PROPERTY TO BOOST MY INCOME
I shall retire at 63 in four-and-a-half years. I belong to a company retirement fund. I know that I have to use two-thirds of my retirement benefit to buy an annuity. If I use the remaining one-third to buy two flats and rent them out to supplement my income, do I have to pay tax on the rental income? If so, how must this be done? Is renting out property a good way to supplement my retirement income?
Riaan Strydom, a financial adviser at PSG Wealth in Mill Park, Port Elizabeth, responds: South African residents must declare all their taxable income to the South African Revenue Service. Rental income forms part of your taxable income and must therefore be declared. You are allowed to deduct expenses incurred in the generation of rental income, so it is important to keep a record of all the expenses related to the property, such as levies, insurance, rates and taxes, agent’s commission and maintenance.
The income can be declared in one of two ways. The most common way for individuals with one or two rental properties is to declare the income when submitting their annual tax return. However, if your combined net taxable rental and investment income is more than R30 000 a year, you must register as a provisional taxpayer and submit provisional tax returns by August 31 and February 28 of each tax year. When submitting your provisional tax return, you must estimate the taxable income for the year and pay a proportional amount of tax with each return.
The question whether rental income is a good investment is more difficult to answer. It depends on an individual’s circumstances and the property. Some of the factors to consider are:
• How much rental income you could receive;
• The expenses you will incur to receive that rental income; and
• Your net income after expenses, and how it compares with the income you could earn if you invested the same capital elsewhere.
You also have to consider the risks associated with a property, such as its location, condition, and how desirable it is for tenants.
If you are without tenants for a couple of months, or, worse, your tenants do not pay and you need to take legal action to have them evicted, your retirement income will be negatively impacted.
I advise that you conduct thorough research and make a well-informed decision before you decide to buy property to supplement your income.
INSURING MY CHILD'S CAR
My child will be going to university next year and living in a residence, and will be given a new car. What do I need to think about to make sure that she is covered under my short-term insurance policy?
Werner Prinsloo, principal at PSG Insure in Durbanville, Cape Town, responds: If your child is still financially dependent on you, you may wonder in whose name the car must be insured: yours or your child’s. A principle called “insurable interest” applies in this situation: the person who takes out the policy (also called the insured) can suffer a financial loss if the item is stolen or damaged.
In a short-term insurance policy, the term “the insured” usually refers to you – if your name is shown in the schedule and includes your spouse and any family members who normally live with you, or who are financially dependent on you. This means your child’s car will be covered under your policy irrespective of whether the vehicle is registered in your or your child’s name.
The conditions of the policy apply, and the premium will depend on where the car is usually kept, which must be specified in your policy and kept up to date. Your child must be registered on the policy as the regular driver.
You should also consider cover for electronic devices, such as a smartphone, laptop or tablet. When insuring these devices when your child takes them to university, it is important to check the specifications in your policy and provide the right information, such as the manufacturer of the device, the model, serial number and insured value (the current replacement value for a new device). This cover applies worldwide.
If your child’s residence room is broken into, personal belongings and clothes will be covered under the household contents or household resident section of a parent’s policy. However, it must be specified in your policy that your child’s address is different to your address.
If cover is required outside of where your child will live, the items will have to be insured under the all-risks section of your policy. However, the value of the unspecified items must be sufficient to accommodate the limit per item you want to cover in your policy.
ESTATE PLANNING FOR OFFSHORE ASSETS
I am based in South Africa and am considering buying an investment property in Europe. What do I need to consider in terms of my estate planning?
Willie Fourie, a fiduciary adviser at PSG Wealth, responds: It is important to obtain expert advice in each jurisdiction where capital is invested relating to domicile, residence, reporting obligations, succession, matrimonial regimes and forced heirship.
The deceased estate of a person resident in South Africa consists of their worldwide assets and can therefore be liquidated by the nominated executor according to the provisions of the deceased’s last will and testament. The problem is that the provisions might not be recognised in the jurisdiction where the offshore assets are registered. Many countries in Europe are civil-law jurisdictions where forced heirship takes precedence over any testamentary provisions.
The following testamentary options should therefore be considered for offshore investments like yours: a single will to deal with all your assets, whether situated in South Africa or elsewhere; a will pertaining to your assets in a specific jurisdiction; or a will dealing only with your assets outside South Africa.
If you decide on more than one will, consider the wording of the various wills carefully. Clearly state the applicable jurisdiction of the will and take care to revoke previous wills only in that particular jurisdiction.
It would be wise to obtain legal advice regarding an offshore will when buying offshore immovable property from the conveyancer in that offshore jurisdiction, as well as to consult a professional when drafting your will. I would further advise you to ensure that your executor understands the complexities of owning offshore assets and is able to facilitate the winding up of your deceased estate, wherever it is situated.
HOW DO I DIVERSIFY MY PORTFOLIO?
I constantly read about diversification. How can I get it right when it comes to my offshore investment portfolio?
Ian Daniell, a financial adviser at PSG Wealth in Uitenhage and PSG’s Wealth Adviser of the Year 2016/17, responds: The main objective of diversification is to invest your money in specific classes and regions. This will reduce the overall risk and volatility in your portfolio, which will help you to avoid making costly mistakes driven by greed and fear.
Diversification helps your portfolio to remain robust and relevant as market conditions change and can help you to remain on track to achieve your investment goals. Whether you are investing in the global or the local market, the same rules of diversification apply. Some key pointers to keep in mind are:
• Global diversification. Exposure to offshore currencies and economies is essential when building resilient long-term portfolios. Limiting your investments to one geographic region or currency (South Africa) will greatly increase risk and volatility. You can achieve exposure to other countries and currencies by investing offshore directly or using rand-denominated offshore funds.
• Market diversification. A good general equity fund or multi-asset fund can ensure that you are exposed to many different industries and market sectors. If you invest only in specialised sectors, such as gold or property, your risk and volatility will rise significantly.
• Manager diversification. Different kinds of fund managers perform well at different times. It can be useful to invest with managers with different styles. You can diversify by choosing a portfolio that includes active and passive fund managers.
• Asset class diversification. The basic building blocks are equities, fixed income, property and cash. You should aim for a mix that suits your risk profile and investment term. This will provide enough growth (equities) in the long term, and enough stability and yield (cash, fixed income and property) in the medium and short term.
Tactical changes may be necessary from time to time, and a financial adviser can help you to decide on a suitable long-term diversified allocation.