Beware of selling any asset within 3 years of buying it!
In South Africa SARS will deem any asset you sell after 3 years from date of purchase as a capital gain/loss and not as income. Why is this important? Because Capital Gains tax is calculated at 10% for individuals instead of the marginal income tax rate of 40%.
Lets look at an example:
Invest R1mil for 3 years and get 10% per year return. After 3 years you will have R1 331 000. If you sell that asset after 2 years and 360 days, you will have to pay income tax of R132 400. If you wait till the next week to sell, you will pay capital gains tax of R33 100.
You save R99 300 if you wait the few days!
So, before you buy any asset, make sure that you want to keep it for at least 3 years. But then you might want to re-consider the investment, and if we are talking about shares, re-balance your portfolio by taking profits on the performers and buying into the next 3 year potential winners.
So what I am saying is that if we only look at financial investments like shares or unit trusts, do not forget about the investment but do not tinker with it for the first 3 years (even SARS agrees on this).
A word of caution perhaps: The Capital Gains Tax rate in other countries can be up to 50%. It will be very easy for SARS to finance the budget shortfall by increasing the current rate of 10%!!!
So, perhaps we should all re-consider our investments and the gains on them every 3 years?!
Thursday, March 24, 2011
Wednesday, March 2, 2011
Update on investments.
You who have equities in South Africa should not expect double digit returns over the next couple of years!
In short the following:
Bottom line
Do not sell SA equities but if you have very little International equity exposure, try to swap some SA for International. This should be done after considering the TAX effect. (Remember, any investment sold 0- 3 years after acquisition will be taxed as INCOME!). This swap should also not be tried if you are not invested on a "platform" offering a range of unit trust funds.
If you have enough international equity exposure for you longer term investments, ride out the equity volatility because Cash after tax will give you even less than equities over longer periods of time.
For longer term investments avoid Bonds, Cash and even property.
UPDATE: The Momentum Protected Index Plan I wrote about in a previous blog, now gives you a capital guarantee on the Top40 shares in South Africa with a 39% after cost participation in growth in that index over a 3 year period. If you have cash to invest for 3 years and do not want to remain in cash but are afraid of losing money on the SA equity market, this might be a good product for you.
In short the following:
- Inflation is going to kick ass in a couple of years from now.
- That is bad for equities!
- USA will have less of a problem because they can't raise interest rates for a year or two.
- That is good for equities!
Bottom line
Do not sell SA equities but if you have very little International equity exposure, try to swap some SA for International. This should be done after considering the TAX effect. (Remember, any investment sold 0- 3 years after acquisition will be taxed as INCOME!). This swap should also not be tried if you are not invested on a "platform" offering a range of unit trust funds.
If you have enough international equity exposure for you longer term investments, ride out the equity volatility because Cash after tax will give you even less than equities over longer periods of time.
For longer term investments avoid Bonds, Cash and even property.
UPDATE: The Momentum Protected Index Plan I wrote about in a previous blog, now gives you a capital guarantee on the Top40 shares in South Africa with a 39% after cost participation in growth in that index over a 3 year period. If you have cash to invest for 3 years and do not want to remain in cash but are afraid of losing money on the SA equity market, this might be a good product for you.
Tuesday, February 1, 2011
Save tax with a Retirement Annuity!
A Retirement Annuity (RA) Fund is a personal retirement plan which enables you to save tax-effectively for your future needs. It is an ideal way to supplement your existing retirement savings if you earn non-pensionable taxable income (also called "non-retirement funding" income). Non-pensionable taxable income includes:
All earnings of tax payers who are not members of pension or provident funds;
Earnings of members of pension or provident funds where such earnings are defined as non-pensionable income; and
For both such members and non-members, it also includes bonuses, share option gains, director's fees, certain allowances and also taxable income from portfolio or property investments.
Tax Incentives
Up to 15% of non-pensionable taxable earnings can be invested in RA's and deducted from taxable income. Please see the example below to understand how this benefit helps to reduce tax and enhance wealth.
Coupled with the tax deduction on the contributions, there is no tax payable on either the capital gains resulting from investment growth or on the income earned (such as interest, net rental income and foreign dividends) within the RA. The tax benefit within the fund comes into effect immediately, enhancing your capital at retirement. On retirement, the lump sum tax-free component has been increased with reduced average tax rates applied to the taxable portion.
Whilst the eventual proceeds on retirement from the fund are subject to tax, this is deferred in the first instance and the allowances are relatively generous. This means that the tax rates on your receipts (be they as capital in the form of a lump-sum "cash" payment or as income in the form of annuity payments) should always be less than the current rate applicable to such contributions.
The legislative changes to the Income Tax Act also make RA's an attractive estate duty-free investment.
Example showing indicative tax and net wealth benefits using non-pensionable taxable income of R1 000 000 per annum:
1. Without RA Rand
Non-pensionable income 1 000 000
Less: normal tax at 40% -400 000
Net after-tax income 600 000
Net wealth (after-tax income 600 000 + no investment) 600 000
2. With RA Rand
Non-pensionable income 1 000 000
Less: Contribution to RA at maximum 15% -150 000
Taxable income 850 000
Less: normal tax at 40% -340 000
Net after-tax income 510 000
Net wealth (after-tax income 510 000 + 150 000 investment) 660 000
As shown above, the R150 000 contribution to the RA is subsidized (in the form of reduced tax) and reduces the tax payable by R60 000 from R400 000 to R340 000. In effect, this means that it only costs R90 000 (after tax) to create an investment of R150 000.
It is important to note that 28 February 2011 is this tax-year's deadline for you to take advantage of the tax benefit on your Retirement Annuity contributions. If you are interested in contributing to an RA, be it to top-up an existing investment or to start investing into a new RA, time is of the essence in order to complete the process ahead of the tax year-end.
All earnings of tax payers who are not members of pension or provident funds;
Earnings of members of pension or provident funds where such earnings are defined as non-pensionable income; and
For both such members and non-members, it also includes bonuses, share option gains, director's fees, certain allowances and also taxable income from portfolio or property investments.
Tax Incentives
Up to 15% of non-pensionable taxable earnings can be invested in RA's and deducted from taxable income. Please see the example below to understand how this benefit helps to reduce tax and enhance wealth.
Coupled with the tax deduction on the contributions, there is no tax payable on either the capital gains resulting from investment growth or on the income earned (such as interest, net rental income and foreign dividends) within the RA. The tax benefit within the fund comes into effect immediately, enhancing your capital at retirement. On retirement, the lump sum tax-free component has been increased with reduced average tax rates applied to the taxable portion.
Whilst the eventual proceeds on retirement from the fund are subject to tax, this is deferred in the first instance and the allowances are relatively generous. This means that the tax rates on your receipts (be they as capital in the form of a lump-sum "cash" payment or as income in the form of annuity payments) should always be less than the current rate applicable to such contributions.
The legislative changes to the Income Tax Act also make RA's an attractive estate duty-free investment.
Example showing indicative tax and net wealth benefits using non-pensionable taxable income of R1 000 000 per annum:
1. Without RA Rand
Non-pensionable income 1 000 000
Less: normal tax at 40% -400 000
Net after-tax income 600 000
Net wealth (after-tax income 600 000 + no investment) 600 000
2. With RA Rand
Non-pensionable income 1 000 000
Less: Contribution to RA at maximum 15% -150 000
Taxable income 850 000
Less: normal tax at 40% -340 000
Net after-tax income 510 000
Net wealth (after-tax income 510 000 + 150 000 investment) 660 000
As shown above, the R150 000 contribution to the RA is subsidized (in the form of reduced tax) and reduces the tax payable by R60 000 from R400 000 to R340 000. In effect, this means that it only costs R90 000 (after tax) to create an investment of R150 000.
It is important to note that 28 February 2011 is this tax-year's deadline for you to take advantage of the tax benefit on your Retirement Annuity contributions. If you are interested in contributing to an RA, be it to top-up an existing investment or to start investing into a new RA, time is of the essence in order to complete the process ahead of the tax year-end.
Monday, January 24, 2011
Momentum Protected Index Plan (PIP)
This is a brand new fund offered by Momentum Wealth and does the following:
The JSE is close to its all time high. A lot of investors do not want to venture into shares because they believe a correction is imminent, so they carry on making the mistake of keeping their longer term money in cash. This product provides them with an alternative to cash!
What I think:
This is just a summary and there are some technical issues as well.
Conclusion: If you have R50 000+ which you want to invest for at least 3 years, rather invest in PIP than cash.
- Gives you 100% capital protection over a 3 year term.
- Participate in the growth of the JSE Top 40 index for the 3 years.
- Trades once a month and the current cap on growth participation is 35% after costs.
The JSE is close to its all time high. A lot of investors do not want to venture into shares because they believe a correction is imminent, so they carry on making the mistake of keeping their longer term money in cash. This product provides them with an alternative to cash!
What I think:
- Let's say cash gives you a taxable 7% effective every year for 3 years. That is 4.2% after 40% tax for 3 years which is 12.6% for the period.
- Let's say inflation creeps up and settles on an average of 6% pa for 3 years. Then you should earn an 18% effective return over 3 years to break even.
- Clearly you lose money in cash!
- If you invest in Momentum's PIP, and the markets do perform, you get 35% return after 3 years. If they muddle through you might only get the cash rate (12.6%) and if they crash and burn, you get 0% return but all your capital back. You get anything between 0% and 35%.
This is just a summary and there are some technical issues as well.
Conclusion: If you have R50 000+ which you want to invest for at least 3 years, rather invest in PIP than cash.
Tuesday, January 18, 2011
Stock picks Jan 2011
current Price Forward Dividend
Share price Earnings PE Yield
Peregrine 11.70 9.50 8.14 2.68%
Basil Read 12.30 4.33 4.33 3.47%
Old Mutual 13.97 16.71 8.24 2.11%
These are the shares I would buy for 'n longer term portfolio. The only one which I would buy at a lower level is Old Mutual at round R13.20. They are all lagging the market and Peregrine will publish good results for Y/E 2011. Basil Read is cheap and when construction recovers in a year or two I would like to have this one in my portfolio. Old Mutual might benefit from corporate action.
Peregrine might go down to R11.50 which is a very good level and Basil might go to R12.20. If this should happen I would buy some more.
Later
G
Share price Earnings PE Yield
Peregrine 11.70 9.50 8.14 2.68%
Basil Read 12.30 4.33 4.33 3.47%
Old Mutual 13.97 16.71 8.24 2.11%
These are the shares I would buy for 'n longer term portfolio. The only one which I would buy at a lower level is Old Mutual at round R13.20. They are all lagging the market and Peregrine will publish good results for Y/E 2011. Basil Read is cheap and when construction recovers in a year or two I would like to have this one in my portfolio. Old Mutual might benefit from corporate action.
Peregrine might go down to R11.50 which is a very good level and Basil might go to R12.20. If this should happen I would buy some more.
Later
G
Wednesday, January 12, 2011
Investing 2011
Better than expected!
That sums up 2010. The 10 shares I chose in April 2009 and discussed in my June 2009 Blog returned 64% over the last 20 months and you can add 6% for dividends paid by them. At the beginning of 2010 I thought the JSE All Share Index would give us 9% for the year, it gave us 16% to which you can add 3% dividends. This year my crystal ball tells me that we should end the year 7.42% up at 34 503 points on the JSE. You can add another 3% for dividends so the return on an investment in the SA share market should give you 10.42% after tax. The market always over react so add a 10% to the 34 503 and the JSE ends on 37 953 points, that is a return of 18% excl dividends.
Cash will probably give you the same as 2010 which was a taxable 6.9% which is just pathetic.
So, you can clearly see that 2011 should be another good year for equities. As I mentioned in my November 2010 Blog, the companies which I think will perform well are American Multi Nationals and SA companies with a well established footprint in Africa.
"What about the Rand!"......you shout. Well, what about it? Who cares. It is overvalued and will get back to parity sometime. Don't delay making international investments just because you think the Rand will go to R6 against the US$. This is a long term game and the investment in the company you buy will always outperform the short term value of a currency!
When do I invest? I think the markets will come down about 7% before end of Feb 2011 which will give us a better buying opportunity. I have to mention that I thought the markets would come down at the end of September 2010 as well and lost some good money when I bought a Put option on the JSE Top 40 index to hedge my long term portfolio!
So, if you have cash you want to invest for the longer term (5 years plus), perhaps invest one third every month for the next 3 months.
If you do not have any investable cash but you have a job, fab! Earning an income not only provide us with pride in our abilities but also the most powerful financial tool. Just remember not to spend any money on buying a new car if you have one that does what it needs to do just because some dog tells you to!
I will cover a new product from Momentum Wealth in my next blog which gives you protection on the downside of the JSE Top 40 index but also participation in the growth over the next 3 years.
I will also use this Blog in future to share with you some stock tips (shares I believe offer value) and would appreciate the same from you.
That sums up 2010. The 10 shares I chose in April 2009 and discussed in my June 2009 Blog returned 64% over the last 20 months and you can add 6% for dividends paid by them. At the beginning of 2010 I thought the JSE All Share Index would give us 9% for the year, it gave us 16% to which you can add 3% dividends. This year my crystal ball tells me that we should end the year 7.42% up at 34 503 points on the JSE. You can add another 3% for dividends so the return on an investment in the SA share market should give you 10.42% after tax. The market always over react so add a 10% to the 34 503 and the JSE ends on 37 953 points, that is a return of 18% excl dividends.
Cash will probably give you the same as 2010 which was a taxable 6.9% which is just pathetic.
So, you can clearly see that 2011 should be another good year for equities. As I mentioned in my November 2010 Blog, the companies which I think will perform well are American Multi Nationals and SA companies with a well established footprint in Africa.
"What about the Rand!"......you shout. Well, what about it? Who cares. It is overvalued and will get back to parity sometime. Don't delay making international investments just because you think the Rand will go to R6 against the US$. This is a long term game and the investment in the company you buy will always outperform the short term value of a currency!
When do I invest? I think the markets will come down about 7% before end of Feb 2011 which will give us a better buying opportunity. I have to mention that I thought the markets would come down at the end of September 2010 as well and lost some good money when I bought a Put option on the JSE Top 40 index to hedge my long term portfolio!
So, if you have cash you want to invest for the longer term (5 years plus), perhaps invest one third every month for the next 3 months.
If you do not have any investable cash but you have a job, fab! Earning an income not only provide us with pride in our abilities but also the most powerful financial tool. Just remember not to spend any money on buying a new car if you have one that does what it needs to do just because some dog tells you to!
I will cover a new product from Momentum Wealth in my next blog which gives you protection on the downside of the JSE Top 40 index but also participation in the growth over the next 3 years.
I will also use this Blog in future to share with you some stock tips (shares I believe offer value) and would appreciate the same from you.
Friday, November 19, 2010
Investments in the year that was 2010 and the year that will be 2011
Looking back at 2010 we can see that investments made so far favoured the brave, with year to date returns (30/9/2010) as follows:
· SA Equities 8.7% (13% end October)
· SA Bonds 14%
· SA listed property 25.68%
· Rand/Dollar 5.4% stronger
· Foreign Equities 0.92% in US$
· Emerging market equities 8.7% in US$
· SA Cash 5.28% (3.17% after 40% tax)
· Inflation 2.84%
At the beginning of 2010 I expected equities to outperform Cash and inflation and hoped that the JSE All Share would reach 31 815 points (15% for the year). These expectations were based on the state of the world economy at that time and the fundamental valuations for the different asset classes.
I knew that interest rates had to come down and that holding money in cash could not be seen as an investment. I believed that the South African Rand should be above R8 to the Dollar and that where you had very little or no international equity exposure you should make use of the strong Rand to invest in those markets. Here I have been a tad premature and the Rand surprised.
I advised clients to remain true to strategic asset allocation principals when investing money and to follow the following specific guidelines:
· For money required in the next 3 years: Invest in cash
· For money required in 4 years from now: Invest in Preference Shares
· For money required 5 to 9 years from now: Invest in Balanced Funds
· For money required only in 10 years and later: Invest in Equity Funds
This strategy would have ensured sufficient cash for short term expenses and would have ensured participation in any growth in equities. The following example demonstrates the outcome:
For a 60 year old client investing R2.5mil, needing R10 000pm after tax to spend, the following investments with allocations and returns materialised year to date 31 October 2010:
· SA Cash 15% allocation 5.76%
· SA Preference Shares 5% allocation 12.96%
· Balanced Funds 28% allocation 11.90%
· SA Equity Funds 31% allocation 16.05%
· International Equity 21% allocation 1.51%
This portfolio provided a 10.15% average return for the year till 31 October 2010 (7.22% real).
At the beginning of 2010 there was still a lot of uncertainty as to the sustainability of the world recovery. The SA equity market has performed well during 2009 and the big question was whether the companies would be able to support the inflated share prices by generating higher earnings. This proved to be the case. The JSE lived up to my prediction of being very volatile and bounced between 26 500 and 28 500 points until October.
Then the US decided to approve the second Quantitive Easing Package (QE2) worth US$600bil, and people started investing in shares and bonds again. Year to date we have seen R60bil flowing to SA bonds and 20bil to SA shares.
The problem for 2011 and beyond
In short we can say that the developed world (USA and Europe), still experience a lot of problems. The US is printing $ to get the economy going which in turn weakens the $ and makes the US exports cheap but also strengthen the currencies of developing countries like SA, making our Rand too strong and thus our exports very expensive.
The low interest rates in the US (0.25%) combined with the massive amount of money the government is printing motivates investors to look for places to invest. In SA they can get 6-7% on bonds and up to 5% dividends in some blue chip shares. The result is international investors buying SA shares at rather expensive valuations.
The problem is that one day, in a couple of years from now, the abundance of money is going to give rise to inflation which will in turn see US interest rates rise. That will spark a sudden and severe turnaround of capital flows, seeing international investors selling their expensive SA shares and bonds and relocating the money to the US.
The Rand will fall out of the sky like a rock and probably overshoot any rational level against the $, spiking SA inflation with the resulting rising of interest rates and eventually company earnings coming under pressure and any overvalued shares taking a nosedive.
When all of this might play out I don’t know. The only thing we can do now is to make rational decisions based on fundamental valuations using information of the day. I would therefore recommend the following investment approach based on asset allocation:
·Cash: only hold cash where you will need to spend it over the next 3 years.
·Preference Shares: Margins on these shares have fallen away and should be replaced by balanced funds.
·Balanced funds: The managers of these funds should be in a good position to manage funds for the medium term return.
·SA equity funds: It will be risky to invest in a SA share index like the JSE All Share. The selection of individual shares will be crucial to ensure that only cheap (value for money) shares are held in the portfolio.
·International equity: There are many international companies that are still very good value for money. One should utilise the strong Rand to invest in these companies. This will also protect against a weakening of the Rand.
Selecting specific shares
As I have predicted in 2009, shares were priced very attractively after the 2008 selloff and a general re-rating was a big probability. Investing in an index fund with the low cost advantage would have been a good choice. Going into 2011 things are very different. Most fund managers agree that shares in general might disappoint and the selection of specific companies will be very important.
The following two areas are highlighted as good potential:
· SA Equities 8.7% (13% end October)
· SA Bonds 14%
· SA listed property 25.68%
· Rand/Dollar 5.4% stronger
· Foreign Equities 0.92% in US$
· Emerging market equities 8.7% in US$
· SA Cash 5.28% (3.17% after 40% tax)
· Inflation 2.84%
At the beginning of 2010 I expected equities to outperform Cash and inflation and hoped that the JSE All Share would reach 31 815 points (15% for the year). These expectations were based on the state of the world economy at that time and the fundamental valuations for the different asset classes.
I knew that interest rates had to come down and that holding money in cash could not be seen as an investment. I believed that the South African Rand should be above R8 to the Dollar and that where you had very little or no international equity exposure you should make use of the strong Rand to invest in those markets. Here I have been a tad premature and the Rand surprised.
I advised clients to remain true to strategic asset allocation principals when investing money and to follow the following specific guidelines:
· For money required in the next 3 years: Invest in cash
· For money required in 4 years from now: Invest in Preference Shares
· For money required 5 to 9 years from now: Invest in Balanced Funds
· For money required only in 10 years and later: Invest in Equity Funds
This strategy would have ensured sufficient cash for short term expenses and would have ensured participation in any growth in equities. The following example demonstrates the outcome:
For a 60 year old client investing R2.5mil, needing R10 000pm after tax to spend, the following investments with allocations and returns materialised year to date 31 October 2010:
· SA Cash 15% allocation 5.76%
· SA Preference Shares 5% allocation 12.96%
· Balanced Funds 28% allocation 11.90%
· SA Equity Funds 31% allocation 16.05%
· International Equity 21% allocation 1.51%
This portfolio provided a 10.15% average return for the year till 31 October 2010 (7.22% real).
At the beginning of 2010 there was still a lot of uncertainty as to the sustainability of the world recovery. The SA equity market has performed well during 2009 and the big question was whether the companies would be able to support the inflated share prices by generating higher earnings. This proved to be the case. The JSE lived up to my prediction of being very volatile and bounced between 26 500 and 28 500 points until October.
Then the US decided to approve the second Quantitive Easing Package (QE2) worth US$600bil, and people started investing in shares and bonds again. Year to date we have seen R60bil flowing to SA bonds and 20bil to SA shares.
The problem for 2011 and beyond
In short we can say that the developed world (USA and Europe), still experience a lot of problems. The US is printing $ to get the economy going which in turn weakens the $ and makes the US exports cheap but also strengthen the currencies of developing countries like SA, making our Rand too strong and thus our exports very expensive.
The low interest rates in the US (0.25%) combined with the massive amount of money the government is printing motivates investors to look for places to invest. In SA they can get 6-7% on bonds and up to 5% dividends in some blue chip shares. The result is international investors buying SA shares at rather expensive valuations.
The problem is that one day, in a couple of years from now, the abundance of money is going to give rise to inflation which will in turn see US interest rates rise. That will spark a sudden and severe turnaround of capital flows, seeing international investors selling their expensive SA shares and bonds and relocating the money to the US.
The Rand will fall out of the sky like a rock and probably overshoot any rational level against the $, spiking SA inflation with the resulting rising of interest rates and eventually company earnings coming under pressure and any overvalued shares taking a nosedive.
When all of this might play out I don’t know. The only thing we can do now is to make rational decisions based on fundamental valuations using information of the day. I would therefore recommend the following investment approach based on asset allocation:
·Cash: only hold cash where you will need to spend it over the next 3 years.
·Preference Shares: Margins on these shares have fallen away and should be replaced by balanced funds.
·Balanced funds: The managers of these funds should be in a good position to manage funds for the medium term return.
·SA equity funds: It will be risky to invest in a SA share index like the JSE All Share. The selection of individual shares will be crucial to ensure that only cheap (value for money) shares are held in the portfolio.
·International equity: There are many international companies that are still very good value for money. One should utilise the strong Rand to invest in these companies. This will also protect against a weakening of the Rand.
Selecting specific shares
As I have predicted in 2009, shares were priced very attractively after the 2008 selloff and a general re-rating was a big probability. Investing in an index fund with the low cost advantage would have been a good choice. Going into 2011 things are very different. Most fund managers agree that shares in general might disappoint and the selection of specific companies will be very important.
The following two areas are highlighted as good potential:
Established international companies with a big part of their earnings being generated in the BRIC countries and
Companies with an established infrastructure in Africa.
Conclusion
It seems as if most investment professionals agree that although shares are not cheap, sitting in cash will produce no return, and that whilst the US keeps on printing money, and developed countries keep interest rates low, the place to be will still be shares, specifically those companies with close ties to the BRIC countries and Africa, as well as undervalued Blue Chip US shares.
We know that this is a party that will continue for a while longer and that the hangover is going to be severe one day, but over the longer term those investors attending the party with a good supply of headache tablets will have the benefit of good memories one day, although having to have stayed in bed for a day or two at one point.
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