My late mother has appointed me as the sole executor of her estate and I am attending to her liquidation and distribution account. She held more than 40 JSE-listed and black economic empowerment (BEE) shares. How do I calculate the capital gains tax (CGT) and the base cost? The shares were bought over the past 30 years. Also, she had changed stockbrokers a few times, and I am unable to work out the costs of the shares.
Willie Fourie, the head of estate and trust services at PSG Wealth, responds: This is quite a detailed issue, but I’ll try to stick to the basics.
CGT was introduced on October 1, 2001, which is the valuation date for all assets for CGT purposes. CGT applies to all assets disposed of after the valuation date of October 1, 2001. Death is an event that triggers CGT, because the deceased is deemed to have disposed of his or her assets. The CGT payable on the disposal of an asset is determined by subtracting the base cost from the proceeds of the disposal. There is an annual exclusion of R40 000 for individuals, which is increased to R300 000 in the year in which a person dies.
The following methods can be used to determine the base cost. The method depends on when the asset was acquired.
Acquisition before the valuation date: 20% x proceeds, less the allowable deductions;
The market value of the asset, which was published in the Government Gazette (GG23037);
The time-apportionment method for assets that were acquired before October 1, 2001; and
The weighted-average method can be used for shares listed on the JSE.
When a share portfolio is transferred to another stockbroker, a statement is usually provided that contains full details of the shares, the value at date of transfer, and the cost price for the shares. This is relatively easy now that all shares are traded electronically. It does create a problem if shares were purchased prior to the commencement of electronic trading on the JSE when investors held share certificates. It could be difficult to obtain detailed records from previous stockbrokers. If there is documentation available to show the date of purchase of the shares, you can determine the price as at date of purchase from the JSE.
The value of BEE shares for CGT will largely depend on the specific employment equity scheme when the shares were issued. Section 8 of the Income tax Act deals with these schemes, and one would have to obtain the rules of the scheme to determine the valuation. The company secretary of the company that implemented the scheme will be able to provide the valuation.
This is a very complex issue, and my advice is to appoint a tax practitioner to assist with the tax of the estate.
SHOULD I CONSIDER PRIVATE EQUITY?
I have read much in the business press recently about private equity. Is this something that I, who doesn’t know a lot about investing, should consider in my portfolio? What are the benefits over investing in listed equities and unit trusts? And aren’t the risks much higher?
Marius Cornelissen, a wealth manager at PSG Wealth Menlyn, responds: Private equity is an asset class that mainly consists of equity securities (shares) and debt in companies that are not publicly traded on a stock exchange. It entails the pooling of investors’ capital by a private equity firm to create a start-up venture capital company, buy real estate or invest in a listed company and take it private.
High-net-worth investors often diversify their equity exposure by placing a portion of their assets in private equity investments. These investments often have return profiles that do not correlate with, and can sometimes significantly outperform, listed equities and unit trusts over an extended period.
However, due to the nature of the underlying investments, there are also different types of risk involved compared with other asset classes. Private equity investments normally have a lock-in period, sometimes between four and seven years, which means you have to stay invested for that period and will have little or no liquidity.
The pricing of these investments is usually not done daily or monthly, so investors do not always know the up-to-date value of their investment. Often private equity investments require significant amounts of initial capital outlay, taking them out of reach for a smaller investor. Finally, not all of these investments result in a positive return and can lead to the permanent loss of capital.
I NEED TO SAVE ON INSURANCE
I haven’t had a salary increase in two years, but my expenses have continued to mount, with municipal rates and insurance forming a much bigger part of my monthly expenses than they did two years ago. There doesn’t seem to be much I can do about my rates, but what about my insurance? Should I part ways with my broker and look for a cheaper, direct insurance option?
Riana Wiese, an adviser at PSG Insure, responds: It is always a good idea to review your household budget and look for ways to save, but be careful of cutting corners on your insurance.
There might be ways to cut your insurance costs and save a little extra month to month, but it can be catastrophic for your finances if you need to claim and find yourself underinsured.
You may be able to find a cheaper policy, but in most cases you’ll discover that the cover is limited and that the terms and conditions put you at a disadvantage in the event of a claim.
Here is how you can ensure that you are adequately insured:
When taking out an insurance policy, make sure that you declare all your previous claims/losses so that you cannot be found to have withheld relevant information from your insurer, which may invalidate future claims.
Provide the correct details of the security measures in place on your property or in your vehicle.
When it comes to disability cover and life assurance, it is paramount that you provide accurate, truthful information about your health and do not withhold anything that may be relevant, as this could leave you or your dependants without an income when it is most needed – even if you’ve been paying your monthly premiums for years.
The best way to find out whether there are any insurance costs you could be saving on – without risking any future benefits should you need to claim – is to discuss your needs and circumstances with an experienced insurance adviser.
IS THE MONEY MARKET SAFER?
My husband has recently become convinced that we need to move most of our savings from the balanced fund where it has been invested for the past seven years to a money market investment. He believes we are in for more tough times, so this is the best way to protect our retirement savings. Do you agree with this thinking? We are both 48 years old and working.
Paul Bosman, a fund manager at PSG Asset Management, responds: The answer to this question depends on your personal circumstances, including when you plan to retire and start drawing an income from your savings. I advise you to discuss this with a qualified financial adviser, who will require more information than you have provided here. That said, your husband is not alone when it comes to looking for a “safe harbour” for your savings. It has been a tough period in the markets, and nobody likes to see their savings decline.
Although the money market may feel safer now, research shows that, in the long term, not taking on enough risk is likely to leave you significantly worse off.
It is one of the great ironies of investing that “playing it safe” is not really safe at all over the long term. To make matters worse, the average investor will start to see this only as they get closer to retirement – when they will have less time to recover their losses.
On the other hand, when investing in equities, you may feel like you’re on the losing end many times over an extended period. It takes a strong resolve to stay committed, but it’s critical. Research shows that investors are unlikely to generate returns that exceed inflation by more than 5% (after fees) over the long term if they do not have significant equity exposure. Counterintuitively, this makes equities a safer long-term bet than cash.
Balanced funds have become a popular choice for investors saving towards retirement. They invest sufficiently in equities to avoid the low-risk, low-return trap, but are required to have at least 25% invested in other asset classes to moderate risk.
The average balanced fund in the South African multi-asset high-equity sub-category has returned about 13% a year since the inception of the sub-category in 1994. This means that, over the long term, every R1 000 put into a balanced fund has doubled about every six years, which is a significantly higher return than you could achieve in the money market.
Email your queries to [email protected] or fax them to 021 488 4119. This feature is sponsored by PSG Wealth.