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A tough but balanced budget, with more scope for offshore diversification

Finance Minister Malusi GigabaFinance Minister Malusi Gigaba’s Budget Speech 2018, delivered on Wednesday, was a tough one for everyone who pays taxes in some form or another in South Africa. As was to be expected there were complaints from various quarters that some sectors of society have been harder hit than others.

However, by and large there was broad agreement that, although tough on all, it was a balanced and fair budget put together under very difficult circumstances. The reality is that no budget ever satisfies everyone and depending on your point of view, there were positives and a dose of bitter medicine for all.
A 1% increase in VAT and an increased fuel levy affects everybody in one way or the other. But for the business sector the budget was largely forgiving as it sought not to undermine investment, business confidence and growth. The ratings agencies are likely to take positive note of this.

There was good news relating to diversified offshore investment. And although they will still also carry a substantial part of the burden in a number of respects, there was relief for high net worth individuals with substantial investment portfolios in that no increase in capital gains tax or the establishment of a new wealth or land tax were announced.

High net worth individuals will be most affected by increases in ad valorem excise duties for luxury goods “consumed mainly by wealthier households”, including motor vehicles; the tax rate for estates above R30m being increased from 20% to 25%; and lower-than-inflation increases to personal income tax brackets and rebates, with high-income earners bearing the brunt of this. The VAT increase will also impact the wealthiest 30% of households who annually contribute around 85% 0f VAT revenue. And the tax on donations exceeding R30m, will be increased from 20% to 25%.


Mitigate risk, seize opportunities

Coming within days after the ascendency of Cyril Ramaphosa to the Presidency, his widely applauded State of the Nation Address (SONA) and the general sense of new hope and expectations this has created in South Africa, the Budget somewhat dampened some of the euphoria. But it also placed Ramaphosa’s intended reforms and programmes within a realistic financial framework, given the limitations that exist. And it stressed Ramaphosa’s call that everybody will have to pull together to get South Africa working again.

Gigaba emphasised that the budget had to ensure the sustainability of the nation’s finances to underpin Ramaphosa’s reformist vision as the many challenges are tackled and priorities are balanced. He termed it a tough, but hopeful budget, acknowledging the risks and challenges. But these, he said, could be overcome by seizing the new spirit in the country as well as new opportunities emerging in an improving global environment.

This is a view that resonates strongly with what we believe in at Carrick. For investors, adversity is often inevitable and unpredictable, but by planning ahead and utilising opportunities and different options, impacts can be mitigated, even avoided, protecting investments that will continue to grow.

The major challenge for Gigaba’s budget was to narrow the deficit, plug a number of other holes, address the debt situation, turn around the ailing state-owned enterprises, fund all the usual government programmes and sectors, and fund the new free tertiary education plan unexpectedly announced by Zuma in December. For all of this he had to find money without borrowing excessively, raiding various state funds, or raising taxes in ways that would kill investment and growth and have the credit ratings agencies howling. It seems he managed quite well.


Offshore investors

The government also demonstrated its confidence in the economic future of South Africa – and the African continent – by giving a thumbs-up for increased offshore investment, including in Africa. This came in the form of a 5% increase in prudential limits on offshore investments for funds under management by institutional investors and affects collective investment schemes, investment managers, long-term insurers, non-linked long-term insurers and retirement funds.

In addition to this, the limit for transfers to holding companies has been increased from R2bn to R3bn for listed companies, and from R1bn to R2bn for unlisted companies, with the aim of facilitating direct investment by South African companies into Africa. The last significant increase in the allowance for foreign investment by domestic funds was in 2010, while most institutional investors had not yet reached the current limit.

This serves as encouragement for diversified offshore investment that will benefit both the investor and the fiscal objectives of the state. Treasury chief director for financial markets and stability Roy Havemann was reported to have said that Treasury did not fear a large outflow of funds as a result of the increase given the big inflows into the JSE currently. Havemann noted that diversification allows savers to benefit from investing in a wider range of asset classes as well as jurisdictions that might be yielding higher returns, while at the same time minimising the risk of capital loss from failures in a single asset class or jurisdiction.

Carrick fully concurs with this sentiment. In fact, it has always been our advice to clients not to have all one’s eggs in one basket. There are other good reasons too for diversification. The political outlook for South Africa is the best it has been in a decade. A balanced budget will seek to meet many challenges and diversified needs, as well as protecting citizens’ ‘investment’ in the state and growing the economy. But there are no guarantees and impediments could arise unexpectedly.

In the same way high net worth individuals with substantial investment portfolios should always be aware that new or unexpected risks and challenges could arise at any time. Just like the nation’s budget planners, they too should be aware of this and plan ahead to protect and grow their investments.

There are ample options available to create a better balance in one’s investment portfolio and thereby mitigate the worst unexpected impacts that may arise. It is Carrick’s unreserved commitment to our clients to provide them with the best solutions possible to achieve this. The cardinal rule is to diversify…both by having a diverse portfolio of assets and by investing offshore in ways that are cost and tax efficient.

As leading experts in offshore investment, Carrick is committed to providing our clients with the best options possible with a view to medium to long-term wealth preservation and growth. If you would like more information about the available options and how you can best diversify your portfolio, contact a qualified Carrick adviser at today.

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