1

BUDGET SPEECH 2020

WEALTH

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01 JOHANN ELS

BUDGET: LIFTING SENTIMENT, BUT DOWNGRADE STILL A REALITY3

02 FARHAD SADER BRIGHT YOUNG MINDS WANT GOVERNMENT TO ACT NOW

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03CHRIS POTGIETER

FINANCIAL EMIGRATION – DO THE COSTS AND COMPLEXITIES WARRANT THE

BENEFITS?

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04 WIKUS FURSTENBERG

POSSIBLE MOODY'S RATINGS ACTION – A QUICK TAKE9

05 ELIZE BOTHA USE THE TAX CUTS TO STAY ON COURSE

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06 TAX TABLES 17

CONTENTS

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The 2020/21 Budget shows that National Treasury

is willing to make hard choices during diff icult

times. It may not have done enough to avert a

downgrade, but Minister Mboweni’s focus on

expenditure cuts rather than tax hikes will lift sentiment

and ease some pain for long-suffering consumers.

NO NET TAX INCREASESWhile the absence of net tax hikes is good news for

consumers, risks remain around the ambitious plans to

cut expenditure on the wage bill, as this still needs to

be negotiated with unions. Mboweni also announced

baseline spending reductions of R261 billion with

adjustments on the wage bill penned in at about R160

billion over the medium term.

BETTER THAN EXPECTED, BUT NOT GOOD ENOUGH FOR MOODY’S Despite huge deficits and no debt stabilisation, the

Budget was on balance better than expected, given

the emphasis on expenditure reduction and not tax

increases. But the large deficit, debt ratio and primary

def icit, combined with still weak economic growth

and the risks around the wage bill savings could still

lead to a Moody’s downgrade in March. As expected,

Moody’s highlighted these risks in their post-budget

commentary.

Another risk going forward – and an aspect to feature

on the radar of rating agencies – is that any expenditure

savings will be “eaten up” by the growing interest rate

bill. Interest payments will increase on average by 12%

a year over the next three years.

Equities are expected to react positively to the news

that there will be no net tax increases, apart from the

usual “sin” taxes, while bonds could respond more

negatively to the very large deficit, rising debt ratio and

risks associated with achieving the wage bill savings.

Old Mutual expects a neutral inflationary effect.

In a surprise move, individual income tax brackets were

adjusted by more than inflation (5.2% versus expected

4.4% inflation). This provides for total personal income

tax relief of R2 billion, compared with a potential extra

R12 billion had there been no tax bracket adjustments.

From an inflationary perspective, there will likely be

minimal impact as the increases in fuel and excise

taxes are generally lower than last year. It is still a very

deflationary environment.

BUDGET DEFICIT TO DECLINEWhile the Budget deficit is expected to decline over

the next three years, it will explode to -6.8% in 2020/21

from -6.5%, which had been expected in October. The

BUDGET: LIFTING SENTIMENT, BUT DOWNGRADE STILL A REALITY

AUTHORJOHANN ELSCHIEF ECONOMIST: OLD MUTUAL INVESTMENT GROUP

4

deficit is, however, expected to recede a little from

there and is seen unchanged at -6.2% in 2021/22 and

-5.7% in 2022/23.

A deficit as high as -6.8% high will, however, clearly

be seen as a risk for Moody’s. Although the very large

deficits might seem like this is an expansionary budget,

that is not true to the full extent as these deficits might

imply that expenditure excluding wages and interest

payments only rise by 4.5% on average over the next

three years. That is slightly below expected inflation

over this period.

The envisioned lower corporate tax rate in future is

a positive signal as this will encourage investment

and help expand production. However, this should

not come at the expense of removing incentives in

areas that have a proven history of working, like in the

automotive industry.

FUTURE CUT IN CORPORATE TAXIt was announced in the Budget that government intends

to restructure the corporate income tax system over the

medium term by broadening the base and reducing

the rate. Broadening the base will involve minimising

tax incentives and introducing new interest deduction

and assessed loss limitations. South Africa’s corporate

income tax rate has remained unchanged at 28% for

more than a decade.

In summary, the positives outweigh the negatives in

this Budget, but the jury is out on the wage bill.

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AUTHORFARHAD SADERMANAGING DIRECTOR: OLD MUTUAL WEALTH

A head of the 2020 Budget Speech, the leaders

of tomorrow called on Finance Minister Tito

Mboweni to act decisively, imploring the

government to take the necessary action to

repair the country’s purse.

South Africa’s top young thinkers are most concerned about high levels of corruption in government and the barriers this creates in attracting investment. Yet the best and brightest young talent in the f ield of economics are cautiously optimistic about the potential for the South African economy to recover.

This was what I gathered while reading through essay

submissions to the annual Nedbank and Old Mutual Budget

Speech Competition, which announced its 2019 winners

on 26 February. Bekithemba Qeqe, University of Fort

Hare and Matifadza Bingudza, University of Pretoria, were

adjudged winners of the postgraduate and undergraduate

competitions respectively.

The most ardent recommendation by tomorrow’s economic

leaders was to root out corruption by any means necessary.

For the f inalists, the number one barrier to attracting

investment and fostering economic growth is corruption. All

the entrants cited this as a signif icant obstacle to creating

a supportive business environment and securing the

stability required to allow for the effective implementation

of macro-economic policies.

Tasked with evaluating President Cyril Ramaphosa’s

economic stimulus package, jobs summit initiative and bold

USD 100 billion investment target, competition participants

BRIGHT YOUNG MINDS WANT GOVERNMENT TO ACT NOW

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well as political risk and instability were frequently

mentioned by students as barriers to investment.

One argued that poor governance structures create

uncertainty around the safety of investments.

5. The high cost of labour and restrictive labour regulations

were argued by a number of students as a barrier to

investment. However, one student made the case that

high unemployment makes labour relatively inexpensive

compared to some other emerging economies.

6. The instability in society as a result of inequality and

poverty also reduces investor confidence, according to a

few students mentioning crime and theft in particular.

7. Other barriers specif ically mentioned were the diff iculty

of doing business and low business confidence; exchange

rate instability; challenges to the rule of law; infrastructural

challenges as well as the low-skilled labour force.

are understandably pessimistic about the possibility of short-

to medium-term gains. Citing government ineff iciency,

corruption and the lack of a skilled workforce, all f inalists

agree that these reforms are unlikely to meet their goals

unless the problems at the root of the economic turmoil

are addressed.

Even so, these outstanding young thinkers remind us not to

overlook the reasons for optimism in these troubled times.

Most students highlighted South Africa’s robust f inancial

services and banking sector as a key asset in attracting

investment. The independence of the Reserve Bank and

our stable monetary policy were also frequently mentioned

by f inalists as a draw for investors. After all, South Africa

boasts some of the most sophisticated and sound f inancial

institutions in the world.

On the whole, the f inalists see the country’s strong regional,

continental and global trade networks — particularly our

role as a gateway into emerging African markets — as a

key factor in favour of attracting investment. The views

expressed by the f inalists echo the calls from broader

society for decisiveness and action. Hopefully, these views

are not falling on deaf ears. Their ideas aside, every year,

these bright young minds remind us that we have a whole

new generation of talented and innovative leaders in our

country eager to make a difference. Just listening to the

enthusiasm with which they debate opportunities and

ideas f ills me with hope and optimism for the future.

Other findings include:1. All the students cited high levels of corruption as a

barrier to investment, particularly in relation to State-

Owned Enterprises (SoEs).

2. The mismanagement and decline of SOEs were also

often mentioned as a barrier, in particular Eskom,

because of the harm of unreliable energy supply to

the industry as well the bailouts putting enormous

pressure on the f iscus.

3. Students frequently mentioned a threat to property

rights and the rule of law as well as political interference

with institutions as undermining the likelihood for

investment. In particular, land reform, mining and

reform in SOEs were a concern.

4. The budget deficit was mentioned as being a deterrent to

investment because it makes the country look f inancially

unstable. Government ineff iciency and instability as

7

South Africa’s “expat tax” and its potential

implications have caused a great deal of hype

(largely based on inaccurate information),

resulting in many clients looking to f inancial

emigration as a means of resolving their issues around

paying tax in South Africa on income earned offshore.

Financial emigration is the application, as part of a

formal emigration process, to the South African Reserve

Bank to change from a resident of South Africa to a

non-resident for exchange control purposes. It does not

by itself impact one’s tax residency, but can be seen

as a related process. Formal emigration and changing

tax residency are complex processes and may well be

the desired outcome for individuals seeking to live

permanently in another country, but it is certainly

not a quick f ix for tax relief. Furthermore, changing

tax residency status could result in immediate tax

consequences in the form of exit charges.

REVISED LEGISLATIONThe revised Income Tax Act (effective 1 March 2020)

will result in South African tax residents working

abroad temporarily being exempt from paying tax on

the f irst R1 million they earn abroad. Thereafter they

will be required to pay tax on any foreign earnings.

Previously, the foreign employment income earned by

FINANCIAL EMIGRATION – DO THE COSTS AND COMPLEXITIES WARRANT THE BENEFITS?

South African tax residents was fully exempt from tax

in South Africa, provided certain requirements were

met. Importantly, the amendment only affects income

received from employment and does not affect those

earning foreign investment income (which is already

taxed) or individuals who are no longer residents of

South Africa for tax purposes.

Much of the misunderstanding around this topic stems

from the fact that f inancial emigration is a colloquial

term that does not exist in any legislation. Rather, the

key issues are formal emigration and tax residency,

which are two separate (often linked) processes. Formal

emigration entails physically relocating from one country

to another country. Formal emigration will typically

also involve f inancial emigration i.e. changing one’s

status to non-resident for exchange control and tax

purposes. The entire process is lengthy and includes

rigorous audit, and upon SARB and SARS approval, the

individual will be issued with an Emigration Tax Clearance

Certif icate. Sometimes, f inancial emigration needs to be

done retrospectively when people physically emigrate

and only subsequently recognise the requirement to

regularising their status as non-resident for exchange

control and tax purposes.

AUTHORCHRIS POTGIETERMANAGING DIRECTOR: OLD MUTUAL WEALTH TRUST COMPANY | PRIVATE CLIENT SECURITIES | TREASURY ADVISORY FIDUCIARY

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for no more than 91 days in total during the current

assessment year; 91 days in total during each of the f ive

years of assessment preceding the current assessment

year; and 915 days in total during those f ive preceding

years of assessment. Contravening any of these periods

will result in an individual’s tax status being reverted to

a South African resident. So, one could have formally

emigrated, changed your tax residency status and then

subsequently be classif ied as a SA tax resident again.

BE CLEAR ABOUT YOUR OBJECTIVES; SEEK PROFESSIONAL ADVICEIn conclusion, it is clear that f inancial emigration is

a highly complex, costly and long-term decision and

pursuing this path solely to avoid tax is ill advised.

Investors should bear in mind that all South Africans

have an annual R1 million single discretionary allowance

and R10 million foreign investment allowance - both

of which can be used for foreign investment and asset

transfer without having to change tax residency.

While everyone’s circumstances are different, there

are numerous factors to consider and it is important

to understand the real cost and lifestyle implications

before deciding to f inancially emigrate. As with any

major f inancial decision, it is always advisable to seek

professional advice to ensure that your actions and

objectives remain aligned and that your investment

plan is optimally structured.

SUBSTANTIAL EXIT CHARGESChanging your tax status to non-resident could have

signif icant capital gains tax consequences, as your

worldwide assets (with the exception of f ixed property

situated in South Africa) are deemed as being disposed

of at market values. Therefore, 40% of any gain would

be included in your income and you will be taxed at

your marginal tax rate. This ‘exit charge’ can be quite

substantial and you may need to raise liquidity to settle

your affairs with SARS.

It is important to ensure that your intention to relocate

and your affairs are fully disclosed in your tax returns in

the year of your emigration as well as in the proceeding

f ive years. These disclosures could be key if, at a later

stage, your tax residency or ability to exit funds were

to be examined.

COMPLEX RESIDENCY TESTSSouth Africa’s tax regime is based on a residence-based

system and one’s tax residency status is determined by

how much time you spend in the country, where your

assets are based, where your family resides most of the

time, and the location of your primary residence. In

order to become non-resident, individuals must prove

their intention to become ordinarily resident in another

country and demonstrate the steps they have taken

(or are taking) to carry out this intention.

Finally, they will then need to meet requirements of

the physical presence test by being in South Africa

9

Much had been written since late 2018

about a possible rating action by Moody’s

Rating Agency (Moody’s). In this article,

we share some thoughts on the possible

impact on fund returns, should the South African

nominal bond yield curve steepen in response to a

downgrade. We wish to reiterate that this analysis is

not a forecast, but merely intends to give investors a

feel for how these funds may behave in the particular

scenario highlighted below.

WHAT EXACTLY IS THE HYPE ABOUT MOODY’S?This is nothing new, really. Moody’s is one of the three

major international rating agencies (the other two are

Standard & Poor’s and Fitch). These rating agencies

issue a credit rating to bond issuers (at a fee). Their

client base ranges from private sector f irms to countries,

like the Republic of South Africa. The credit rating is

basically a reflection of the rating agency’s estimate of

the default probability of the borrower. The higher the

rating (AAA), the lower the default risk and vice versa. In

determining the rating, the agency takes into account

a myriad of factors, including mostly macroeconomic

and f inancial variables, as well as political risk. Most

investors tend to at least partially base their investment

decision (which would include the pricing of these

bonds) on these “independent” ratings.

POSSIBLE MOODY'S RATINGS ACTION – A QUICK TAKE

AUTHORWIKUS FURSTENBERGPORTFOLIO MANAGER & HEAD OF INTEREST RATE PROCESS: FUTUREGROWTH ASSET MANAGEMENT

In some cases, mandates require investors to invest in

bonds with a so-called investment grade rating only,

where the lowest investment grade rating is BBB- (or

Baa3 in the case of Moody’s). In the case of the Republic

of South Africa, Moody’s is the only rating agency that is

still rating the country as such. The other two agencies

have downgraded South Africa to a sub-investment

rating of BB+ for local currency denominated debt.

Moreover, for inclusion in certain global bond indices,

a minimum investment rating of BBB- is required.

GRAPH 1: SOVEREIGN CREDIT RATING SCALE

Source: Futuregrowth

MOODY'S S&P FITCHAaa AAA AAA PrimeAa1 AA+ AA+

High gradeAa2 AA AAAa3 AA− AA−A1 A+ A+ Upper

medium grade

A2 A AA3 A− A−

Baa1 BBB+ BBB+ Lower medium

gradeBaa2 BBB BBBBaa3 BBB− BBB−Ba1 BB+ BB+ Non-

investment grade

(speculative)

Ba2 BB BB

Ba3 BB− BB−

B1 B+ B+Highly

speculativeB2 B BB3 B− B−

SA Foreign currency sovereign rating

SA Local currency sovereign rating

FC

FC LCLC FC LC

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WHY IS THIS SO “NEWSWORTHY”?The widespread and lingering concern is that Moody’s

will f inally “see the light” and follow the other two

rating agencies, which will cause the country to lose

its last investment grade rating. This, in turn, will force

passive or benchmark driven global investors to sell

their rand-denominated South African government

bonds they currently hold in their portfolios. At the

time of writing, foreign investors owned about 37%

of South African government bonds. This equates to

roughly R800 billion. That said, it is important to note

that not all of it is actually owned by passive or index

tracking investors. A signif icant portion of emerging

market bonds, including those issued by South Africa,

is owned by the so-called “unconstrained” foreign

investors. These investors are not constrained by credit

ratings, indices and other limitations, but would base

their investment decisions on their internal fundamental

analysis and relative valuation. Even so, it is reasonable

to assume that some selling may either pre-empt (the

active investors) or follow (the passive managers) the

rating change.

HOW NEWSWORTHY IS A POSSIBLE MOODY’S DOWNGRADE REALLY? It most certainly is not fresh news, since the possibility has been telegraphed way in advance. Of course, the element of uncertainty is whether the agency will actually act on the negative outlook or surprise most by once again holding off, the way they have done over the past year or so. We would refrain from guessing the outcome. Suff ice to state that, in our view, the agency is behind the curve and should have acted already.

More interesting is the way markets are currently priced. It comes as little surprise that both US dollar- and South African rand-denominated government bonds have been trading as sub-investment graded debt for a while (see Graph 3 on the next page). It follows that markets should not be surprised by a downgrade, as a fair amount of the “bad’ news has been discounted and may at least in terms of this be trading close to fair value.

That said, most of the time markets tend to overreact and thus trade around fair value estimates. So, with this in mind, we cannot overlook the probability that bond yields may still spike in response to an actual

downgrade and thus cheapen more.

25.0%

27.0%

29.0%

31.0%

33.0%

35.0%

37.0%

39.0%

41.0%

43.0%

45.0%

May

-11

Nov

-11

May

-12

Nov

-12

May

-13

Nov

-13

May

-14

Nov

-14

May

-15

Nov

-15

May

-16

Nov

-16

May

-17

Nov

-17

May

-18

Nov

-18

May

-19

Nov

-19

Hol

din

g (%

)

GRAPH 2: FOREIGN OWNERSHIP OF RAND-DENOMINATED BONDS ISSUED BY THE RSA GOVERNMENT (NOMINAL AND INFLATION-LINKED)

Sources: SA National Treasury, Futuregrowth

11

Swit

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Den

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Ger

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y

Swed

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Sin

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Net

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lan

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Au

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Nor

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Fin

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USA

Au

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Fran

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Bel

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and

Jap

an Spai

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Mal

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Pol

and

Mex

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Ital

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Ind

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Sou

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-1

1

3

5

7

9

11

13A

AA

AA

A

AA

A

AA

A

AA

A

AA

A

AA

A

AA

A

AA

A

AA

+

AA

+

AA

+

AA

AA

AA

AA

-

A+ A A-

A-

BB

B+

BB

B

BB

B-

BB B+

B+

10y

YTM

(%)

S&P Foreign Currency Ratings

Bra

zil

UK

Sources: Bloomberg, Futuregrowth

IS THIS INCORPORATED INTO OUR INVESTMENT VIEW AND STRATEGY?Indeed it is. Our investment philosophy at Futuregrowth

is never to rely on the input from off icial rating agencies

but to allow our fundamental analysis to lead us to

our own conclusions and, in this case, our ratings. In

this sense, our investment theme and strategy have

incorporated concerns about sustained f iscal slippage

and its impact on the country’s sovereign credit

worthiness for more than two years. From a valuation

perspective, various indicators point to the probability

that a fair amount of this fear is already in the price.

We also have to consider other drivers, such as very

depressed global bond yields, strong disinflationary

forces and a repo rate that is unlikely to increase any

time soon. The steep slope of the nominal bond yield

curve is another indicator of how much bad news had

been discounted for. Sitting on the fence (on cash) thus

implies an opportunity cost the investor can ill afford.

HOW ARE OUR FUNDS POSITIONED IN LIGHT OF THE ABOVE?The four Old Mutual unit trust funds managed by

Futuregrowth are strictly managed to mandate and

thus a carefully pre-determined risk profile. In the case

of the Money Market and the Interest Rate Plus funds,

the impact of a downgrade will be limited, since their

respective mandates limit the extent of interest rate

risk and therefore the holding of longer-duration bonds.

In the case of the Income Fund, the higher risk allowance

afforded by the fund’s mandate will put it more at

GRAPH 3: LOCAL CURRENCY DENOMINATED 10-YEAR TREASURY YIELDS AND S&P CREDIT RATINGS

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%B

razi

l

Mex

ico

Pol

and

Turk

ey

Ru

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Mal

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a

Ind

ones

ia

Sou

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Hu

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ary

Thai

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Per

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Rom

ania

Col

um

bia

Wei

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tion

of f

orei

gn h

oldi

ng

Benchmark Driven Investor Unconstrained Investor

risk in case of a bond yield spike. However, it should

be borne in mind that, even in this case, the lasting

impact should be limited - considering the diversity of

return sources in the fund and the modif ied duration

cap of two years. (For some perspective, the modif ied

duration of the JSE All Bond Index or ALBI is around

7). Currently, the fund modif ied duration is even lower

than the cap at 1.6. More importantly, the fund has

no holdings of nominal RSA Government bonds with

a maturity longer than ten years. The single biggest

exposure is to the R186 (maturity 2026). Relative to

longer-dated bonds, the R186 offers some protection

in case of a sell-off, in light of its position on the yield

curve as well as its relatively high running yield (partly

due to the high coupon rate of 10.5%).

Sources: IMF, Futuregrowth

By design, the Old Mutual Bond Fund will be most at

risk in the case of a sudden spike in yields. To this end,

the fund is currently managed with a neutral modif ied

duration position relative to its benchmark, the ALBI. In

addition, we have a very active yield curve position where

we favour bonds with a remaining term to maturity of

8 to 20 years. This is offset by a signif icant underweight

position to bonds with a maturity longer than 20 years.

Since we believe that the ultra-longer-dated bonds are

most at risk in the case of a Moody’s downgrade, the

underweight 20+ year position should mitigate some

of the risk of capital loss relative to the ALBI. Let’s be

clear, in a scenario of rising yields it will be impossible

to completely avoid capital loss, considering the risk

allowance of this particular portfolio.

GRAPH 4: FOREIGN OWNERSHIP OF EMERGING MARKET LOCAL CURRENCY BONDS

13

ESTIMATING THE IMPACT OF FUND RETURN IN CASE OF A YIELD SPIKEWe have used the same scenario to conduct stress

testing on the four funds. We opted to pick a simplistic,

yet realistic scenario of bearish yield curve steepening.

In this scenario, the front end of the yield curve stays

anchored. This is based on our base case view that the

South African Reserve Bank is likely to keep the repo

rate unchanged in light of weak economic growth, a

benign inflation outlook and the fact that the free-

floating exchange rate regime will be allowed, as it

has in the past, to serve as a pressure valve. At the

back end of the yield curve, we allowed the yield of

the longest-dated nominal bond (R2048) to rise by

100 basis points. This allowed for simple interpolation

of the yield curve points in between. The sharp rise at

the back end reflects the reality that foreign investors

GRAPH 5: TOTAL STOCK RETURN IN THE CASE OF BEARISH YIELD CURVE STEEPENING (STABLE CASH RATE, THE R2048 YIELD RISE BY 100BPS)

Source: Futuregrowth

hold these longer-dated bonds. It is assumed that

this happens in one day. The outcome of this scenario

on the same day total returns of the individual stocks

across the yield curve is illustrated in Graph 5 below.

The next step was to apply this simulation to the

four funds. The impact on absolute fund return is

summarised below. The outcome is exactly what the

various risk prof iles of the various funds intended. The

low risk funds would offer signif icant partial capital

preservation, while the Old Mutual Bond Fund will

reflect the greatest loss on the day.

It is important to note that the fund returns below are

for same day only. This does not consider base accrual,

which over time will offset some of the unrealised capital

“loss” on the day. It also does not take into account any

pull-back in yield that may follow in the days afterwards

– which is what we would expect.

-9.00%

-8.00%

-7.00%

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00% CA

SH +

MM

K

R20

8

R20

23

R18

6

R20

30

R21

3

R20

32

R20

35

R20

9

R20

37

R20

40

R21

4

R20

48

R20

44

0.0

0%

0.0

0%

-0.18

%

-1.0

0%

-2.0

7%

-2.4

4%

-2.7

5%

-3.6

9%

-4.4

6%

-4.6

1%

-5.6

8%

-6.2

4%

-7.18

%

-8.2

6%

15

TABLE 1: SAME DAY FUND RETURNS VERSUS BENCHMARK

CHART 6: ESTIMATED TOTAL ABSOLUTE FUND RETURN FOLLOWING A 100BPS YIELD CURVE BEAR STEEPENING

-4.00%

-3.50%

-3.00%

-2.50%

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

Money Market

0.00% -0.02%-0.33%

-3.45%

Interest Plus Income Bond

Since our positioning is relatively defensive, a market movement as per our scenario above will benefit the funds,

with the exception of the Interest Plus Fund, relative to their respective benchmarks. The table below summarises

the relative performance of the four funds.

FUND BENCHMARK RELATIVE

Old Mutual Money Market Fund 0.00 0.00 0.00

Old Mutual Interest Plus Fund -0.02 0.00 -0.02

Old Mutual Income Fund -0.33 -0.75 0.42

Old Mutual Bond Fund -3.45 -3.73 0.28

Published on www.futuregrowth.co.za/newsroom.Futuregrowth Asset Management (Pty) Ltd (“Futuregrowth”) is a licensed discretionary f inancial services provider, FSP 520, approved by the Registrar of the Financial Sector Conduct Authority to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. The fund values may be market linked or policy based. Market fluctuations and changes in exchange rates may have an impact on fund values, prices and income and these are therefore not guaranteed. Past performance is not necessarily a guide to future performance. Futuregrowth has comprehensive crime and professional indemnity in place. Performance f igures are sourced from Futuregrowth and IRESS.

15

1. A SOUND FINANCIAL PLAN HELPS BUILD CONFIDENCE Start by reviewing your financial goals and assessing

your circumstances. Your financial plan should

reflect your needs and risk profile and will take into

consideration your current financial position and the

time horizon you have available.

Once you’ve established your plan, review this annually

with the help of a certified financial planner. Regular

reviews will help set your mind at ease knowing that

your plan is still working as expected, despite any

short-term volatility.

2. A DIVERSIFIED PORTFOLIO WILL SPREAD YOUR RISK A sound financial plan will give you exposure to a

good mix of asset classes, including local and global

shares, bonds, cash and property.

A well-structured portfolio offers a balance between

inflation-beating returns and the stability of fixed

income assets. This should give you the confidence

that you’re still on track to meet your long-term goals.

USE THE TAX CUTS TO STAY ON COURSE

The personal income tax rates announced in

this year’s Budget provides consumers with

some breathing space and added cause

to review their investment strategies with

more optimism.

Perceptive investors should use the welcomed opportunity

to recommit themselves to their long-term investment

strategy, making prudent use of the extra cash in their

pockets to make their financial goals a reality.

A well-balanced and diversified portfolio with a long-

term perspective serves investors in both good and bad

times. If you are constantly changing your investment

strategy and time horizon based on your gut feeling,

you are unlikely to achieve your desired result over the

long term.

Similarly, if you don’t have a plan in place, staying focused

when markets are consumed by noise in the local and

global economies will be a challenge.

Here are eight considerations that will help you stay

on course.

AUTHORELIZE BOTHAMANAGING DIRECTOR: OLD MUTUAL UNIT TRUSTS

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3. THE WHOLE IS GREATER THAN THE SUM OF ITS PARTSOne of the advantages of properly structuring your

diversified portfolio is that a rise in one asset class

may offset a decline in another.

Staying the course means taking a view of the total

return over the long term. Being distracted by market

noise or the performance of only one aspect of your

portfolio may easily cause you to make unwise decisions.

4. DON’T TRY TO TIME THE MARKETResearch by Old Mutual shows that investors could

have lost out on as much as 44% growth in investment

returns if they had missed only the ten best days of

the JSE All Share index from 1999 to 2019.

A similar study in the USA showed that six of those

best ten days of growth followed soon after the ten

most volatile days by two weeks. This means that

markets can turn very quickly and its best to rather

stay the course than trying to make a calls by timing

the market.

5. YOU CAN’T COUNT ON CASHTaking money out of the market into cash may

seem like a safe bet in uncertain times, but your

long-term returns will be stunted. Cash is unlikely

to offer you above-inflation returns, and well below

that of equities, and even bonds.

Unless you have an urgent need for liquidity, cash

is not a prudent long-term option if you want your

money to appreciate in value.

6. KEEP AT ITThe best results are achieved by those who are in

the market for the long term. Saving from a young

age is beneficial as is making regular contributions.

If you intend building your long-term wealth, you

need to disregard short-term volatility. Staying the

course means investing through dips in the market

in the knowledge that the cheaper you buy, the

greater the potential gain.

7. FIND THE RIGHT PARTNER Old Mutual has been around for 175 years and is a

major global financial services company with the

tools, experience and people to help ensure that

your investments match your needs and goals. It’s

easier to stay the course when you have a trusted

adviser on your side.

8. DO WHAT’S BEST FOR YOURemoving the emotion from your investment decisions

is never easy. Drawing on the expertise of a financial

planner is a great way to do that when setting your

financial plan in motion.

Having an experienced and trusted planner at your

side also makes it easier for you stay on track with your

investment plan.

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Individual, special trusts, insolvent and deceased estatesYear of assessment ending 28 February 2021

Taxable Income (R) Rate of tax (R)

1 – 205 900 18% each Rand

205 901 – 321 600 37 062 + 26% of taxable income above 205 900

321 601 – 445 100 67 144 + 31% of taxable income above 321 600

445 101 – 584 200 105 429 + 36% of taxable income above 445 100

584 201 – 744 800 155 505 + 39% of taxable income above 584 200

744 801 – 1 577 300 218 139 + 41% of taxable income above 744 800

1 577 301 and above 559 464 + 45% of taxable income above 1 577 300

Year of assessment ending 29 February 2020

Taxable Income (R) Rate of tax (R)

0 – 195 850 18% of each Rand

195 851 – 305 850 35 263 + 26% of the amount above 195 850

305 851 – 423 300 63 853 + 31% of the amount above 305 850

423 301 – 555 600 100 263 + 36% of the amount above 423 300

555 601 – 708 310 147 891 + 39% of the amount above 555 600

708 311 – 1 500 000 207 448 + 41% of the amount above 708 310

1 500 001 and above 532 041 + 45% of the amount above 1 500 000

RATES OF TAXES

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Retirement fund lump sum withdrawal benefitsYear of assessment ending 28 February 2021

Taxable Income (R) Rate of tax (R)

0 – 25 000 0% of each Rand

25 001 – 660 000 18% of the amount above 25 000

660 001 – 990 000 114 300 + 27% of the amount above 660 000

990 001 and above 203 400 + 36% of the amount above 990 000

Retirement fund lump sum benefits or severance benefitsYear of assessment ending 28 February 2021

Taxable Income (R) Rate of tax (R)

0 – 500 000 0% of each Rand

500 001 – 700 000 18% of the amount above 500 000

700 001 – 1 050 000 36 000 + 27% of the amount above 700 000

1 050 001 and above 130 500 + 36% of the amount above 1 050 000

RATES OF TAXES

TRUSTS (OTHER THAN SPECIAL TRUSTS)Years of assessment ending on 28 February 2021

2021 2020

Trusts 45.0% 45.0%

Effective Capital Gains Tax Rate 36.0% 36.0%

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Rebates and threshold 2021 2020Primary rebate for individuals R14 958 R14 220Secondary rebate (65 years of age or older) in addition to primary rebate

R8 199 R7 794

Tertiary rebate (75 years of age or older) in addition to primary and secondary rebate

R2 736 R2 601

Tax threshold for individuals under 65 years of age R83 100 R79 000

Tax threshold for individuals 65 years of age to below 75 years of age

R128 650 R122 300

Tax threshold for individuals 75 years of age or older R143 850 R136 750

Interest exemption 2021 2020

Interest exemption for individuals under 65 years of age R23 800 R23 800

Interest exemption for individuals 65 years of age or older R34 500 R34 500

Donations tax and estate duty 2021 2020

Donations tax rate – first R30 m 20% 20%

Donations tax rate – amount above R30 m 25% 25%

Donations tax – annual exemption (individuals only) R100 000 R100 000

Estate duty rate – first R30 m 20% 20%Estate duty rate – dutiable estate above R30 m 25% 25%

Estate duty abatement (N1) R3.5 m R3.5 m

(N1) If, at the time of death, the deceased was widowed, the estate duty abatement is equal to R7 m, less the abatement that was applied to the estate of the first deceased spouse.

USEFUL INFORMATION AT A GLANCE

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Capital Gains Tax-Individuals 2021 2020Annual capital gain/loss exclusion R40 000 R40 000

Primary residence exclusion R2 m R2 m

Exclusion on death R300 000 R300 000

Once-off relief for disposal of qualifying small business assets(N1)

R1.8 m R1.8 m

Effective CGT rate – individuals and special trusts 0 - 18.00% 0 - 18.00%

TRAVEL ALLOWANCE

2021 2020

Travel allowance subject to PAYE(N2) 80% 80%

Travel allowance – maximum vehicle value (N3) R665 000 R595 000

(N1) When a small business with a market value not exceeding R10 million is disposed of.

(N2) If the employer is satisfied that at least 80% of the use of the vehicle will be for business purposes, then PAYE may be based on 20% of the travel allowance.

(N3) In terms of both the deemed and actual cost reduction methods, the value of the vehicle is capped at this amount. In respect of the actual cost reduction method, the capping applies in respect of wear and tear or lease payments and finance charges. To claim against a travel allowance received, a log book needs to be maintained.

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Travel allowance – Cost Scales Year ending 28 February 2021

Value of the vehicle(including VAT) (R)

FixedCost (R)

Fuel Cost (C)

Main-tenanceCost (C)

0 – 95 000 31 332 105.8 37.4

95 001 – 190 000 55 894 118.1 46.8

190 001 – 285 000 80 539 128.3 51.6

285 001 – 380 000 102 211 138.0 56.4

380 001 – 475 000 123 955 147.7 66.2

475 001 – 570 000 146 753 169.4 77.8

570 001 – 665 000 169 552 175.1 96.6

> 665 000 169 552 175.1 96.6

Reimbursed travelIf an employee is reimbursed for business kilometres travelled at a rate not exceeding R3.98 per kilometre, no tax will be payable provided:• the reimbursement is based on actual business kilometres

travelled; and• no other compensation in the form of a further travel

allowance or reimbursement is paid by the employer to the employee.

The reimbursement exceeding a rate of R3.98 per kilometre must be included as remuneration to calculate the amount of employees’ tax to be withheld.

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COMPANY CARTaxable value per month 2021 2020

First company car:

• If subject to maintenance plan 3.25% 3.25%

• If no maintenance plan 3.50% 3.50%

Second and subsequent company cars (not used primarily for business)

• If subject to maintenance plan 3.25% 3.25%

• If no maintenance plan 3.50% 3.50%

NOTES:1. The above monthly rates apply to the determined value

of the vehicle. From 1 March 2011, VAT is included in calculating the determined value.

2. From 1 March 2011, reductions to the fringe benefit value for private travel and/or costs borne by the employee for insurance, maintenance or fuel for private travel are only made on assessment. In order to claim a reduction, a logbook needs to be maintained.

3. 80% of the fringe benefit value, not reduced for private use or costs above, is subject to PAYE. Where the employer is satisfied that at least 80% of the use of the vehicle will be for business purposes, then PAYE may be based on 20% of the fringe benefit value.

4. Where the employer holds the vehicle under an operating lease, as defined in the Income Tax Act, the fringe benefit value is not calculated on the percentage method per the table above, but is the sum of the actual lease costs and the cost of fuel.

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OFFICIAL RATE OF INTERESTThe official rate of interest is:• Loan in Rands: 100 basis points above the repurchase

(repo) rate.• Loan in foreign currency: 100 basis points above the

equivalent of the repo rate for that currency.If the repo rate changes, the official rate changes from the commencement of the following calendar month.

The current official rate is set at 7.25% with effect from 1 February 2020.

DEDUCTIONS FROM INCOME – INDIVIDUALS Retirement fundsThe deductible amount for current contributions to pension, provident and retirement annuity funds in a year of assessment is limited to 27.5% of the greater of the person’s remuneration for PAYE purposes or taxable income (excluding any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit).

The deduction is further limited to the lesser of R350 000 or 27.5% of taxable income prior to the inclusion of a taxable capital gain. Any contributions exceeding the limitations are carried forward to the immediately following year of assessment and are deemed to be contributed in that following year. The amounts carried forward are reduced by contributions set off against retirement fund lump sums and retirement annuities.

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TRANSFER DUTYWith effect from 1 March 2020 the rates are as follows (acquisition is not subject to VAT):

Property value (R) Rate of tax (R)

1 – 1 000 000 0%

1 000 001 – 1 375 000 3% of the value above R1 000 000

1 375 001 – 1 925 000 R11 250 + 6% of the value above R 1 375 000

1 925 001 – 2 475 000 R44 250 + 8% of the value above R 1 925 000

2 475 001 – 11 000 000 R88 250 +11% of the value above R2 475 000

11 000 001 and above R1 026 000 + 13% of the value exceeding R11 000 000

MEDICAL EXPENSES2020/2021 year of assessmentMedical aid contributions or qualifying medical expenses are not claimable as deductions. A credit-only (tax rebate) system applies.

If the taxpayer is younger than 65 and is not disabled and has no disabled dependants:In respect of medical aid contributions, the amount of the credit is limited to:• R319 if the contributions are in respect of the taxpayer only• R638 in respect of the taxpayer and one dependant• R215 in the case of each additional dependant

In determining the tax payable, individuals younger than 65 are allowed to deduct 25% of an amount equal to the sum of qualifying medical expenses paid and borne by the individual and an amount by which medical scheme contributions paid by the individual exceed 4 times the medical scheme fees tax credits for the tax year, limited

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to the amount which exceeds 7.5% of taxable income (excluding retirement fund lump-sums and severance benefits).

If the taxpayer is younger than 65 and is disabled or has a disabled dependant or, alternatively, is 65 and older:An additional credit is allowed and is calculated as 33.3% of the sum of qualifying medical expenses paid and borne by the individual and an amount by which medical scheme contributions paid by the individual exceed 3 times the medical scheme fees tax credits for the tax year.

Donations to certain Public Benefit Organisations (PBOs)The deduction is limited to 10% of taxable income calculated excluding retirement fund lump sums and severance benefits. The deduction claimed must be supported by a Section 18A certificate issued by the PBO.

COMPANIES AND CLOSE CORPORATIONSNormal tax on taxable income 2021 2020

Companies (other than entities below) 28.0% 28.0%

Companies (other than entities below) effective capital gains tax rate

22.4% 22.4%

Turnover based presumptive tax system (elective) for micro businesses (turnover not exceeding R1m):

R1 – R335 000 0.0%

R335 001 – R500 000 1.0% of the amount above R335 000

R500 001 – R750 000 R1 650 + 2.0% of the amount above R500 000

R750 001 and above R6 650 + 3.0% of the amount above R750 000

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Non-resident companies with a branch in the Republic on SA source income

28% 28%

Personal service providers 28% 28%

Income Tax on Small Business Corporations for financial years ending between 1 April 2019 to 31 March 2020 (N1):

R1 – R83 100 0%

R83 101 – R365 000 7.0% of the amount above R83 100

R365 001 – R550 000 R19 733 + 21.0% of the amount above R365 000

R550 001 and above R58 583 + 28.0% of the amount above R550 000

Public benefit organisations and recreational clubs (trading income only)

28.0% 28.0%

(N1) Primary requirements to qualify as a small business corporation: all the shares are held by individuals, none of whom hold shares in any other company (other than listed shares, unit trusts and shares in certain tax exempt entities); the gross income of the corporation may not exceed R20m for the year of assessment; not more than 20% of the gross income of the company may comprise investment income and income from rendering a personal service and the company is not an ‘employment company’ or a ‘personal service provider’.

WITHHOLDING TAXESA withholding tax is levied in the Republic on the following amounts (subject to double tax treaty relief):

Dividends taxDividends tax is a tax on the beneficial owner of a dividend at the standard rate of 20%. The taxation of the dividend may be subject to numerous exemptions, including dividends paid to South African resident companies and Public Benefit Organisations as beneficial owners and where the dividend is taxed in the hands of the recipient. In the case of dividends in kind (other than in cash) the tax is

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borne by the company that declares and pays the dividend. REITs dividends remain fully taxable for South African residents and non-residents are only subject to dividends tax.

Foreign dividendsForeign dividends received by individuals from foreign companies (shareholding of less that 10% in the foreign company) are taxable at a maximum effective rate of 20%. No deductions are allowed for expenditure to produce foreign dividends.

InterestA final withholding tax on interest paid to non-residents is levied at 15%. Numerous exemptions apply, including interest arising from banks, government debt and listed debt.

Royalties and similar payments to non-residentsA final withholding tax at the rate of 15% of the gross royalties payable in respect of royalties paid to non-residents for the use of patents, designs etc. in the Republic.

Disposal of immovable propertyA withholding tax in advance of a non-resident’s capital gains tax liability must be withheld by the purchaser in respect of the disposal by a non-resident of immovable property with a value in excess of R2m.

The rates are: 7.5% of the purchase price if the seller is a natural person, 10% if the seller is a company and 15% if the seller is a non-resident trust. A lower withholding rate than those set out above may be granted on application.

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Foreign entertainers and sportspersonsA final withholding tax of 15% of the gross revenue is payable.

INTEREST RATES PAYABLE/RECEIVABLE1 Nov 2019 1 Mar 2019

Late or underpayment of tax 10% p.a. 10.25% p.a.

Refund of overpayment of provisional tax 6% p.a. 6.25% p.a.

Refund of tax on successful appeal or where the appeal was conceded by SARS

10% p.a. 10.25% p.a.

Refund of VAT after prescribed period 10% p.a. 10.25% p.a.

Late payment of VAT 10% p.a. 10.25% p.a.

Customs and Excise 10% p.a. 10.25% p.a.

VALUE-ADDED TAX (VAT)VAT is levied on taxable supplies by registered VAT vendors at the standard rate of 15%. The compulsory VAT registration threshold is a turnover of R1 million per annum and for a voluntary registration, the threshold is a turnover of R50 000 per annum. A number of supplies are zero rated, for example exports from the Republic and other supplies are classified as exempt, for example financial services and residential accommodation.

Non-resident suppliers of ‘electronic services’ as prescribed by the Minister by regulation, will be required to register for VAT at the end of any month where the total value of the taxable supplies exceeded R1 million in the previous 12-month period.

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SECURITIES TRANSFER TAX (STT)STT is levied at a rate of 0.25% on the higher of the consideration paid and the market value in respect of the transfer or redemption of listed or unlisted securities, including that of members’ interests in close corporations.

SKILLS DEVELOPMENT LEVY (SDL)Employers with a payroll of R500 000 or more per annum must account for SDL. SDL is calculated at 1% of the leviable amount of the monthly payroll including directors’ fees.

UNEMPLOYMENT INSURANCE FUND (UIF)Unemployment insurance contributions are payable monthly by employers on the basis of a contribution of 1% by the employer and 1% by the employees, based on employees’ remuneration below a certain amount. The employer and employee contributions are both calculated at a rate of 1% of the employee’s gross remuneration up to a prescribed remuneration threshold (before the deduction of pension fund, retirement annuity fund and qualifying medical aid contributions), where applicable. The maximum remuneration on which UIF contributions are calculated is R14 872 per month or R178 464 per annum. Note that the remuneration threshold is subject to change from time to time.

Foreign nationals employed on a temporary basis in South Africa are also liable to contribute towards UIF.

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For more information, please contact your financial adviser, broker or visit

www.oldmutual.co.za

Old Mutual Life Assurance Company (SA) Limited is a licensed FSP.

With compliments from Old Mutual in association with BDO.

Copyright of this publication rests with BDO Tax Services (Pty) Ltd. All rights reserved.

Copying of this information, in whole or in part, is prohibited without prior written permission.

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IMPORTANT INFORMATIONOld Mutual Wealth is brought to you through several authorised Financial Services Providers in the Old Mutual Group who make up the elite service offering. This document is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein. Old Mutual Wealth and its directors, officers and employees shall not be responsible and disclaims all liability for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of or which may be attributable, directly or indirectly, to the use of, or reliance upon any information contained in this document.

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