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BUDGET IN A NUTSHELL: TOUGH TIMES AHEAD


Jaco Leuvennink Cape Town – Finance Minister Pravin Gordhan had a tough message for South Africans in Wednesday's Budget Speech in the National Assembly, with the introduction of a new tax bracket for the very rich, state debt creeping up and almost all economic indicators and fiscal numbers weaker than in last year's budget.

 

While South Africa is "once again at a crossroads" and "tough choices have to be made to achieve development outcomes", Gordhan nevertheless tried to stress the need for growth.

He used the word “transformation” more than 50 times in his speech, but against this background said: “Our growth challenge is intertwined with our transformation imperative.

We need to transform in order to grow, we need to grow in order to transform. Without transformation, growth will reinforce inequality; without growth, transformation will be distorted by patronage." He also indicated that fiscal consolidation will continue.

An additional R28bn will be collected in the coming financial year by means of those earning more than R1.5m per year paying 45% of that back to the taxman (the previous top rate was 41%), limited adjustment for bracket creep, a fuel levy rise of 30 cents per litre, a higher dividend withholding tax rate and the usual rise in sin taxes (excise on alcohol and tobacco).

There was relief for property buyers with the first R900 000 (previously R750 000) of the value of a transaction not liable for transfer duty. Social grants were increased by about 7% on average. While it looks like Gordhan made an effort to appease his critics, listening to him was tinged with sadness on the impression that it was his last budget after making a comeback as finance minister just more than a year ago.

The highlights of the budget are: Macro-economic outlook • Gross domestic product growth will gradually improve from 0.5% in 2016 to 1.3% in 2017 and 2.0% in 2018, supported by improved global conditions and rising consumer and business confidence. The percentages are considerably lower than last year’s estimates.

The review says though that greater availability and reliability of electricity should also support stronger growth in 2018/19. • Exports are expected to grow by 1.9% in 2017, 4.9% in 2018 and 5% in 2019, after estimated negative growth of -1.2% last year.

• After reaching 6.4% in 2016, consumer inflation is expected to decline to 5.7% in 2018.

• The current account deficit, after reaching 4% in 2016, will come down to 3.7% in 2018 and 3.8% in 2019. • Government will continue to enable investment through regulatory reforms and partnerships with independent power producers.

• Public sector infrastructure bottlenecks will be addressed through reform and capacity building. During 2017/18, government will establish a new financing facility for large infrastructure projects. Budget framework

• The budget deficit (consolidated) crept up to 3.4% for 2016/17 from the 3.2% stated in last February’s budget. This was due to less revenue collected than expected. The deficit is expected to narrow to 3.1% for 2017/18 and 2.6% in 2019/20.

• State debt is also steadily creeping up. Debt stock as a percentage of gross domestic product is expected to stabilise at 48.2% in 2020/21 (previously 46.2% in 2017/18, and before that 43.7% in 2017/18). • The main budget non-interest expenditure ceiling has been lowered by R26bn over the next two years (almost the same as the R25bn planned last year). • An additional R28bn (R18.1bn last year) of tax revenue will be raised in 2017/18. Measures to increase revenue by a proposed R15bn in 2017/18 will be outlined in the 2018 Budget. • R30bn has been reprioritised through the budget process to ensure core social expenditure is protected.

• Real growth in non-interest spending will average 1.9% over the next three years. Apart from debt-service costs, post-school education is the fastest-growing category, followed by health and social protection. Specific spending programmes over the next three years Over the next three years, government will spend:

• R490bn (R457bn last year) on social grants.

• R106bn (R93.1bn) on transfers to universities, while the National Student Financial Aid Scheme will spend R54.3bn (R41.2bn).

• R751.9bn (R707.4bn) on basic education, including R48.3bn for subsidies to schools, R42.9bn for infrastructure, and R12.7bn (R14.9bn) for learner and teacher support materials.

• R114bn (R108.3bn) for subsidised public housing.

• R94.4bn (R102bn) on water resources and bulk infrastructure.

• R189bn (R171.3bn) on transfers of the local government equitable share to provide basic services to poor households.

• R142.6bn to support affordable public transport. • R606bn on health, with R59.5bn on the HIV/Aids conditional grant. Tax proposals

• A new top marginal income tax bracket for individuals combined with partial relief for bracket creep will raise an additional R16.5bn.

• R6.8bn will be collected through a higher dividend withholding tax rate. Increases in fuel taxes and alcohol and tobacco excise duties will together increase revenue by R5.1bn.

• As soon as the necessary legislation is approved, government will implement a tax on sugary beverages. The rate will be 2.1c per gram for sugar content above 4g per 100 ml.

• A revised Carbon Tax Bill will be published for public consultation and tabling in Parliament by mid-2017.

• The first R900 000 of the value of property acquired from March 1 2017 will be taxed at zero percent. Before March 1 2017 the first R750 000 of the value of property was taxed at zero percent.

• The general fuel levy will increase by 30c/litre on April 5 2017. This will push the general fuel levy up to R3.15/litre of petrol and to R3.00/litre of diesel. The road accident levy will increase by 9c/litre of petrol and diesel on April 5 2017.

• Personal income tax will bring in R482bn, VAT R312bn, company tax R218bn, fuel levies R96.1bn and customs and excise duties R96bn in the coming year. Sin taxes rise Taxes on alcohol and tobacco are set to rise as follows: Beer 12c/340ml; Fortified wine 26c/750ml; Ciders and alcoholic fruit beverages 12c/340ml; Unfortified wine 23c/750ml; Sparkling wine 70c/750ml; Spirits 443c/750ml; Cigarettes 106c/packet of 20; Cigarette tobacco 119c/50g; Pipe tobacco 40c/25g; and Cigars 658c/23g. Social grant spending and increases Spending on social grants is set to rise from R164.9bn in 2016/17 to to R209.1bn by 2019/20, growing at an annual average of 8.2% over the medium term. The number of social grant beneficiaries is expected to reach 18.1 million by the end of 2019/20. The specific increases are:

• State old age grant from R1 505 to R 1 600 per month;

• State old age grant, over 75s from R1 525 to R1 620;

• War veterans grant from R1 525 to R 1 620;

• Disability grant from R1 505 to R 1 600;

• Foster care grant from R890 to R920 ;

• Care dependency grant from R1 505 to R1 600; and

• Child support grant from R355 to R380.

BUDGET SQUEEZING AN ALREADY BLED TAX BASE – IRR

BUDGET SQUEEZING AN ALREADY BLED TAX BASE – IRR

Lameez Omarjee

 

 

Finance Minister Pravin Gordhan ahead of his 2017 Budget. 

Johannesburg – Finance Minister Pravin Gordhan’s Budget Speech lacked a plan for growth and austerity, said Gwen Ngwenya, chief operations officer at the Institute of Race Relations (IRR).

The IRR released a report on the National Budget, which was delivered by Gordhan in Parliament on Wednesday. It highlighted that government expenditure will continue to exceed revenue by a high margin, adding more pressure on an already burdened tax base.

“The Treasury’s plan is an exercise in extracting blood from a stone by squeezing an already over-bled tax base,” said Ngwenya.

She said that the state has been taking a greater portion of the wealth generated in the economy. “Government expenditure as a proportion of gross domestic product has increased from 26.4% in 1994/95 to a projected 33% in 2017/18. By international standards this is a very high level,” she explained.

Ngwenya also referred to increasing debt levels, up from 26% of GDP in 2008/09 to the current level of 50.7% of GDP. “As debt levels have increased, so too has the government’s interest bill. The state’s debt cost amounted to 8.8% of total expenditure in 2013/14 but is forecast to increase to 11% in 2019/20,” she added.

The state debt burden is currently at 10% and servicing this debt could be spent on health, housing and community development. It is equivalent to half the education budget, according to the report. “Debt is therefore starting to crowd out other areas of expenditure,” said Ngwenya.

With the tax-to-GDP rate already high, and no “sustainable options” to raise revenue in future, said Ngwenya. Only significantly higher levels of growth will free the state from a tax-to-GDP trap, according to the report.

Burdened households

Household debt is 50% higher than in the 2000s, and the tax on sugary drinks coming in later this year and the fuel levy of 30 cents per litre will further “gouge” household incomes, she explained.

Personal income tax is the largest single contributor to tax revenue at 38.1%, compared to corporate income tax contributing 17.3% and VAT which contributes 24.7%. Relying on the middle class and individual taxpayers to help reduce the budget deficit is not a sustainable policy avenue, according to the report.

“The government has very little room to manoeuvre. If current growth and revenue collection targets are not met, the government may find itself in a considerable degree of fiscal, and therefore political, difficulty,” said Ngwenya.

Reducing the budget deficit requires austerity, as economic growth is far too low, explained the report.

However, austerity measures would be accompanied by political difficulty for the government, and to avoid austerity, growth is required. But there is no clear growth strategy laid out, according to the report.

National and provincial administrations share the bulk of the responsibility for spend which is wasted through “corruption” and “inflated tenders” and empowerment contracts, said the report. “Cutting wastage and corruption would reduce the deficit pressure on the government.”

The report found that increasing corporate tax above the current 28% would do more harm than good as South Africa’s economic competitiveness is already reduced. Further, increasing the VAT rate would lead to political consequences. Spending less money on social protection, which accounts for 60% of expenditure, and personnel expenditure, which accounts for 35%, would give government breathing room. But this also carries political consequences.

“Our view is that the government has come close to maxing out the revenue it can extract from the economy, but has no workable plan to create new revenue,” said Ngwenya.

 

 

 

ALLAN GRAY BACK ON TOP AT RAGING BULLS

ALLAN GRAY BACK ON TOP AT RAGING BULLS

 

Named best local management company for 2016.

Patrick Cairns 

After a five year break, Allan Gray reclaimed the title of South African Management Company of the Year at this year’s Raging Bull Awards. The award is given to the asset manager that delivers the best overall risk-adjusted performance across all of its funds.

Allan Gray last won the award in 2011, having won it consecutively since 2008. However, it had slipped to fifth by 2014 and last year it took third place.

“We were very flattered to win this award, which for us is testimony to our focus on creating long-term wealth for our clients,” said Jeanette Marais, director of distribution and client service at Allan Gray. “We are extremely grateful for advisers and investors’ continued trust and confidence.”

PSG Asset Management was named as the second best South African Management company, while last year’s winner, Nedgroup Investments was third. For the second consecutive year, Nedgroup Investments took the Raging Bull award for Offshore Management Company of the Year. 

“This accolade is a real endorsement of our ‘best of breed’ philosophy where we identify and partner with exceptional independent managers who we believe have a sustainable edge,” Nedgroup Investments said in a statement.

To commemorate the 21st edition of the awards, the Raging Bulls also included two special awards for top performance over 21 years. The first went to the fund delivering the best outright performance in the South African equity general category over this period, while the second went to the South Africa multi asset equity fund that had produced the best risk-adjusted performance.

Both awards were claimed by Investec Asset Management. The Investec Equity Fund won in the equity general category, and the Investec Managed Fund won for the best multi-asset fund.

Investec also took the Raging Bull for the best South African equity fund, measured on outright performance over three years. That award went to the resurgent Investec Value Fund, which has shown a remarkable recovery recently after a number of years of under-performance.

Another notable award was the Raging Bull for the best South African-domiciled Global Equity General Fund, which went to the Old Mutual Global Equity Fund for an incredible fifth consecutive year.

The Prescient Income Provider Fund was also a repeat winner. For the second year in a row, the fund took the Raging Bull for the best performing South African Interest Bearing Fund over three years. 

The award for the best South African multi-asset equity fund on a risk-adjusted basis over three years went to the NFB Ci Cautious Fund of Funds, while the Centaur BCI Flexible Fund was named as the top multi-asset flexible fund on a risk-adjusted basis.

                                                  ........................... END ..............................

BUDGET2017: CHANGES TO TRANSFER DUTY

Budget2017: Changes to transfer duty

Carin Smith

Cape Town - Finance Minister Pravin Gordhan announced in his Budget 2017 that properties less than R900 000 will no longer attract transfer duty.

Jonathan Kohler, CEO of Landsdowne Investment Properties applauds this announcement.

“This move will help to encourage home ownership in South Africa – especially in the second-hand market. With higher prices in new developments such as the Fourways Precinct attracting building costs of approximately R19 000 per square meter and other new developments in the Waterfall area attracting building fees of approximately R23 000 per square meter, the Budget 2017 announcement will positively impact prospective first time homeowners who will now be able to enter the market," said Kohler.  

"Buyers can now purchase very good value second-hand properties in popular locations with a cost of between R9 000 and R12 000 per square meter – making it an attractive investment falling below the R900 000 transfer duty threshold."

With the steady increase in property prices over the past 24 months, this is a welcome relief to individuals wanting to enter the market as well as existing property owners wanting to sell with good appreciation and get back into market again, in his view.

"For over 12 years in the residential sectional title space, the one bedroom apartment has been the best investment property performer. This announcement will further boost this portion of the market," said Kohler.

According to Jacques du Toit, Absa property economist, the transfer duty threshold on property increased to R900 000 will support housing affordability in view of consumers and households that came under increased financial strain due to inflationary pressures and rising interest rates since early 2014.

"We always knew that this was a budget that was set to bring a higher tax burden, especially for the wealthy and tougher times for consumers on the whole as Treasury needed to find an extra R28bn in a shrinking economy," said Samuel Seeff, chair of the Seeff property group.

Insofar as the property market is concerned, the raising of the threshold for transfer duty exemption from R750 000 to R900 000 effective from the 1 March is the most positive and welcome outcome for Seeff as it will enable more first time home buyers to get onto the property ladder.

That said, the cost of home ownership remains high with home owners burdened with rising property taxes, sectional title levies and ever-higher basic utility costs.

"We are pleased that there has been no further hike in transfer duty for the higher price brackets as was the case last year," said Seeff.

Bruce Swain, MD of Leapfrog Property Group, said buyers were given some relief in 2015 when the threshold was raised to R750 000 (up from R600 000 in 2014). This further increase to R900 000 will do much to alleviate the pressure on buyers, which will in turn boost the property market”, says Swain. 

Swain applauded Gordhan for appealing to home owners, especially in the lower end of the property market, to hold on to their homes for longer. 

“A house is an asset that can be used to generate real wealth – not just by eventually selling it for a good price, but to by using it as collateral to fund a child’s education for example. This is responsible advice that ought to be applied by all South African home owners,” said Swain. 

The raising of the threshold for transfer duty on properties sold for less than R900 000, up from R750 000 is positive news as it provides some relief for first time home buyers, said  Dr Andrew Golding, chief executive of the Pam Golding Property group.

“This aspirant sector of the market is a key driver of South Africa’s residential property market, solidly underpinning activity, particularly in metropolitan hubs which increasingly draw a younger generation of home buyers wanting accommodation close to the workplace," said Golding.

“Also welcome is the increased investment in infrastructure and transport networks as well as in integrated urban development projects and township precincts, as this helps provide a catalyst for growth in the housing market.”  

STAY CALM, AND STAY INVESTED

STAY CALM, AND STAY INVESTED

Your chances of earning a real return on your money are much higher if you remain invested over the long term.

Patrick Cairns 

 

Over the past ten years, investors in South African-domiciled unit trusts have generally enjoyed fairly good returns. Excluding money market funds, 92.78% of all local funds with ten-year track records have delivered inflation-beating performance over this period.

However, this statistic looks very different over the short term. For the one year period to the end of December 2016, only 23.99% of funds produced real returns – in other words outperformed inflation.

All South African-domiciled unit trusts

 

Total number of funds

Number of funds that beat inflation

Percentage

One year

992

238

23.99%

Ten years

346

321

92.78%

Source: Morningstar

One could argue that this just shows that last year was quite poor for investors. However, it does also make the point that the longer you stay invested, the better your chances of earning a real return on your money.

This is particularly true for funds that invest primarily in growth assets like listed equity. When comparing returns over a number of time periods, it is quite apparent that your chances of seeing real returns are much higher if you stay invested for at least five years.

The tables below show the relative performance of funds in three local unit trust categories – multi-asset high-equity, multi-asset flexible, and equity general. These categories were chosen as they have the greatest exposure to equities. The analysis shows how many funds in each category delivered real returns over six different time periods.

South Africa Multi-Asset High-Equity

 

Total number of funds

Number of funds that beat inflation

Percentage

One year

157

10

6.37%

Two years

126

25

19.84%

Three years

104

68

65.38%

Five years

80

78

97.50%

Seven years

57

55

96.49%

Ten years

42

38

90.48%

Source: Morningstar

South Africa Multi-Asset Flexible

 

Total number of funds

Number of funds that beat inflation

Percentage

One year

65

17

26.15%

Two years

63

17

26.98%

Three years

57

28

49.12%

Five years

48

46

95.83%

Seven years

44

42

95.45%

Ten years

30

28

93.33%

Source: Morningstar

South Africa Equity General

 

Total number of funds

Number of funds that beat inflation

Percentage

One year

162

31

19.14%

Two years

143

14

9.79%

Three years

122

52

42.62%

Five years

98

91

92.86%

Seven years

82

78

95.12%

Ten years

59

54

91.52%

Source: Morningstar

Across all three categories, five years is a clear inflection point. It is from this period that an investor’s chances of seeing a real return go above 90%, and stay there.

There is admittedly a small shortcoming in this analysis in that it doesn’t take survivorship bias into account. In other words, funds that have closed down aren’t taken into consideration and in many cases those funds would have closed because they were poor performers.

However, the difference between short-term and long-term performance is still stark. Even though returns over one- or two-years may be poor, if you stay invested you are likely to be rewarded.

It is also noticeable that the multi-asset high-equity funds show much better relative returns over three years than flexible or pure equity funds. As they are generally more diversified across different asset classes you would expect their medium-term performance to be more stable, and the tables show that this is the case. Even in this category, however, the likelihood of seeing real returns increases significantly after five years.

The lesson here is that patience is a key part of successful investing. What happens over the short term might seem alarming, but if you stay invested and let time do its work, your chances of growing your real worth become a lot better.

 

                                     ................................   END ..............................

 

Latest News

BUDGET IN A NUTSHELL: TOUGH TIMES AHEAD


Jaco Leuvennink Cape Town – Finance Minister Pravin Gordhan had a tough message for South Africans in Wednesday's Budget Speech in the National Assembly, with the introduction of a new tax bracket for the very rich, state debt creeping up and almost all economic indicators and fiscal numbers weaker than in last year's budget.

 

While South Africa is "once again at a crossroads" and "tough choices have to be made to achieve development outcomes", Gordhan nevertheless tried to stress the need for growth.

He used the word “transformation” more than 50 times in his speech, but against this background said: “Our growth challenge is intertwined with our transformation imperative.

We need to transform in order to grow, we need to grow in order to transform. Without transformation, growth will reinforce inequality; without growth, transformation will be distorted by patronage." He also indicated that fiscal consolidation will continue.

An additional R28bn will be collected in the coming financial year by means of those earning more than R1.5m per year paying 45% of that back to the taxman (the previous top rate was 41%), limited adjustment for bracket creep, a fuel levy rise of 30 cents per litre, a higher dividend withholding tax rate and the usual rise in sin taxes (excise on alcohol and tobacco).

There was relief for property buyers with the first R900 000 (previously R750 000) of the value of a transaction not liable for transfer duty. Social grants were increased by about 7% on average. While it looks like Gordhan made an effort to appease his critics, listening to him was tinged with sadness on the impression that it was his last budget after making a comeback as finance minister just more than a year ago.

The highlights of the budget are: Macro-economic outlook • Gross domestic product growth will gradually improve from 0.5% in 2016 to 1.3% in 2017 and 2.0% in 2018, supported by improved global conditions and rising consumer and business confidence. The percentages are considerably lower than last year’s estimates.

The review says though that greater availability and reliability of electricity should also support stronger growth in 2018/19. • Exports are expected to grow by 1.9% in 2017, 4.9% in 2018 and 5% in 2019, after estimated negative growth of -1.2% last year.

• After reaching 6.4% in 2016, consumer inflation is expected to decline to 5.7% in 2018.

• The current account deficit, after reaching 4% in 2016, will come down to 3.7% in 2018 and 3.8% in 2019. • Government will continue to enable investment through regulatory reforms and partnerships with independent power producers.

• Public sector infrastructure bottlenecks will be addressed through reform and capacity building. During 2017/18, government will establish a new financing facility for large infrastructure projects. Budget framework

• The budget deficit (consolidated) crept up to 3.4% for 2016/17 from the 3.2% stated in last February’s budget. This was due to less revenue collected than expected. The deficit is expected to narrow to 3.1% for 2017/18 and 2.6% in 2019/20.

• State debt is also steadily creeping up. Debt stock as a percentage of gross domestic product is expected to stabilise at 48.2% in 2020/21 (previously 46.2% in 2017/18, and before that 43.7% in 2017/18). • The main budget non-interest expenditure ceiling has been lowered by R26bn over the next two years (almost the same as the R25bn planned last year). • An additional R28bn (R18.1bn last year) of tax revenue will be raised in 2017/18. Measures to increase revenue by a proposed R15bn in 2017/18 will be outlined in the 2018 Budget. • R30bn has been reprioritised through the budget process to ensure core social expenditure is protected.

• Real growth in non-interest spending will average 1.9% over the next three years. Apart from debt-service costs, post-school education is the fastest-growing category, followed by health and social protection. Specific spending programmes over the next three years Over the next three years, government will spend:

• R490bn (R457bn last year) on social grants.

• R106bn (R93.1bn) on transfers to universities, while the National Student Financial Aid Scheme will spend R54.3bn (R41.2bn).

• R751.9bn (R707.4bn) on basic education, including R48.3bn for subsidies to schools, R42.9bn for infrastructure, and R12.7bn (R14.9bn) for learner and teacher support materials.

• R114bn (R108.3bn) for subsidised public housing.

• R94.4bn (R102bn) on water resources and bulk infrastructure.

• R189bn (R171.3bn) on transfers of the local government equitable share to provide basic services to poor households.

• R142.6bn to support affordable public transport. • R606bn on health, with R59.5bn on the HIV/Aids conditional grant. Tax proposals

• A new top marginal income tax bracket for individuals combined with partial relief for bracket creep will raise an additional R16.5bn.

• R6.8bn will be collected through a higher dividend withholding tax rate. Increases in fuel taxes and alcohol and tobacco excise duties will together increase revenue by R5.1bn.

• As soon as the necessary legislation is approved, government will implement a tax on sugary beverages. The rate will be 2.1c per gram for sugar content above 4g per 100 ml.

• A revised Carbon Tax Bill will be published for public consultation and tabling in Parliament by mid-2017.

• The first R900 000 of the value of property acquired from March 1 2017 will be taxed at zero percent. Before March 1 2017 the first R750 000 of the value of property was taxed at zero percent.

• The general fuel levy will increase by 30c/litre on April 5 2017. This will push the general fuel levy up to R3.15/litre of petrol and to R3.00/litre of diesel. The road accident levy will increase by 9c/litre of petrol and diesel on April 5 2017.

• Personal income tax will bring in R482bn, VAT R312bn, company tax R218bn, fuel levies R96.1bn and customs and excise duties R96bn in the coming year. Sin taxes rise Taxes on alcohol and tobacco are set to rise as follows: Beer 12c/340ml; Fortified wine 26c/750ml; Ciders and alcoholic fruit beverages 12c/340ml; Unfortified wine 23c/750ml; Sparkling wine 70c/750ml; Spirits 443c/750ml; Cigarettes 106c/packet of 20; Cigarette tobacco 119c/50g; Pipe tobacco 40c/25g; and Cigars 658c/23g. Social grant spending and increases Spending on social grants is set to rise from R164.9bn in 2016/17 to to R209.1bn by 2019/20, growing at an annual average of 8.2% over the medium term. The number of social grant beneficiaries is expected to reach 18.1 million by the end of 2019/20. The specific increases are:

• State old age grant from R1 505 to R 1 600 per month;

• State old age grant, over 75s from R1 525 to R1 620;

• War veterans grant from R1 525 to R 1 620;

• Disability grant from R1 505 to R 1 600;

• Foster care grant from R890 to R920 ;

• Care dependency grant from R1 505 to R1 600; and

• Child support grant from R355 to R380.

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