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Go beyond the noise and focus on what you can control to build financial wealth

06 May 2021 Tracy Muller, Head of Fiduciary Advice at Nedbank Wealth Management
Tracy Muller, Head of Fiduciary Advice at Nedbank Wealth Management

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 recently by many news reports about the possible introduction of prescribed assets legislation and appropriation of land without compensation, as well as the regular calls for government to disrupt intergenerational transfers of wealth and take a more stringent approach to levying wealth taxes as a means of funding the country’s responsibilities to the poor and vulnerable.

While sensationalised media reports and public speculation have never been reliable sources of financial and investment guidance, these commentaries invariably create fear and uncertainty. That is why it is important for us as individuals to focus less on sensationalism and speculation, and more on the factors that we can control when it comes to effective financial planning.

Obviously, as individuals we cannot control changes in legislation, economic growth rates (or lack thereof), tax policy, market movements or even the rollout of an effective Covid-19 vaccination programme. However, while there will always be factors such as these, that are out of our control, many of them also present opportunities 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 calm and in control of their 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. He had announced several government plans that could potentially impact financial wealth (in some instances, positively). These included a reduction in the corporate tax rate, which is an opportunity for anyone who owns or manages a business. The minister 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 for those not paying tax (who should be) and taxpayers not making full disclosures. These included a determination to identify and prosecute those guilty of tax evasion, as well as a commitment to locate more effectively offshore assets that have not been declared for tax.

For any high-net-worth individual who is complying with tax requirements, these developments present an opportunity for building financial wealth. That’s according to Judge Dennis Davis, who chairs the Davis Tax Committee and 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 the South African Revenue Service (SARS) in the coming years will be on broadening the tax base, improving collections efficiency, and plugging holes in the existing tax system, notably obvious under-declaration of actual income, extensive value-added tax (VAT) fraud and customs failures. Together, these 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 provides very little scope for personal tax increases or even for the much-feared wealth tax. So, provided you are tax-compliant, there is nothing to fear.

Judge Davis also provided valuable insights into the contentious issue of estate duty. This has long been a concern for high-net-worth South Africans, who fear 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 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’ generated around an issue can make it difficult to see that there are in fact many financial wealth factors that we 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 – whether it be perceived or real – in the present. This is why planning for the unknown, throughout our life journey, remains one of the key cornerstones of sound financial planning.

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The next year or two will continue to be a turbulent one with regards to regulatory change. Do you think…

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What we need is less regulation not more
The industry has overwhelmed itself with its own excessive regulation
The industry is bracing itself to deal with the regulatory changes, and brokers and insurers need to stay well informed of the effects of these changes
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