In the wake of the most recent ratings downgrades, a whopping budget deficit and the upcoming all-important ANC national conference, one word sums up South Africa at this moment in time: uncertainty. Just about the only certain thing it seems, is that in order to plug the huge budget hole, government will be increasing taxes soon… and it is likely to affect high net worth individuals the hardest.
We pointed out in a recent article that government’s options were very limited, other than raising taxes, and in particular the likelihood of a capital gains tax (CGT) rate increase. Underscoring the concerns of high net worth individuals, this article generated much interest with many people contacting Carrick for more information.
It was the late American business author and chairman of ITT Corporation, Harold ‘Hal’ Geneen, who said: “Uncertainty will always be part of the taking charge process”.
While all the political and economic uncertainty around us may instil a sense of gloom in many, it need not be. In uncertain times – as we experience in South Africa at present – there are always opportunities and options available that allow you to take charge. By taking control and exploring the options, you can determine or minimise the level of your exposure to the risk that comes with uncertainty and volatility.
In a sense uncertainty is a good thing: one can argue that it motivates people to do what they should have been doing all along.
Nonetheless, in recent months Carrick Wealth has consistently been advising that now is a good time to reassess, diversify and reinvest at least some of your assets offshore. With the prospect of sharp tax increases that could likely include an increase in the CGT rate, this becomes even more essential. It will be wise to act proactively now and diversify at least a part of your assets to an offshore, tax-efficient jurisdiction. This will allow you to maximise your capital gains at the current potentially lower rate.
The anticipated tax increases that could impact on your local investments and wealth, are being necessitated by the budget deficit of R50.8bn recently revealed by Finance Minister Malusi Gigaba. President Zuma has instructed Treasury and the Presidential Fiscal Committee (PFC) to come up with a rescue plan that will cut spending by R25bn and increase revenue by an additional R15bn – likely through more taxes – to be implemented following the 2018 Budget in February.
The figures, in actual fact, are much higher than that. The latest R40bn rescue plan is over and above the R15bn in tax measures and R31bn in spending cuts for the 2018-19 fiscal year already included in former finance minister Pravin Gordhan’s budget of February this year, before Gordhan was fired.
In the latest credit risk ratings of South Africa – by Fitch and S&P Global, while Moody’s is waiting until after the upcoming ANC national conference and the 2018 budget in February – the agencies red-flagged South Africa’s growing national debt. They are particularly also concerned over South Africa’s state-owned enterprises (SOEs) and the R470bn size of the government’s growing guarantee book for these SOEs and their debts, and the risk it poses to the fiscus. Unfortunately there are no quick and easy fixes for these problems.
The rescue plan proposed by Treasury, the PFC and Mr Zuma includes welcome proposals for new austerity rules and limits regarding the debts and guarantees pertaining to SOEs. But it does necessitate serious spending cuts and increasing taxes.
And therein lies the rub for government. Instead of appeasing the ratings agencies as Mr Zuma seems to be hoping for, the plan is likely to backfire and even exacerbate an already bad situation: it will increase taxes, worsen the tax burden carried by South Africa’s narrow base of taxpayers and therefore stifle economic growth. And the lack of growth is another of the agencies’ major concerns.
Whether government will be able to implement its proposed austerity measures and spending cuts, also remains somewhat uncertain, with a number of big-spend items still hovering inconclusively in the background.
So exactly where will the money come from? As we mentioned in our previous article, government’s rumoured intention of turning to the Public Investment Corporation (PIC) with its assets of R1.928-trillion in which civil servants’ pensions are invested, appeared to have been blocked by strong resistance from various quarters. Raising more loans is also out of the question. The top personal income tax bracket already stands at 45 per cent for individuals with taxable incomes above R1.5 million per year. Following on remarks made by Judge Denis Davies of the Davis Tax Committee, the imposition of a wealth tax also seems unlikely, though not ruled out altogether. An increase in the VAT rate is a possibility but unlikely as it is a politically unpopular option that will affect the poor the worst.
A number of other forms of taxation could be considered, but few will deliver the required revenue, while others could stifle growth. It leaves an increase in CGT as one of the obvious soft targets. Already over the past four years CGT has been significantly increased on an annual basis and it is the one area that remains open to further increases, especially for individuals.
Looming over all of this is the ANC’s elective national conference in less than two weeks’ time. All three ratings agencies have said that forthcoming “political developments” – meaning the ANC conference and election of new ANC leaders – will influence their further decisions, indicating that they were hoping for an improved political direction that would lead to policy certainty and positive impacts on the economy. While some uncertainties remain in respect of the conference, with all 9 ANC provinces having completed their branch nominations, the rand had strengthened significantly on the back of news that Deputy President Cyril Ramaphosa was well ahead of his nearest challenger in the race to succeed President Zuma as leader of the ANC. A glimmer of hope is clearly starting to penetrate through the gloom.
Nonetheless, with much uncertainty still around, instead of becoming despondent or speculating about future events over which you have no control, rather take a positive, proactive stance: take action to control the things that you can, as Geneen suggested.
For one, Carrick believes it would be prudent to start planning for a future CGT rate increase. The choice could be to liquidate at least a portion of your assets now and crystallise your gains at the current potentially lower CGT rate. This would rebase your CGT and also allow for further planning opportunities.
These may include portfolio diversification as a number of clients are holding extremely concentrated equity portfolios, reinvesting the sales proceeds into tax efficient solutions and using the opportunity to externalise into hard currency to hedge against South African political risk and access international markets. It would also be a good time to invest this year’s bonus or one’s disposable or liquid assets into a tax efficient offshore structure.
For more information and to learn about all the available options, you can contact one of Carrick’s qualified advisers at [email protected].