What Budget 2018 means for financial planners

What Budget 2018 means for financial planners

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Article highlights

  • Increase in estate duty
  • Increasing donations tax
  • Increase in offshore limits

Every year, the delivery of the budget speech is met with widespread and varying analysis which is likely to continue over the next few weeks.

In the meantime, we believe that the important issue is to understand exactly what the impacts and changes will be for investors so that as financial planners, you can clearly communicate these to your clients.

While many people will be relieved that the marginal rate of tax and the effective capital gains tax rate has not increased, the dreaded “tax bracket creep” means that taxpayers in most of the different tax brackets will actually be worse off the coming tax year when inflation is taken into consideration. Furthermore, in possibly one of the biggest announcements in the speech, VAT is up 1% to 15% and the usual suspects (sin taxes) have increased. Fuel levies have been increased by 52 cents per litre.

Tough conversations with your clients

A few increases introduced in the Budget will require financial planners to sit with their clients and walk them through some tough conversations. These will deal specifically with:

1.Increase in estate duty from 20% to 25% for those with estates larger than R30m.  The Estate Duty Act will be amended to apply 20% tax on the first R30 million and 25% thereafter. Recent amendments in tax laws have made trusts less attractive from a tax point of view. It will be interesting to see the impact of this increase in the popularity of estate planning mechanisms such as trusts. And, in order to prevent people from donating assets at a lower rate of 20% to reduce their estate Treasury intends.

2.Increasing donations tax from 20% to 25% for donations larger than R30m. Once again 20% will apply to the first R30 million and 25% thereafter. It is intended that both amendments will be effective from 1 March 2018.

Other important (but easier) issues to discuss with clients

Some of the easier conversations financial advisors are going to need to have with their clients are regarding:

1.Transfer to Preservation Funds after retirement: in 2017 legislation was amended to allow transfers from an employment fund to a retirement annuity fund (RA) after an employees contracted retirement date. Pension and provident preservation funds were excluded as these funds allows one withdrawal thereby bypassing annuitisation requirements. After consultation with industry, Treasury has indicated that system changes to prevent one withdrawal in such a case is not as burdensome as initially thought and will therefore allow transfers into preservation fund’s from an employment fund after retirement.

2.Tax treatment of contributions to retirement funds outside South Africa (SA): currently a retirement fund member contributing to a fund situated outside of SA for employment rendered outside of SA does not qualify for contribution tax deductions. Treasury has indicated their intention to review this to allow deductible contributions in cases where benefits are taxable.

3.Increase in offshore limits: The limits for collective investment schemes and long-term insurers will rise to 40% from 35%; and for non-linked long-term insurers and retirement funds to 30% from 25%. An additional allowance is available to all institutional investors for investment in Africa and this is increased from 5% to 10%. As always, we believe the budget speech is a great opportunity to check in with your clients and to encourage them to stay informed about their investments and the impact of regulation and other changes on their financial positions.