BUDGETSPEECH2018

In celebrating the centenary of Nelson Mandela we are not merely honouring the past, we are building the future - President Cyril Ramaphosa SONA 2018.

CONTENTS

KERRIN LAND LAYING A “TOUGH” FOUNDATION FOR A “HOPEFUL” FUTURE

IZAK ODENDAAL & DAVE MOHR FISCAL CONSOLIDATION ON TRACK, FRIENDLY FOR INVESTORS

ELIZE BOTHA INVEST TODAY TO FUEL ECONOMIC GROWTH TOMORROW

CHRIS POTGIETER & MANDY DIX-PEEK TAXING THE WEALTHY, BUT NO “WEALTH TAXES”

TAX TABLES

RETIREMENT REFORMS

BUDGET PROPOSALS

BOTTOM LINE

When we think about the long term, we often do so in terms of the

consequences our actions today will have on the next generation, our

children. However, research by Britannica concluded recently that the

lifespan for humans is now some 114 years, up from the 20 years you

could expect to live 2000 years ago. This increase can be attributed to

many factors, including a better understanding of diseases, improvements

in medicine, cleaner water and technological advancements. With

ongoing development in all areas of human life, rising life expectancy

is a trend unlikely to reverse anytime soon. So as we, as a nation, brace

ourselves for the “tough” years ahead, of trying to restore balance to the

budget, discipline to the fiscus and efficient service delivery to government

sectors, uppermost in our minds is whether this will set us on a path for

growth, for prosperity and a more “hopeful” future for all.

THE NEED FOR EDUCATIONNo one can argue against the need to ensure we have an education

system that equips our youth with the skills they’ll need to constantly

learn, adapt and thrive in the rapidly changing world of today. For an

emerging economy such as South Africa, with 47% of our population in

the 15 years or younger age band, it's even more critical.

According to minister Gigaba, the largest reallocation of resources

towards government’s priorities was on higher education and training,

amounting to additional funding of R57 billion over the medium term.

As a result, this is the fastest-growing spending category, with an annual

average growth of 13.7 percent. This allocation will be administered

under the reinvigorated National Student Financial Aid Scheme (NSFAS).

The objective of the increased provision of funds for education, tertiary or

otherwise, is to ultimately reduce youth unemployment and the number of

young people committed to a life of dependency on state social grants

or worse. Education is also key in building the confidence of our youth

to be innovative in tackling our country’s challenges with fresh ideas.

MONEY CAN’T BUY EVERYTHINGWhile increased funding is a great start, effective education will also

require improved government delivery. Even if both of these are in place,

delivering graduates with fresh ideas and solid book learning are not

on their own sufficient to rapidly change our current reality of youth

unemployment (>50%) and the alarming number of our economically

active population that is unskilled (34%). It is clear that while a long-term

focus on quality education will benefit us, in the short term our economy

is missing a critical pillar.

President Ramaphosa committed to a Jobs Summit in the 2018 State of

the Nation address: “One of the initiatives will be to convene a Jobs

Summit within the next few months to align the efforts of every sector

and every stakeholder behind the imperative of job creation. The summit

will look at what we need to do to ensure our economy grows and

becomes more productive, that companies invest on a far greater scale,

LAYING A “TOUGH” FOUNDATION FOR A “HOPEFUL” FUTUREKERRIN LAND CEO: OLD MUTUAL WEALTH

that workers are better equipped, and that our economic infrastructure

is expanded”. I am sure corporate South Africa and labour movements

will rise to the call – certainly for us as Old Mutual, socially responsible

business is about ensuring future sustainability of our country and the

billions of rands of investments we’ve already made in quality education

and infrastructure have been with that in mind.

But the real power of successful economies lies not in big business, but

in the thousands of small businesses at the heart of driving growth. And

real power for change, of a problem this vast, will not come from the

plans of a few but from many of us as individuals, who are in a position

to do so, stepping forward.

As successful business people, entrepreneurs, retirees after long careers,

we have skills, experience, wisdom and sometimes the financial means

to lend a hand – we merely need the will to do so. Can you create even

just one internship role or learnership in your small business? Can you

make some time to offer yourself a mentor for young students? Are you

able to invest a small portion of your capital into a promising start-up

business, along with active involvement in providing input to the young

entrepreneur who’s launching it?

Newly elected South African president Cyril Ramaphosa's State of the

Nation Address ended with quoting late music icon Hugh Masekela's

"Thuma Mina" (Send Me).

"I WANNA BE THERE WHEN THE PEOPLE START TO TURN IT AROUND

WHEN THEY TRIUMPH OVER POVERTY

I WANNA LEND A HAND

SEND ME" - HUGH MASEKELA

CAN WE AS INDIVIDUALS RISE TO THAT CALL?

T he dramatic political developments of the past few weeks provided

a very unusual backdrop to the 2018 Budget Speech. What does

this mean for investors?

FISCAL CONSOLIDATION APPEARS TO BE BACK ON TRACKYears of running budget deficits have resulted in rapid growth of the

overall debt-to-GDP ratio. Fiscal consolidation is the process of reducing

the deficit (the shortfall of tax revenue relative to spending which has to

be made up by borrowing).

Investors were looking for a credible and sensible approach to consolidation.

By credible we mean a plan that markets and ratings agencies find

convincing, based on realistic assumptions with a high likelihood of being

implemented. Sensible refers to reducing the deficit without imposing

crippling austerity (squeezing the last drop from taxpayers and slashing

essential spending) that can trip the economy’s nascent recovery.

The deficit for the current fiscal year is likely to be 4.3% of GDP, in line with

the October Medium-Term Budget’s revised projection. But unlike October,

there is a plan to narrow the deficit over time by cutting R85bn on the

spending side over the next three years and raising additional revenue.

VAT INCREASE DEMONSTRATES COMMITMENT TO SUSTAINABILITYAn additional R36bn in revenue will be raised, mostly by hiking the

Value-Added Tax (VAT) rate to 15% from 14%, the first such increase in

25 years. The VAT increase will raise an additional R22bn. Other indirect

taxes such as the fuel levy and excise duties will add around R2bn. On

the direct personal tax side, there is some fiscal drag relief (R7.3bn) but

government will still get R6.8bn from fiscal drag. However, there are no

further increases in direct individual taxes.

The budget deficit is therefore projected to decline to 3.6% in the

subsequent two years, eventually settling at 3.5%. If this is achieved,

the debt-to-GDP ratio can stabilise at 56% in 2022, an acceptable

level in the global context, and much better than the almost 60% ratio

predicted in October.

By taking the politically unpopular, but pragmatic step of hiking VAT,

government demonstrates its commitment to stabilising its finances and

to achieving a more sustainable footing. This, together with the stronger

global economy and improved domestic growth outlook, should convince

Moody’s to maintain our investment grade credit rating.

If there is a weakness in the Budget, it is probably the failure to

meaningfully address the funding crisis at State Owned Enterprises

(SOEs). Many SOEs (in particular Eskom, the largest and most geared

entity) are running out of cash and are unable to fund themselves due to

the extreme reluctance of institutional lenders (banks, pension funds and

DAVE MOHR & IZAK ODENDAAL, OLD MUTUAL MULTI-MANAGERS

WHAT SHOULD INVESTORS MAKE OF THE BUDGET SPEECH?

asset managers) to lend them money. Government cannot afford further

bail-outs and the Budget emphasised that any further bail-outs will have

to be deficit neutral, i.e. funded by selling assets, but still aimed at

reducing exposure to guarantees. Unfortunately, there is no detail as

yet. Private sector participation is still on the cards, but only “over the

medium term”. However, the change to Eskom’s Board is an important

step (and something that falls outside the purview of the Treasury).

AN INVESTOR-FRIENDLY BUDGETThe global backdrop to this Budget is far more favourable than in recent

years. Global economic activity is expanding at the fastest pace in a

decade and is spread across virtually all the major economies. This in itself

should support South Africa’s modest economic upswing, especially with

commodity prices firming up. However, it also means that companies can

generate decent profit growth, which is reflected in rising share prices.

Despite the wobble in equity markets in early February, inflation and

interest rates remain low after gradual increases. The macroeconomic

environment therefore remains favourable.

From the point of view of individual investors, the Budget is positive. For

one thing, there are no additional taxes on investment returns (including

dividend withholding tax and capital gains tax).

By putting state finances on a more sustainable path, government should

create a more accommodative overall investment climate. The 2018

Budget is probably enough to secure South Africa’s current Moody’s

credit rating, reducing the risk of index exclusion and a forced selling

by foreign investors. It also makes it easier for the Reserve Bank to focus

on the inflation outlook instead of risk management. This leaves scope

for interest rate cuts. Longer-term borrowing costs (bond yields) should

also decline further due to the renewed focus on fiscal consolidation,

supporting bonds and other asset classes. The increases in indirect taxes

should not materially change the positive inflation outlook, and this is a

further positive for bonds.

A NICE SURPRISE FOR OFFSHORE INVESTINGWith the offshore allocation of balanced funds lifted to 30% from 25%, fund

managers will have more freedom in allocation based on expected return

and valuation. Institutional investors can also increase African exposure

to 10% from 5%. This is probably the biggest surprise for local investors.

The further easing of capital controls demonstrates confidence in the local

economy and local assets on the part of government.

Offshore exposure (currently at the maximum of 25% for most balanced

funds, including ours) will be carefully reconsidered. For one thing, the

rand is probably in fair to slightly overvalued territory on a purchasing

power parity (PPP) basis after the strong appreciation of the past two years.

A ccording to the National Development Plan (NDP), South

Africa needs a capital injection to the value of 25% of its GDP

to achieve the targeted economic growth of 5.4% by 2030. While

the Finance Minister focused on his plan for fiscal consolidation and

economic growth in the 2018 National Budget Speech as a solution

to this problem, the shortfall can be partly funded by improved savings

levels of both the public and private sector.

South Africans, we have seen are notoriously bad savers. The 2017

Old Mutual Savings and Investment Monitor reported that while South

African households allocate 16% of their income to servicing debt, a

poor 3% goes towards savings.

Comparative with other BRICS Nations, in 2016 South Africa showed

a saving to GDP rate of 16.16%; 0.35% higher than Brazil. China,

on the other hand, saved over 46.05%, followed by India at 30.8%

and Russia at 25.36%.

Higher savings reserves mean that consumers can absorb unexpected

expenses without going further into debt or turning to the State or family

for social assistance.

Current low rates of savings and high levels of debt means that South

African households are essentially dissaving – in that they are spending

and borrowing more than they are able to save – which has the potential

to seriously hinder our chances of achieving the growth necessary to

bring about real change for investors’ financial future.

IT ALL STARTS WITH A CHANGE OF CULTUREWhilst it may appear challenging for South African households to save

due to hindering economic factors we currently have low inflation,

coupled with stagnant salaries, as well as historically low employment

rates which result in higher dependency ratios. It is important to note

that the key determinant of increased savings is a change in culture.

In South Africa, our growing poverty rate – despite a recent increase in

government grants and continuous new job creation – can be eliminated

by wealth creation. Creating wealth requires some discipline and a

move away from instant gratification to invest for the future. It also

requires a general realisation with regards to the actual costs involved

in funding retirement, so that people are able to plan sufficiently.

There is a great opportunity for us, as a country, to grow our wealth by

changing the culture of spending to a culture of saving and investment.

We have reason to be encouraged when considering that other

developing countries, such as Singapore and Thailand, were in the same

position 30 years ago, and have managed to grow their economies

in large part due to improved household savings and investments. For

example, the share of China’s population living in extreme poverty in

1980 was over 88%, this number had dropped to just under 2%. While

ELIZE BOTHAMANAGING DIRECTOROLD MUTUAL UNIT TRUSTS

INVEST TODAY TO FUEL ECONOMIC GROWTH TOMORROW

we understand that in the low income bracket access to disposable

income for saving might be a challenge, a market of almost R58bn

in informal savings tells us that we might be missing an opportunity to

bring further savings into the economy.

A PROMISING PERSPECTIVEIt is encouraging however, that the research findings of the 2017 Old

Mutual Savings and Investment Monitor showed a slight improvement

in South Africans’ confidence in their own ability to make responsible

financial decisions.

While this positive shift in perception is no doubt a step in the right

direction, as it shows a growing awareness of the serious implications

and vicious financial consequences of bad debt and frivolous spending,

strained economic conditions have prevented this new perspective from

resulting in tangible change when it comes to saving for the future.

A NEW DAWNArguably most highly anticipated in President Ramaphosa’s maiden

State of the Nation Address, was how we are going to improve our

economy. He used the word “economy” 18 times in his hour and a

half speech and spoke passionately from a macro perspective about

the importance of fuelling economic growth through the increased

investment into the economy, which will in turn create employment and

trigger a great level of economic transformation.

While some people may have listened to this portion of the address

and assumed that the call of duty for increased investment was aimed

at government and businesses, the truth is that individuals are just as

responsible for changing their individual circumstances.

REMEMBER THE BUTTERFLY EFFECTThere is an interesting saying that “a butterfly can flap its wings in New

Mexico and cause a hurricane in China”. The idea that small actions

can have a far-reaching and long-lasting effect is a useful concept that

can be applied to both life and finances. Similarly, individual investors

tend to underestimate their impact in the bigger picture and don’t realise

the far reaching effects of their own behaviour.

Rather than allow yourself to get caught up in the market noise, focus

on allowing the Butterfly Effect to set in motion over time. It is never

too late to start making little changes to your spending and saving

habits to ensure a more secure financial future for yourself and the

broader economy.

Economic realities continue to put downward pressure on South Africans’

ability to conserve money for the future, but it is up to us to make the

cultural change necessary to increase household savings and, ultimately,

fuel the kind of GDP growth that our country requires.

CHRIS POTGIETER & MANDY DIX-PEEKDIRECTORS: OLD MUTUAL WEALTH TRUST COMPANY

TAXING THE WEALTHY, BUT NO “WEALTH TAXES”

T he 2018 Budget has spared high net worth individuals from threatened “wealth taxes” to a large extent. It was a fine balancing act between

introducing an increase in VAT which has been argued to be regressive i.e. mostly impacting the poor, while also taking a larger amount from the more affluent portion of SA society. There were no changes to the inclusion rate and annual exclusion amount for Capital Gains Tax for individuals, trusts and companies. No changes were made to Dividends Withholding Tax, the top marginal individual income tax rate and the flat tax rate on trusts. However, there are a number of other notable increases in tax and tax thresholds impacting high income earners and high net worth individuals.

Firstly, there was again no adjustment to the top four tax brackets for individuals. There has been no increase in these income tax brackets for two years which, when inflation is taken into account, means that high income earners are paying more tax. Below inflation adjustments were made to the bottom three brackets for individuals.

Secondly, Donations Tax has been increased from 20% to 25% for donations in excess of R30m made in a tax year and Estate Duty has similarly been increased from 20% to 25% on dutiable estates in excess of R30m. This is significant for high net worth individuals with dutiable estates over R30m as a 25% increase in estate duty is a hard pill to swallow but there are estate planning opportunities to assist in minimizing the estate duty liability for example, the use of trusts. While Trusts have been the subject of much debate regarding their usefulness/viability after the introduction of section 7C of the Income Tax Act, we still believe that they have an important role in effective estate planning.

The ability to diversify wealth overseas has also been supported by this Budget. While individual offshore allowances remain as they were, institutional offshore allowances have increased by 5%. This is enlightened thinking from Treasury as it gives investors greater investment freedom and reduces the risk of overexposure to a single market and geography.

Finally, when it comes to spending wealth one would have to pay significantly more in duties and levies on a number of goods, ranging from the basic such as fuel to luxury items. The most notable of these are:

- An increase of 52c/litre for fuel (22c/litre in the general fuel levy; 30c/litre in the Road Accident Fund levy)

- Increases in alcohol and tobacco excise duties of between 6% and 10%- An increase in ad valorem excise duties for luxury goods from 7% to 9

MORE ON TRUSTSIn summary, Trusts were spared in this Budget in that no significant changes were made to the taxation of these useful estate planning vehicles. Distributions made by Trusts to beneficiaries, the so-called “conduit principle”, was not attacked as it has been in the US and UK.

The taxation of Trusts remains unchanged in that a trust’s taxable income will continue to be taxed at a flat rate of 45% but if income is distributed it will be taxed in the beneficiary’s hands. Trusts’ capital gains inclusion rate also remains unchanged at 80% but if the gains are distributed to capital beneficiaries they will pay the capital gains tax at the rate for individuals. Because the conduit principle remains intact the benefit of income splitting and the taxation of Trust income and gains in the hands of beneficiaries is still a valuable tax-saving tool.

The question is how do we continue to use Trusts as an effective estate planning tool going forward even in the light of the introduction of Section 7C last year. Section 7C effectively made the introduction of funds into Trusts problematic. However, there are ways to mitigate against the problem in certain instances. For example, by correctly wording one’s Last Will and Testament, one can afford the appropriate discretion to executors to limit the impact of Section 7C on any part of an estate being paid to a Trust rather than directly to the heir.

Thorough consideration of the implications of Section 7C of the Income Tax Act becomes even more important when one considers the Budget Speech proposal that the official rate of interest in the Income Tax Act be adjusted. The official rate of interest is the current repurchase rate plus 100 basis points (currently 7.75%). This rate is used in terms of section 7C to calculate the annual donation amount on low interest or interest-free loans to Trusts and Companies for donations tax purposes. The proposal is for this rate to be increased to a level closer to the prime rate of interest. The annual donations on these types of loans will have to be reviewed to avoid underpayment issues.

2. ESTATE DUTY AND DONATIONS TAX

The table below illustrates the taxation of the dutiable estate after allowance for the deductions and abatement:

ESTATE DUTY RATES FOR PERSONS DYING ON OR AFTER 1 MARCH 2018

Dutiable Estate Rate of Estate Duty

R0 - R30 000 000 20% of each R1

R30 000 001 and aboveR6 000 000 + 25% of dutiable estate above R30 000 000

The table below illustrates the taxation of donations after the above mentioned exemptions:

Donations Tax Rates

Taxable Donation Rate of Donations Tax

R0 - R30 000 000 20% of each R1

R30 000 001 and above R6 000 000 + 25% of taxable donation above R30 000 000

3. INTEREST EXEMPTION

The interest exemption thresholds remain as follows:

• R23 800 per annum for taxpayers under the age of 65,

• R34 500 per annum for taxpayers aged 65 years and older.

It is expected that these amounts will remain unchanged in future.

4. DIVIDEND WITHHOLDING TAX

The local dividend withholding tax rate remains unchanged at 20%.

5. TAXATION OF SMALL BUSINESSES

The tax rates for small business corporations (gross income not exceeding R20 million) for financial years ending on any date

1. PERSONAL INCOME TAX

In acknowledgment of the financially constrained taxpayer, the 2018 Budget brings about no adjustments to the top four income tax brackets and below inflation adjustments to the bottom three brackets. The table below illustrates the adjusted tax rates applicable to individual taxpayers and special trusts for the 2018/2019 tax year:

TAX RATES FOR NATURAL PERSONS AND SPECIAL TRUSTS 2018/2019 TAX YEAR

Taxable Income Rate of tax

R0 - R195 850 18% of each R1

R195 851 - R305 850 R35 253 + 26% of taxable income above R195 850

R305 851 - R423 300 R63 853 + 31% of taxable income above R305 850

R423 301 - R555 600 R100 263 + 36% of taxable income above R423 300

R555 601 - R708 310 R147 891 + 39% of taxable income above R555 600

R708 311 - R1 500 000 R207 448 + 41% of taxable income above R708 310

R1 500 001 and above R532 041 + 45% of taxable income above R1 500 000

With effect from 1 March 2018, all trusts excluding special trusts are taxed at a flat rate of 45%.TAX REBATES

2017/2018 Tax Year

2018/2019 Tax Year

Primary rebate R13 635 R14 067

Secondary rebate (Age 65 to below 75) R7 479 R7 713

Tertiary rebate (Age 75 and older) R2 493 R2 574

TAX THRESHOLDS

2017/2018 Tax Year

2018/2019 Tax Year

Below age 65 R75 750 R78 150

Age 65 to below 75 R117 300 R121 000

Age 75 and older R131 150 R135 300

This means that a taxpayer earning less than these thresholds will pay no income tax in the 2018/2019 tax year.

The examples below demonstrate the impact of the proposed changes on individuals younger than 65:

BUDGET SPEECH 2018: BUDGET TAX CHANGES

TAX IMPACT FOR INDIVIDUALS YOUNGER THAN 65

Taxable income (R)

2017/18 rates (R)

Proposed 2018/19 rates (R)

Tax change (R)

% change

150 000 13 365 12 933 -432 -3.2%

300 000 49 348 48 265 -1 083 -2.2%

500 000 115 824 113 808 -2 016 -1.7%

750 000 212 490 210 474 -2 016 -0.9%

1 000 000 314 990 312 974 -2 016 -0.6%

1 500 000 519 990 517 974 -2 016 -0.4%

2 000 000 744 990 742 974 -2 016 -0.3%

BUDGET SPEECH 2018: BUDGET TAX CHANGES CONTINUED

between 1 April 2018 and 31 March 2019:

Tax table applicable to small business corporations

Taxable Income (R) Rate of Tax (R)

R0 – R 78 150 0% of taxable income

R78 151 – R 365 000 7% of taxable income above R78 150

R365 001 - R550 000 R20 080 + 21% of taxable income above R365 000

R550 001 and above R58 930 + 28% of taxable income above R550 000

The tax rates for micro businesses (turnover not exceeding R1 million per year) for financial years ending on any date between 1 March 2018 and 28 February 2019:

Tax table applicable to turnover for micro businesses

Taxable Turnover (R) Rate of Tax (R)

R0 - R335 000 0% of taxable turnover

R335 001 - R500 000 1% of taxable turnover above R335 000

R500 001 - R750 000 R1 650 + 2% of taxable turnover above R500 000

R750 001 and above R6 650 + 3% of taxable turnover above R750 000

8. TRANSFER DUTY

The rates of transfer duty remains unchanged at:

RATE OF TRANSFER DUTY

Property Value (R) Rate of Tax (R)

R0 – R900 000 0% of property value

R900 001 - R1 250 000 3% of property value above R900 000

R1 250 001 - R1 750 000 R10 500 + 6% of property value above R1 250 000

R1 750 001 - R2 250 000 R40 500 + 8% of property value above R1 750 000

R2 250 001 - R10 000 000 R80 500 + 11% of property value above R2 250 000

R10 000 001 and above R933 000 + 13% of property value above R10 000 000

9. MEDICAL TAX CREDITS

With effect from 1 March 2018, the initial monthly tax credit (for contributions to medical schemes) for all tax payers is R310 and for a taxpayer and his or her first dependent is R620. An

additional monthly credit of R209 is afforded to each additional dependent. This is a below- inflation increase to the medical tax credits.

For taxpayers younger than the age of 65 an additional tax credit will be given of an amount equal to 25% of the aggregate of:

• the amount by which their contribution exceeds four times their tax credit (for contributions), plus

• their out of pocket expenses

that exceeds 7.5% of their taxable income (excluding any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit).

For taxpayers 65 years of age or older, or taxpayers who are disabled or who have disabled dependents, an additional tax credit will be given of an amount equal to the aggregate of:

• 33.3% of the amount by which their contribution exceeds three times their tax credit (for contributions), plus

• 33.3% of their out of pocket expenses.

The additional tax credit afforded to employees who are 65 years and older with respect to their contributions to medical schemes may also be accounted for in the monthly PAYE calculations. This facility is also afforded to provisional tax payers who are 65 years of age and older.

Where multiple taxpayers contribute towards the medical scheme or medical expenses of a third party (for example, adult children jointly contributing to a parent’s medical scheme), they may excessively be benefitting from this rebate. It is thus proposed that the medical tax credit should be apportioned between the contributing taxpayers where they carry a share of the medical scheme contribution or medical expenses.

The medical tax credit regime will be reviewed once the Davis Tax Committee presents its recommendations.

10. TAX-FREE SAVINGS ACCOUNTS

TFSA remains unchanged:

• Contributions are currently subject to an annual limit of R33 000 and a lifetime limit of R500 000.

• Investment returns, growth and payouts in respect thereof are tax free.

BUDGET SPEECH 2018: BUDGET TAX CHANGES CONTINUED

CONCLUSIONAs was the case with the last two budgets, this budget again attempts to address various divergent agendas and economic realities. Faced with a flat lining tax take, dismal growth and even more financial commitments (viz; worsening budget deficit, SOE bail-outs, NHI and higher education), Minister Gigaba decided to take the plunge and increase the VAT rate. In arriving at this decision it was assessed that our current company tax rate is comparable to peer nations, and that individual taxpayers can bear no further tax hikes.

The transformation of the South African economic landscape – both the nature of the economy and who own and control it – remains an important focus. However education and job creation remains the key focus and this has been emphasised in both President Ramaphosa’s SONA and Minister Gigaba’s Budget address.

It is self-evident that individual taxpayers need to invest their hard-earned money in a tax-efficient way. In this regard, the tax-efficient benefits of retirement funds and TFSAs appear ever sweeter. It would be foolhardy to attempt to navigate the complex regulatory and investment environment without financial advice.

Government has undertaken to facilitate a more investor friendly environment while pursuing a radical transformation of the South African economic landscape. The Minister called on all South Africans to “find in ourselves the ethical leadership of Madiba, the selflessness of Albertina Sisulu and the humanity of Hugh Masekela” and that this should be the year of “renewal, revitalisation and a step change in progress in fostering inclusive economic growth which rolls back unemployment, poverty and inequality.”

He also welcomed the return of Old Mutual stating that this is a major vote of confidence in South Africa.

PLEASE NOTE THAT THE INFORMATION PROVIDED IN THIS CIRCULAR IS BASED ON PROPOSALS MADE IN THE NATIONAL BUDGET SPEECH DELIVERED ON THE 21st OF FEBRUARY 2018 IN PARLIAMENT. UNTIL THE PROPOSALS HAVE FORMALLY BEEN PROMULGATED IN LEGISLATION IT WILL ONLY BE VIEWED AS PROPOSALS.

INCOME TAX CALCULATOR If you want to calculate your monthly income tax and compare it to that of last year, you can make use of Old Mutual’s Income Tax Calculator, which has been updated to also include the tax changes applicable to retirement funds. You will therefore be able to see the benefits of retirement reform where your income tax is concerned.

This calculator takes your monthly income, retirement contributions, medical expense amounts and your employer’s contribution to risk benefits and retirement funds into account and can be found via the following link:

https://www.oldmutual.co.za/markets/south-african-budget/income-tax-calculator

Compiled by: Personal Finance Legal & Product Legal Date: 21 February 2018

INCOME TAX CALCULATOR If you want to calculate your monthly income tax and compare it to that of last year, you can make use of Old Mutual’s Income Tax Calculator, which has been updated to also include the tax changes applicable to retirement funds. You will therefore be able to see the benefits of retirement reform where your income tax is concerned.

This calculator takes your monthly income, retirement contributions, medical expense amounts and your employer’s contribution to risk benefits and retirement funds into account and can be found via the following link:

https://www.oldmutual.co.za/markets/south-african-budget/income-tax-calculator

Taxation of contributions Since 1 March 2016 as per the “T Day” tax reforms:

• Contributions by employers to all retirement funds became taxed as a fringe benefit in the hands of the employee member.

• The full employer contribution is deductible by the employer.

• The tax deductions for member contributions were simplified and improved with a uniform deduction of 27.5% of the higher of remuneration or taxable income (inclusive of taxable capital gains), with a yearly deduction cap of R350 000.

The Taxation Laws Amendment Act (2017) clarified that the deduction may only be applied against the amount of taxable income before the addition of taxable capital gains, and also reiterated that non-trade income (like compulsory annuity income) is included as taxable income for purposes of the deduction.

Contributions that exceed the allowable deduction are deemed to have been made in the following year and will be deductible subject to the limits applicable in that year.

This rollover will also apply to excess contributions made to retirement annuity funds and pension funds prior to 1 March 2016, but not to contributions made to provident funds prior to 1 March 2016. Only contributions made to provident funds from 1 March 2016 that exceed the limit will enjoy the roll-over relief.

Any contributions that remain unapplied as deductions upon the member’s exit from the fund, may be applied against that member’s retirement benefits at retirement, firstly against the lump sum and then against the annuity income.

Provident funds’ annuitisationThe T Day reforms and especially the improved tax deduction was premised on compelling certain provident fund and provident preservation fund members to purchase an annuity at retirement. The 2017 Taxation Laws Amendment Act has again postponed this requirement – this time to March 2019. However, there may be a further delay and this matter is presently being deliberated within NEDLAC. A further paper on comprehensive social security is soon to be released and this should assist in bringing finality to this debate.

Preservation of benefits after reaching normal retirement age In 2014, changes to the Income Tax Act allowed individuals to elect when to retire. This meant that the lump sum benefit accrued to the individual on the date on which the member elected to retire and not at normal retirement age. Therefore, a member can elect to retire after reaching normal retirement age if the rules of the fund provides for this.

The 2017 Taxation Laws Amendment Act introduced further flexibility to retiring members of pension and provident funds by providing that, with effect from 1 March 2018, transfers of

retirement benefits be allowed from these funds to a retirement annuity fund, provided that the fund rules make provision for this. In this regard, it is proposed to also allow transfers to preservation funds, provided that in these cases, the member’s once off withdrawal will not be allowed.

Aligning the access provisions upon emigration between RA and Preservation FundsCurrently RA Fund members may be paid out their full RA fund benefits upon emigration. It is proposed, that this concession is to be afforded to preservation fund members.

Other Retirement Sector ReformsSome further reforms in the pipeline are:-

• Broadening coverage to low income workers, possibly via requiring auto enrolment of employees into retirement funds;

• Bringing all public retirement funds within the same regulatory framework as private funds (i.e. having to register with the registrar of pension funds and being subject to the Pension Funds Act);

• Further rationalising the number of funds so that only the cost effective funds remain (the regulator appears to be targeting an end-game of less than 200 funds remaining out of the current 1651);

• Simplifying and reducing the costs of retirement fund products;

• Ensuring effective intermediation;

• Modernising and improving governance to King IV standards (The King IV corporate governance standard was issued recently – it contains specific practice standards for Boards of retirement funds);

• The introduction of specific enforcement measures to deal with criminal and unethical practices

• Introducing the concept of an umbrella fund into the Pension Funds Act so that these funds may be regulated more appropriately; and

• National Treasury and the FSB to develop more efficient measures to find the beneficiaries of unclaimed benefits.

BUDGET SPEECH 2018: RETIREMENT REFORM

Value-added tax (VAT)It is proposed that as from 1 April 2018 VAT will be increased from 14% to 15%.

VAT was last adjusted in 1993, and is lower than the global and African averages. This proposal aims to meet new spending commitments and prevent further erosion of the public finances.

The VAT proposal will increase the cost of living of all households. However, the zero-rating on basic food items and paraffin will reduce the impact on the poor, who will receive further assistance through an above-inflation increase in social grants. The wealthiest 30% of households contribute 85% of the VAT revenue.

As from 1 April 2018, government proposes to amend the VAT Act to reflect the original policy intent, that only brown bread and whole-wheat brown bread will be zero-rated. Products such as rye and low GI bread, which tend to be consumed by richer households, will not be zero-rated.

2. Estate Duty and Donations TaxIn line with the Davis Tax Committee recommendations, and in keeping with the progressive structure of the tax system, the 2018 Budget proposes to increase estate duty as follows (with effect from 1 March 2018):• 20% on the first R30 million dutiable estate; and• 25% on the dutiable estate above R30 million.

A basic deduction of R3.5 million is still allowed as an abatement in determining the dutiable estate after the deduction of liabilities, bequests to public benefit organisations and bequests to spouses.

Any donations above R30 million per tax year will also be taxed at 25% as from 1 March 2018. The first R100 000 donation made by a natural person and the first R10 000 donation made by a donor other than a natural person per tax year remains exempt from donations tax.

3. Capital Gains Tax (CGT)Inclusion rates remain the same and are as follows:• Individuals and Special Trusts: 40%• Companies: 80%• Trusts (other than Special Trusts): 80%

The effective capital gains tax rates are as follows:• Individuals and Special Trusts: 18%• Trusts: 36%• Companies: 22.4%

The annual exclusion for individuals remains at R40 000 and R300 000 in the year of death.

4. “Sin Taxes” and LeviesThe following increases are proposed:-• Tax on a packet of 20 cigarettes increases by R1.22• Tax on a 340ml can of beer increases by 14.66c• Tax on 750ml of wine increases by 27.75c• Tax on a 750ml bottle of spirits increases by R4.80

Government proposes to increase the general fuel levy by 22c p/l with effect from 4 April 2018. It is proposed that the RAF Levy will be increased by 30c/l. This will push up the general fuel levy to R5.34 p/l of petrol and R5.19 p/l of diesel.

The health promotion levy, which taxes sugary beverages, will be implemented from 1 April 2018. The tax rate will be 2.1c/gram for sugar content in excess of 4g/100ml.

5. Trusts and Loan AccountsWhere a trust incurs no interest or interest at a rate lower than the official rate of interest, an amount equal to the difference between the interest incurred by the trust (if any) and the interest that would have been incurred at the official rate of interest, would be treated as a donation made to the trust thus potentially triggering donations tax. This section is applicable to loans, credit or advances made to trusts before, on and after 1 March 2017. The official rate of interest was decreased from 8% to 7.75% in July 2017. The official rate of interest is currently calculated as the repo rate plus 1%.

It is proposed that the official rate of interest be increased to a level closer to the prime rate of interest.

6. Social Security ReformIn 2016 government released a paper for comment setting out their plans for a comprehensive social security reform programme and a further paper is set to be released soon. Government’s further utterances have indicated that this initiative is still firmly on the agenda.

7. National Health Insurance (NHI) A follow-up to the 2011 paper was released in 2016. Government has undertaken to release a paper setting out further detail. Various funding options are being considered by the Davis Tax Committee-the proposed end game is to eventually withdraw the medical tax credit regime. Until such time, below inflation increases to the medical tax credits will be effected.

8. Financial Sector Reforms The Twin Peaks reforms for prudential and market conduct regulations are on track with the recent enactment of the Financial Sector Regulations and Insurance Bill. In the short term the FSB is focusing on certain specific market conduct concerns such as mitigating illicit financial flows, financial soundness of insurers, increasing competition, financial inclusion, addressing over indebtedness and financial illiteracy, financial inclusion and transformation and dealing with consumer credit insurance abuses.

9. Environmental taxesIn addition to raising revenue, tax policy support to protect the natural environment and promote sustainable use of limited resources with the following:• The Carbon Tax Bill was adopted in August 2017 and is expected

to be enacted by the end of December 2018. Government proposes to implement the tax from 1 January 2019 to meet its nationally determined contributions under the 2015 Paris Agreement of the United Nations Framework Convention on Climate Change.

• To reduce the litter and dissuade consumers from buying plastic bags, the plastic bag levy is to be increased by 50% to 12c per bag with effect from 1 April 2018.

• The environmental levy on incandescent light bulbs will be increased from R6 to R8 to incentivise more energy-efficient behaviour. This measure will take effect on 1 April 2018.

• The vehicle emission tax will increase for every gram above 120 gCO2/km for passenger vehicles and R150 for every gram above R175 gCO2/km for double cab vehicles, effective 1 April 2018.

10. Cryptocurrency• Cryptocurrency is a digital asset that is used as a medium

of exchange. It poses a risk to the income tax system as cryptocurrency is extremely volatile and its sustainability is uncertain. At the same time, the supply of cryptocurrency can cause administrative difficulties in the VAT system. To address these issues, it is proposed that the income tax and VAT legislation be amended.

• In 2018, the Reserve Bank, together with other domestic financial sector regulators, will publish a position paper on the evolving of the private cryptocurrencies.

This information was taken from the Old Mutual Budget Stop Press 2018

BUDGET SPEECH 2018: BUDGET PROPOSALS

Taking into consideration, the volatile circumstances facing South Africa

currently, the nation’s relentless spirit to prosper to a new path of growth

and transformation is evident. A sense of optimism has taken hold of the

nation within the first two months of 2018.

Minister Malusi Gigaba, emphasised the fact that debt remains robust,

despite two sovereign credit rating downgrades during the year 2017.

The budget proposes major spending adjustments, and strategic tax

measures in response to the unsustainable debt outlook presented in

October 2017, by: a minor adjustment in the taxation of small businesses,

no adjustments to the top four income tax brackets and below inflation

adjustments to the bottom three brackets, an increase in VAT from 14%

to 15% and an increase in estate duty and donations tax. Together, with

faster economic growth these measures serve to reduce the budget deficit

and stabilise national debt. Fee-free education and job creation was

emphasised, in both the State of the Nation Address and the Budget

Speech in order to enhance our financial environment.

Government is working with municipalities to secure investments that

can reshape the cities and accelerate growth. Eskom and the Road

Accident Fund account for the majority of the government’s contingent

liabilities. Despite the difficulties, government is beginning to address

fundamental issues such as corruption and poor governance within state

owned organisations.

There is an active move to create economic confidence, as well as rebuild

a financial service sector that serves all South Africans. The commitment

to improve political certainty boosts investments and strengthens the rand.

Government will implement reforms to promote investment by reducing

policy uncertainty and act in a decisive manner to strengthen governance

and sound financial practices. This is an encouraging platform to take

advantage of and enhance the savings culture, as well as for taxpayers

to invest in the most tax efficient vehicles. In these complex and financially

trying times, one should always look to a trusted financial planner for

guidance to ensure their financial needs are met.

Notably, Minister Gigaba welcomed the decision to move Old Mutual’s

primary listing to the Johannesburg Stock Exchange. The Minister further

said “…we see this as a major vote of confidence in the attractiveness

and growth potential of South Africa as a market in its own right, as well

as a headquarter for African operations”

The country’s success in realising transformation and ensuring a financial

environment that is beneficial for everyone is dependent on us all.

“We are at a moment in the history of our nation when the people, through

their determination, have started to turn the country around… Now is the

time for all of us to work together, in honour of Nelson Mandela, to build

a new, better South Africa for all” - President Ramaphosa at SONA.

BUDGET SPEECH 2018:BOTTOM LINE

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