in-depth assessment covering capital appreciation, costs and tax exposure."

The study assumed an original investment of R5 million over five years, a marginal tax rate of 40%, an endowment tax rate of 30%, a CGT inclusion rate of 25% and an annual CGT exclusion of R15 000.

Annual portfolio churn of 20% was also assumed along with portfolio growth of 15% while the annual endowment cost was put at 0.36%. Conservative portfolio management, unit trust and advisory fees were assumed.

Best overall performance was registered by a direct equity share portfolio with a long-term growth mandate. The closing balance was R9 438 812 versus R9 136 940 by an endowment structure linked to an underlying share portfolio.

Total costs within the endowment structure amounted to R610 967 (versus R422 977 in the direct equity portfolio) with a CGT bill of R95 909 (versus R56 549).

Barrett adds: "Since the beginning of the new millennium, many South Africans have created a significant amount of wealth through the equity, property, share option schemes, entrepreneurial activities or a combination of these factors.

"Simultaneously, CGT is having material influence on tax computations and investment decisions. Anglo American has a CGT base cost of R99.88 (if held prior to Oct 2001) and currently trades at around R400. Sale of a single share therefore generates a maximum CGT exposure of R30 for the indiviudal."

Considerations such as this are prompting high net worth individuals to review structures such as endowment policies and trusts.

Says Barrett: "They are asking themselves whether housing assets in these structures is still a good idea.

"The yardstick is the real benefit, not the assumed benefit. You have to unpack all elements in the structure to arrive at the real position. If you want to put your new millennium millions to work to maximum effect, a little unpacking is well worth the effort."