How should I invest R10m for the long term?

I have about R10 million in my money market account, which I do not need to access for the foreseeable future. How should I invest this for the long term? I already have a local share portfolio, and I would like to consider direct exposure to offshore equities. I have also considered loaning the money to a local trust.

Name withheld

 

Graham Lovely, a financial adviser at PSG Wealth in Rondebosch, responds: You can take money offshore as part of your R10-million annual foreign investment allowance, which requires a tax clearance certificate from the South African Revenue Service, or you can take up to R1 million a year offshore without tax clearance as part of your discretionary allowance, which can be used for investment purposes. Either option will enable you to use an offshore investment account and access equities through an investment platform that provides exposure to most stock exchanges around the world.

The advantages are enhanced diversification, a pure rand hedge and higher potential growth. You also have complete transparency in terms of what makes up your investment portfolio, and, in general, the fees are competitive compared to other investment vehicles.

It is advisable that an estate-planning exercise is conducted in conjunction with your investment planning.

A local trust might be worth considering, but it has disadvantages.

First, it is a contravention of the exchange-control laws to house offshore equities in a local trust. You either need an offshore trust for this purpose, and these trusts are expensive to maintain, or you could consider an asset swap within a local trust.

Second, local trusts could be affected by a proposed change to the taxation of interest-free loans, which, according to the Draft Taxation Laws Amendment Bill, will come into effect on March 1, 2017.

A new section, 7C, will be introduced into the Income Tax Act, which will apply to any loan made by a natural person or company to a connected trust. If the interest charged on the loan is less than the repo rate (currently seven percent) plus one percentage point, the difference will be deemed to be income and fully taxable at your marginal rate.

Section 7C will require that the additional tax payable is recovered from the trust. If it is not recouped within three years, it will be deemed to be a donation and subject to donations tax at a rate of 20 percent.

The amendment will also mean that you won’t be able to reduce the value of your loan account over time by donating R100 000 a year to the trust tax-free. Any donation related to a connected loan will be subject to donations tax.

The bottom line is that it is not advisable to set up a trust simply to save tax. The main benefit of a trust is to protect your assets. In your case, it may be preferable to externalise your discretionary funds and add the direct offshore portfolio to your quiver of assets. The diversification alone will provide you with the assurance that your savings will keep pace with inflation.

 

How can I transfer an asset out of a family trust?

My late father had a property that was registered in the name of a trust. I pay the rates and taxes on the property, which is vacant land. Before he passed away, my father verbally expressed the wish that the land should go to me. My brothers and sisters have not disputed this and have provided me with a written acknowledgement that the property can be transferred into my name. One of my brothers is a trustee of the trust, and the rest of us are beneficiaries.

How should I transfer the land into my name without spending a lot of money?

How should we cancel the trust? There are no other assets in the trust apart from the property. The trust does not have a bank account.

Name withheld on request

 

Karen Carstens, of PSG Wealth Trust and Estate Services, responds: Although the answer to the question seems to be fairly straightforward, a number of facts that have not been disclosed could result in a different answer.

The reader can use the following points as a guideline:

• Was the property transferred to the trust as a result of a bequest or donation, or was it sold to the trust, and if so, at what value? The answer will determine the cost to transfer the property to the beneficiary, as well as the taxes and transfer costs to be paid.

• The type of trust. Trusts can be distinguished by how they were formed. A testamentary trust is created in terms of a will. An inter vivos trust is created in terms of a contract between living persons.

The rights conferred on the beneficiaries can be defined as contingent rights or vested rights to the trust assets.

In a discretionary trust, the beneficiaries have a contingent right to the trust property. The trustees administer the property according to the provisions of the trust deed for the benefit of the beneficiaries, or to achieve the objective stated in the trust deed.

In a vesting trust, the beneficiaries are the actual owners of the property, which is merely placed under the control of the trustees until a certain event occurs, or until a certain date.

• In the absence of a clause in the trust deed to the contrary, all decisions by the trustees must be unanimous.

In the reader’s case, her brother is a trustee, and if he is the sole trustee, he can give effect to transferring the property to the beneficiary.

If the trust is a discretionary trust where the beneficiaries have no vested rights to the trust property, they are not in a position to acknowledge in writing that the property can be transferred to one of the beneficiaries. Only the trustee can decide to award the property to the beneficiary, although, in all probability, he will be guided by the consent of his siblings.

The fees payable to transfer the property from the trust will depend on the value of the property and the specifics of how the trust or will is structured.

Section 9(4)(b) of the Transfer Duty Act contains exemptions on transfer duty when immovable property is transferred from a trust to a beneficiary. Essentially, a transfer of immovable property from a testamentary trust to the beneficiaries of such a trust is free from transfer duty.

In the case of an inter vivos trust, if the beneficiary is a relative of the founder within the third degree of consanguinity, the transfer will be exempt from transfer duty. If the beneficiary pays any consideration for the transfer of the property, transfer duty will be payable.

The transfer of the property from the trust can be finalised only once a bank account has been opened in the name of the trust and if the trust is registered for income tax with the South African Revenue Service. The trust’s financial statements and filed tax returns must be up to date before the property can be transferred and the trust deregistered.

Once the transfer of the property has been completed, and the trustees can show that the trust has complied with all statutory and regulatory requirements, it is dormant and has fulfilled its purpose, and they can deregister the trust at the Master of the High Court.

There is no simple answer to the reader’s question, and although all the parties seem to agree to the transfer, there are a number of unanswered questions and issues to consider. It is recommended that the reader obtains advice from a fiduciary expert to ensure that this matter is handled correctly.

 

How is the tax deduction on my retirement fund contributions calculated?

I contribute 7.3 percent and my employer contributes 13.5 percent of my pensionable salary (R500 000 a year) to my pension fund. I also contribute R12 000 a year (about 2.5 percent of non-pensionable salary) to a retirement annuity (RA) fund.

Recently, my RA provider informed me that individuals can now deduct up to 27.5 percent of their total remuneration in respect of contributions to pension, provident and RA funds, subject to an annual cap of R350 000. In my case, how would the 27.5-percent deduction be calculated?

Name withheld

 

Braam Fouche, a financial adviser at PSG Wealth in Umhlanga Rocks, Durban, responds: You have indicated that your current pension fund contribution amounts to 20.8 percent of your pensionable salary, but that you also earn a large percentage of non-pensionable income as part of your total remuneration. Therefore, you can calculate the deduction for which you qualify as 27.5 percent of your total taxable income, less your current contributions to your pension and retirement annuity (RA) funds, which would leave you with the balance that you can either contribute to another RA fund or add to your current pension fund contributions. The implementation of the latter option needs to be verified with your employer or pension fund administrator.

 

Note: Readers will be sent the unabridged answers to their questions. However, published responses will be edited for length and clarity.