Old Mutual Premiums and Problems 2012

Transcription

PREMIUMS & PROBLEMS
Edition No. 105
July 2012
A journal to provide an information service and a forum for the
discussion of problems and new developments in financial planning.
The opinions expressed by contributors are not necessarily those of Old
Mutual Life Assurance Company (SA) Ltd, a Licensed Financial Services
Provider. FSP License Number 26/10/703.
Calculations and illustrations should under no circumstances be used in
quotations.
Copyright reserved.
Kindly note that this edition has been updated in accordance with the
Budget Speech delivered in February 2012. Certain interpretations are
based on the editors’ understanding of the Budget Speech and
correspondence with the Commissioner for Inland Revenue.
Contributions and enquiries are welcome and must be sent to:
The Editors
Premiums & Problems
Personal Financial Advice Human Resources
Legal Department
Old Mutual
PO Box 66
Cape Town
8000.
e-mail: premiums&[email protected]
Editors
®
David Hands B Comm, LLB, LLM (Tax), CFP
®
Jim Dawson BA (Hons), LLB, ICMQ, CFP
®
Soré Cloete B Com LLB, CFP
H Dip Tax
®
Tristan Naidoo LLB (UWC) Adv. PG Dip in Fin. Plan CFP
®
Julia le Roux B.A. LLB, CFP
®
Carl Muller BLC LLB LLM (Tax Law) Adv. PG Dip. in Fin Plan CFP
®
Gerald Peter LLB, CFP
Adv. PG Dip. in Fin Plan
The Editors wish to thank the following persons for their contributions to
the Business Assurance chapter:
Jean-Louis Fourie FIA
Mostafa Abdou BCom (Accounting)
Robert Spiers FIA
®
Angus Lawrie BCom LLB, CFP , H Dip Tax (UNISA)
Published by Old Mutual Personal Financial Advice Human
Resources Legal Department
Design and layout:
Debbie Sampson
Proofreading:
Tristan Naidoo
Reproduction, printing and binding:
Creda Communications
Premiums & Problems – Exam Edition No 105
Disclaimer:
The information contained in this publication is provided for reference
purposes only and is not intended to constitute advice of any nature. Old
Mutual or any of its subsidiaries shall in no circumstances be liable or
responsible and disclaims all liability for any loss, damage (whether
direct or consequential) or expense of any nature whatsoever, which
may be suffered as a result of, or which may be attributable, directly or
indirectly, to the use of or reliance upon the information contained in this
publication
Old Mutual Offices
Personal Financial Advice
BLOEMFONTEIN
PHG Building
196 Nelson
Mandela Road
BLOEMFONTEIN
9300
Tel: (051) 505 2300
Fax:(051) 505 2320
CAPE TOWN
2nd Floor, Southgate
Carl Cronje Drive
Tygerwaterfront
BELLVILLE
7530
Tel: (021) 917 2310
Fax:(021) 917 2400
DURBAN
P.O. Box 2139
WESTVILLE
3630
Tel: (031) 267 5600
Fax:(031) 267 5638
PORT ELIZABETH
P.O. Box 386
PORT ELIZABETH
6001
Tel: (041) 390 7795
Fax:(041) 390 7796
PRETORIA
Menlyn Office Park 2
Gobie Street
Menlyn
0181
Tel: (012) 481 4460
Fax:(012) 481 4583
JOHANNESBURG
1st Floor
Nicol Grove Office Park
Cnr Leslie Avenue East &
William Nicol Drive
Fourways
2091
Tel: (011) 707 5222
Fax:(011) 707 5215
Old Mutual Offices
Brokers
WINELANDS
P.O. Box 399
SOMERSET WEST
7137
Tel: (021) 840 1828
Fax: (021) 917 4746
BLOEMFONTEIN
P.O. Box 214
BLOEMFONTEIN
9300
Tel: (051) 505 2083
Fax: (051) 505 2023
PRETORIA MENLYN
PO Box 34
Umtata
5099
Tel: (012) 470 6100
Fax: (012) 470 6200
KZN SERVICE CENTRE
P.O. Box 2552
DURBAN
4000
Tel: (031) 302 5169
Fax:(031) 301 1771
JOHANNESBURG
P.O. Box 91
PARKLANDS, 2121
Tel: (011) 217 1494
Fax:(011) 217 1489
PORT ELIZABETH
P.O. Box 386
PORT ELIZABETH
6000
Tel: (041) 502 4989
Fax:(041) 502 4955
GAUTENG BANKS
P.O. Box 91
PARKLANDS
2121
Tel: (011) 217 1052
Fax:(011) 217 1449
EGOLI BANKS
Private Bag X573
MENLYN
0063
Tel: (012) 470 6151
Fax:(012) 470 6206
(i)
Table of Contents
Table of Contents
A - Income & Capital Gains Tax
General notes .................................................................... A1
1.
Introduction ............................................................... A1
2.
Residence-based tax .................................................... A1
3.
The taxpayer .............................................................. A3
4.
Employee’s Tax and Provisional Tax ................................ A3
5.
The steps in calculating the tax liability of a natural
person ...................................................................... A5
6.
Gross income .............................................................. A6
7.
Exempt income............................................................ A20
8.
Deductions ................................................................. A27
9.
Calculating the tax liability ............................................ A31
Income tax rates for natural persons & special trusts ........ A31
Income Tax Calculation Sheet ........................................ A35
Provisions relating to persons who are married ................. A36
1.
Income deemed to have accrued to the spouse - s.7(2) ..... A36
2.
Spouses married in community of property ...................... A37
Dividends Withholding Tax ................................................. A38
1.
Regulated Intermediary (RI) .......................................... A39
2.
Exemptions (s 64F, read with s 64FA(2), 64G(2),
& s64H(2)(a), Income Tax Act) ...................................... A40
3.
Generic Product Examples ............................................ A43
4.
Impact of DWT on allowable deduction for retirement annuity
contributions ............................................................... A44
5.
Impact of DWT on companies and shareholders ............... A44
Table of Contents
(ii)
Capital Gains Tax ............................................................... A45
1.
Who is liable for CGT?. ................................................. A45
2.
What is capital gain?. ................................................... A45
3.
Assets ....................................................................... A46
4.
Disposals .................................................................... A46
5.
Exclusions from capital gains tax .................................... A47
6.
Determining the base cost............................................. A50
7.
Attribution of capital gains ............................................ A52
8.
Aggregate capital gain or aggregate capital loss ............... A53
9.
Capital losses .............................................................. A54
10.
Record-keeping ........................................................... A54
Summary of capital gains tax liability calculation ............... A56
B - Investment Planning
General notes ..................................................................... B1
What is investment planning? ................................................. B1
The investment planning process ............................................ B1
Main factors affecting client’s investment strategy ..................... B4
1.
Risk .......................................................................... B4
2.
Liquidity ..................................................................... B10
3.
Taxation ..................................................................... B10
4.
Inflation. .................................................................... B13
Miscellaneous Investment Formulae .................................. B14
1.
Bank acceptances ........................................................ B14
2.
Values of gilts (e.g. Eskom stock) in phases of rising and
falling interest rates ..................................................... B14
3.
Calculation to determine return on redemption of
existing debt (e.g. bond on house or motor vehicle lease) .. B15
4.
A guide to interest rate calculations using basic interest
tables ........................................................................ B19
(iii)
Table of Contents
Bond Redemption Table ................................................ B22
Investment Planning Worksheet ........................................ B26
1.
Step 1: Financial data................................................... B27
2.
Step 2: Income growth objective ................................... B30
3.
Step 3: Determine investor’s marginal rate of tax ............. B30
4.
Step 4: Determine whether debt should be repaid
from capital available ................................................... B32
5.
Step 5: Invest the capital required for emergency
purposes at the best available call rate ........................... B33
6.
Step 6: Provide for future capital needs .......................... B33
7.
Step 7: Determine income deficit in year 6 ...................... B33
8.
Step 8: Determine the amount to be invested in an
income portfolio........................................................... B34
9.
Step 9: Determine future cash flows ............................... B35
10.
Step 10: Determine total annual income from
income portfolio........................................................... B36
11.
Step 11: Incorporating the figures determined in
steps 7 to 10 do a comprehensive cash flow analysis ........ B36
12.
Step 12: Investment of balance of capital ....................... B38
Investment comparison ...................................................... B39
Collective Investment Scheme ............................................ B45
1.
What is a collective investment scheme? ......................... B45
2.
Benefits of collective investment schemes ....................... B45
3.
Classification of collective investment schemes................. B46
4.
Funds not specifically categorised ................................... B49
5.
Factors to consider when investing in unit trusts............... B49
6.
Categories of unitised investment products ...................... B50
Table of Contents
(iv)
Offshore investments ......................................................... B54
1.
Introduction ................................................................ B54
2.
Diversifying risk. .......................................................... B54
3.
Exploiting international markets and enhancing
returns ....................................................................... B54
4.
Selecting an offshore centre ......................................... B54
5.
Offshore Investment Options for SA Residence ................ B57
6.
Estate Planning & Tax implications ................................. B60
7.
Exchange Control Odds & Ends ...................................... B63
C - Retirement Planning
Retirement Planning Worksheet ......................................... C1
Notes to Retirement Planning Worksheet ........................... C2
Table A: Capital preservation .............................................. C4
Table B: Annuity rates ....................................................... C6
Retirement planning vehicles: A comparison ..................... C8
Preservation Funds ............................................................ C20
Severance benefits ............................................................. C23
Comparison between defined benefit and defined
contribution funds .............................................................. C24
Retirement Annuity Calculation Sheet ............................... C25
Calculating the tax payable where the taxpayer
retires from more than one retirement
fund (after 1 October 2007) ............................................... C26
Calculating the tax payable where the taxpayer
retires from a retirement fund
after having withdrawn or retired from another fund
previously and/or receiving a severance benefit ................ C28
(v)
Table of Contents
Techniques to reduce income tax at retirement .................. C29
Introduction ........................................................................ C29
1.
Investment of capital in investments generating
tax-free returns .......................................................... C29
2.
Limiting lump sums to tax-free amount ........................... C29
3.
Preserve retirement fund benefits upon withdrawal ........... C29
4.
Retire later from Retirement Annuities ........................... C29
Divorce Order Awards from Retirement Funds.................... C30
Divorce Orders and the Government Employees
Pension Fund (GEPF) .......................................................... C32
D - Business Assurance
Business entities: A comparison ......................................... D1
Business entities - Advantages and Disadvantages ............ D10
1.
Sole proprietorship ....................................................... D10
2.
Partnership ................................................................. D12
3.
Close corporation ......................................................... D13
4.
Company .................................................................... D15
Company Act 71 of 2008 – New structure of
companies...........................................................................D16
Company-owned policies - Summary of tax
implications ........................................................................ D18
1.
Paragraph (m) of the definition of gross income ............... D18
2.
Paragraph (d) of the definitions of gross income ............... D18
3.
Deductibility of premiums - Section 11(w) ....................... D20
4.
Exemptions ................................................................. D22
5.
Summary of developments ............................................ D26
Deferred compensation ...................................................... D30
1.
Definition .................................................................... D30
2.
Income tax implications ................................................ D30
Table of Contents
(vi)
3.
Estate duty implications ................................................ D33
4.
Capital gains tax implications......................................... D33
Keyperson assurance .......................................................... D34
1.
Definition .................................................................... D34
2.
3.
4.
5.
Keyperson valuation ..................................................... D35
6.
Keyperson valuation guideline ....................................... D37
7.
Calculation of cover required where policies are
owned by third parties .................................................. D38
Preferred compensation ..................................................... D42
1.
Definition ................................................................... D42
2.
How the plan works...................................................... D42
3.
4.
Estate duty consequences ............................................. D43
5.
Important considerations .............................................. D43
6.
Capital Gains Tax Implications ....................................... D43
Buy-and-sell agreement ..................................................... D45
1.
Definition .................................................................... D45
2.
The elements of a buy-and-sell agreement ...................... D45
3.
How the plan works...................................................... D46
4.
5.
Estate duty implications (s.3(3)(a)(iA)) ........................... D47
6.
Income tax implications of restraint of trade
payments ............................................................................ D49
1.
Implications for the company......................................... D49
2.
Implications for the employee ........................................ D50
(vii)
Table of Contents
Loan account cover ............................................................. D51
1.
Debit loan accounts ...................................................... D51
2.
Credit loan accounts. .................................................... D51
Loan account redemption plan ........................................... D53
1.
Introduction ................................................................ D53
2.
3.
4.
Business contingency plan .................................................. D55
1.
Introduction ................................................................ D55
2.
Working of the plan ...................................................... D55
3.
4.
5.
The balance sheet: Business assurance leads ..................... D57
Introduction ........................................................................ D57
Assurance leads ................................................................... D57
Valuing business interests .................................................. D61
1.
Introduction ................................................................ D61
2.
Assumptions used in Business Valuations ........................ D61
3.
Valuation Method ......................................................... D62
4.
Earnings Yield Method .................................................. D64
5.
Dividend Yield Method .................................................. D65
6.
Super Profits Method .................................................... D66
Table of Contents
(viii)
Financial ratios ................................................................... D70
Introduction ........................................................................ D70
1.
Liquidity ratios ............................................................ D70
2.
Solvency ratios ........................................................... D72
3.
Profitability ratios......................................................... D72
E - Estate Planning
Introduction ....................................................................... E1
Methods to save Estate Duty............................................... E2
Ways to limit growth in the estate........................................... E2
Capital Gains Tax and Estate Planning ................................ E3
Disposals by the deceased .................................................... E3
Disposals by the estate ......................................................... E4
Taxation of trusts ................................................................. E5
Donations Tax: Exemptions ................................................ E6
Estate Pegging Worksheet
Comparison of costs and benefits ....................................... E7
Costs involved in transferring assets .................................. E8
Costs involved in the setting up and administration
of trusts .............................................................................. E9
The taxation of trust income ............................................... E10
Tax rates ............................................................................ E11
Interest-free loans ............................................................. E14
1.
Income tax considerations............................................. E14
2.
Donations tax considerations ........................................ E15
3.
CGT Consequences ...................................................... E15
(ix)
Table of Contents
Anti-tax avoidance measures.............................................. E16
1. Section 7 ......................................................................... E16
2. Sections 54 - 64 (Donations tax)......................................... E16
3. Section 80A ..................................................................... E16
4. Section 103(5) (Cession of interest) .................................... E17
Tax implications of retaining control in estate planning. .... E19
1.
Trusts ........................................................................ E19
2.
Companies: Unquoted shares ........................................ E19
Limited interests................................................................. E21
1.
Tax implications........................................................... E21
2.
Valuing limited interests for estate duty purposes:
Deaths before and after 1 April 1977 .............................. E23
3.
Valuation of limited interests: Examples .......................... E24
Tables for valuation of limited interests………………….E28 - E33
Estate duty: Rebate of duty on successive deaths .............. E34
How to calculate the estate duty that may be apportioned
to policies owned by third parties/ where there is a thirdparty beneficiary ............................................................... E35
ANC marriage - Estate Duty Worksheet .............................. E37
ANC marriage and residue is bequeathed to
surviving spouse - Estate Duty Worksheet ......................... E38
Community marriage - Estate Duty Worksheet ................... E40
Community marriage and residue is bequeathed to
surviving spouse - Estate Duty Worksheet ......................... E42
Calculation of residue which accrues to the
surviving spouse ................................................................. E44
Estate planning - Liquidity analysis .................................... E45
Capital Needs Analysis Worksheet...................................... E46
Trust Worksheet - Income tax saving ................................. E47
Table of Contents
(x)
Calculation of accrual in terms of the accrual system ......... E48
Life assurance and estate planning..................................... E49
Retirement fund lump sums................................................ E51
Intestate succession ........................................................... E53
1.
The surviving spouse ................................................... E53
2.
Descendants ............................................................... E54
The Wills Act, No. 7 of 1953 - The signing of wills .............. E56
1.
Wills in respect of which the testator has died before
1 October 1992 ........................................................... E56
2.
Wills in respect of which the testator has died after
1 October 1992 ........................................................... E57
F - General
Report writing .................................................................... F1
1.
Introduction/Background .............................................. F1
2.
Areas of concern .......................................................... F1
3.
Objectives .................................................................. F1
4.
Possible courses of action and their appraisal
and evaluation............................................................. F2
5.
Conclusion/Recommendations........................................ F2
Exchange control guidelines ............................................... F3
1.
Capital Transactions ..................................................... F3
2.
Portfolio Investments by South African Institutional
Investors ................................................................... F3
3.
Emigration .................................................................. F4
4.
The Single Discretionary Allowance ................................. F5
5.
Credit and/or Debit Cards ............................................. F6
6.
Estates and transfers to beneficiaries .............................. F6
(xi)
Table of Contents
Section S54 of the Long-term Insurance Act ...................... F8
Definitions ........................................................................... F8
Provisions relating to policies (excluding annuities).................... F10
Provisions relating specifically to annuities ............................... F11
Basic interest calculations on a financial calculator ............ F14
Valuation of market value of long-term gilts
(e.g. Eskom stock) ............................................................... F17
Nominal and effective rate of interest ...................................... F18
Simple vs compound interest ................................................. F18
Simple vs compound interest. ................................................ F19
Debt repayments .................................................................. F19
Resultant Rate ..................................................................... F20
Life Expectancy Tables........................................................ F21
Compound Interest Tables ……………….…………………..F23 - F34
Present Value Tables ……………………..………….…………F35 - F41
Medical Schemes ................................................................ F42
1.
Introduction ................................................................ F42
2.
Purpose of the Act........................................................ F42
3.
Role-players ................................................................ F42
4.
Medical Schemes ........................................................ F49
5.
Duties and obligations of the broker .............................. F56
6.
Penalties .................................................................... F61
Table of Contents
(xii)
Money Laundering. ............................................................. F62
1.
Introduction ................................................................ F62
2.
Prevention of Organised Crime Act 121 of 1988 (POCA) ..... F62
3.
Financial Intelligence Centre Act 38 of 2001 (FICA) ........... F64
Compliance in terms of the Policyholder Protection
Rules (Long-term Insurance Act 52/1998)......................... F77
The Financial Advisory and Intermediary Services
Act. ..................................................................................... F78
1.
Introduction ................................................................ F78
2.
Pertinent definitions ..................................................... F78
3.
Licensing .................................................................... F80
4.
Key Individuals ............................................................ F80
5.
Representatives ........................................................... F81
6.
Fit and Proper requirements .......................................... F82
7.
Compliance Officer ....................................................... F85
8.
General Code of Conduct for FSP’s and
Representatives .......................................................... F86
9.
Record Keeping ........................................................... F96
10.
Offences & Penalties ..................................................... F97
(xiii)
Table of Contents
Income, Capital Gains & Dividends Withholding Tax
Income Tax,
Capital Gains
Tax
&
Dividends
Withholding Tax
A1
General notes
1.
Introduction
In South Africa income tax is levied in terms of the Income Tax Act
No. 58 of 1962 (as amended). This Act contains provisions for the
levying of four different types of tax, i.e. income tax, dividends
withholding tax (DWT), donations tax and capital gains tax (CGT).
In these notes we will deal only with income tax, CGT, and DWT.
Income Tax and CGT are taxes levied on all persons who have a
taxable income and/or capital gains. The word "person" in this
context does not only refer to natural persons, but also to
companies, close corporations, estates of deceased persons, clubs,
trusts and any other legal entity subject to tax. In these notes the
focus is on the normal tax payable by a natural person and, more
specifically, the employed person earning a salary.
2.
Residence-based tax
A “residence minus” tax system became effective on 1 January
2001 and South African residents have since been taxed on their
world-wide income. To avoid double taxation all foreign taxes paid
by these residents will, however, be allowed as a credit against the
South African tax liability (subject to certain limitations). Certain
categories of income and activities undertaken outside South Africa
will be exempt from South African tax. A Double Taxation
Agreement may also apply. All non-residents will be taxed on their
South African sourced income.
Who is a resident?
Individuals
A resident is defined as either:

A person who is ordinarily resident (namely, whether that
person’s permanent home in South Africa is the home to
which he or she will return). This is the subjective part of the
definition, or

A person who is in the Republic for more than 91 days in
aggregate during the year of assessment; and was in total,
during the preceding five years of assessment, physically
present in the Republic for a period exceeding 915 days; and
physically present in the Republic for a period exceeding 91
days, in aggregate, in each of such five preceding years.
A2
(This is the more objective part of the definition known as
the “physical presence” test.)

It should also be noted that where a person who is a
resident, in terms of the above definition, is physically
outside South Africa for a continuous period of 330 full days,
such a person shall be deemed not to be a SA resident from
the day on which such a person left the RSA. This does,
however, not apply to persons who are resident in the
Republic because of the ordinary resident test.
In summary, then, a person may be a resident in terms of
either the physical presence test or the ordinarily resident
test. However, where the person is a resident in terms of the
physical presence test only, but is physically outside of
South Africa for a continuous period of 330 days, that
person is deemed not to be an SA resident.
Companies
A company is a resident if it is incorporated, formed or
established in South Africa, or has its place of effective
management is in South Africa.
Certain specific exclusions
How will the income of a controlled foreign entity (CFE) be
taxed?
A CFE is a foreign entity which is
residents as defined in Section 9D.
African residents hold more than 50
rights or votes in the entity or control
controlled by South African
Control means where South
per cent of the participation
the entity.
Such income, whether active or passive, will be taxed in the hands
of the residents controlling the CFE. Note that there are exceptions
to this general principle.
How will foreign losses be treated?
Foreign losses of a CFE will be ring-fenced in the CFE and not
taken into consideration in determining the tax liability of the
South African resident controlling the CFE.
3.
A3
The taxpayer
The term "taxpayer" means any person chargeable with any tax
levied in terms of the Act (s.1 "taxpayer").
All taxpayers (other than companies, close corporations and
trusts) are taxed according to one tax table.
Note:
4.

For income tax purposes, a minor is taxed in his/her own
right unless the provisions of section 7 apply.

A deceased estate is regarded as a taxpayer (represented by
the executor) and is taxed according to the tables applicable
to natural persons. If the taxpayer dies during the year that
he/she would have turned 65, the deduction of the
secondary rebate is allowed s.6(1) and 6(2). However, the
rebate will be apportioned, depending on how far into the
year of assessment death occurs.
Employee’s Tax and Provisional Tax
Tax is collected by way of employees’ tax and provisional tax.
(Fourth Schedule) Employees’ tax refers to the tax deducted by an
employer from remuneration paid or payable to any employee.
This method of collecting tax is also referred to as the pay-as-youearn system (PAYE). Provisional tax refers to the estimated
amounts of tax that are paid at periodic intervals.


The First Period (at half year)
o
Half of the total tax for the full year;
o
Less the employee’s tax deducted for this period (6
months);
o
Less any allowable foreign tax credits for this period (6
months).
The Second Period (at year end)
o
The total estimated tax for the full year;
o
Less the employee’s tax paid for the full year;
o
Less any allowable foreign tax credits for the full year;
o
Less the amount paid for the first period.
A4

The Third Period: (voluntary top up six months after year
end unless year end is February in which case seven months
after year end).
o
The total tax payable for the full year;
o
Less the employee’s tax paid for the full year;
o
Less any allowable foreign tax credits for the full year;
o
Less the amount paid for the 1st and 2nd provisional tax
periods.
A provisional taxpayer is:

Any person (other than a company) who derives income,
other than remuneration or an allowance or advance as
contemplated in section 8(1).

Any Company excluding Public Benefit Organisations and
Recreational Clubs.

Any person who is notified by the Commissioner that he is a
provisional taxpayer.
As from the 2007 year of assessment, directors of private
companies and members of close corporations are not required to
register as provisional taxpayers.
The following persons / natural persons are not required to pay
provisional tax:

Any person whose
remuneration.
income
is
derived
solely
from

Any person who does not carry on a business and whose
income does not exceed the tax threshold:
2011/2012 Tax Year
2012/2013 Tax Year
Below age 65
R59 750
R63 556
Age 65 and over
R93 150
R99 056
Age 75 and over
R104 261
R110 889
A5

The taxable income of any person which is derived from
interests, dividends, and rental from the letting of fixed
property will not exceed R20 000.

Any person, who apart from income derived from
remuneration, receives investment income which does not
exceed R22 800 for persons under 65 or R33 000 for
persons over 65.

Any person 65 years or older is exempt from the payment of
provisional tax if: the taxable income for the tax year does
not exceed R120 000 and consists of remuneration, pension,
interest, dividends or rental income from the letting of fixed
property; and he /she do not carry on any business.

Non-resident ship and aircraft owners that are required to
make payment under section 33 of the Act are exempt from
paying provisional tax.
When any taxpayer’s liability for normal tax for the year of
assessment is calculated by the South African Revenue Service
(SARS), these amounts of employees’ tax and provisional tax
payments are then set off against the taxpayer’s final liability for
tax. If the sum of the tax paid the taxpayer’s total liability for tax,
the excess is refunded, but if the amount of tax paid is insufficient,
the taxpayer must pay in the shortfall.
It has previously been proposed that SITE be repealed given that
the personal income tax threshold for taxpayer’s younger than 65
is approaching the SITE ceiling of R60 000.
5.
The steps in calculating the tax liability of a
natural person
The following steps are used to determine the liability for normal
tax of a natural person:
Determine gross income
Less exemptions
=
Income
Plus taxable capital gains
=
Taxable income
Apply normal tax rates
=
Tax per scale
Less rebates
=
Tax payable.
Less deductions
We will now look at each of these steps individually.
A6
6.
Gross income
6.1
General formula
Gross income means, in relation to any year or period of
assessment:

in the case of any resident: the total amount, in cash or
otherwise, received by or accrued to or in favour of such
resident and

in the case of any person other than a resident: the total
amount in cash or otherwise received by or accrued to or in
favour of such person from a source within or deemed to be
within the Republic during such year of assessment, but
excluding receipts or accruals of a capital nature.
Although the definition refers to amounts received by or accrued to
the taxpayer, there are certain provisions which deem amounts
received by persons other than the taxpayer, to have been
received by the taxpayer. These include:

income received in certain circumstances by a married
person from his or her spouse (s.7(2));

income received in certain circumstances by a minor child
(s.7(3) and s.7(4));

income flowing from a donation, settlement or other
disposition (s.7(5), s.7(6), s.7(7))and s.7(8));

lump sums payable by approved funds after the death of the
taxpayer (Second Schedule par. 5(1));

certain types of investment income (s.9D).
Trade income
Trade includes every profession, trade, business, employment,
calling, occupation or venture, including the letting of any property
and the use of any patent, design, trademark or copyright or any
property which is of a similar nature (s.1 "trade").
6.2
Shares and Tax
Section 9C
All “qualifying shares” that have been held for a continuous period
of three years or more, are regarded as capital in nature, and are
A7
automatically subject to capital gains tax. Whereas previously it
was necessary to look into the facts and circumstances of each
case, including the intention of the holder of the shares, now only
the length of time for which those shares are held is relevant.
Where the shares are acquired on different dates, the taxpayer is
deemed to have disposed of the shares held for the longest period
of time.
Note, however, that a share held for under three years may still be
regarded as capital, depending on the intention of the holder
thereof.
The definition of a “qualifying share” includes listed and unlisted
shares, shares in private companies, interests in close
corporations, and certain collective investment schemes (unit
trusts). Among the exclusions are interests in share block
schemes, former rollover schemes, hybrid equity investments,
shares that are not equity shares (for example non-participating
preference shares) and shares in unlisted foreign companies.
There is no election to be able to treat shares as either capital or
revenue in nature. The amendments are favourable to taxpayers
who hold onto shares for more than 3 years; in that the highest
effective rate of CGT for individuals of 10% is lower than the
marginal rates of income tax applicable to taxable income.
In respect of the sale of shares held for more than three years, the
taxpayer must, however, include in his income any expenditure in
respect of the shares which the taxpayer previously enjoyed a
deduction for in that year or previous years.
6.3
Off-shore investment income
Section 9D
This section introduces certain anti-avoidance measures in relation
to the income of controlled foreign entities (CFE), as well as
investment income arising from certain donations, settlements or
other dispositions.
The important definitions in section 9D are the following:
Controlled foreign company means a foreign company in which any
resident/residents, individually or jointly, directly or indirectly,
have more than 50 per cent of the participation rights or are
A8
entitled to exercise more than 50 per cent of the votes, i.e. control
the entity.
Foreign company means any association, corporation, company
arrangement or scheme (excluding a CC or public benefit
organisation (PBO)) which is not a resident.
Participation rights means the right to participate directly or
indirectly in the share capital, share premium, current or
accumulated profits or reserves of the foreign company, whether
of a capital nature or not.
There will be included in the income of affected residents a
proportional amount of the net income of the foreign entity, which
is attributable to the participation rights of the resident in such
entity.
This provision will not apply to a resident who, together with
connected persons, holds less than 10% (in aggregate at all times
during the tax year) of participation rights and voting rights in the
CFE.
Section 9D(9) sets out various amounts that are exempt from the
provisions of section 9D, e.g. if the net income of the CFE is
subject to income tax in South Africa, the provisions of section 9D
will not be applicable.
6.4
Specific inclusions
The definition of gross income lists certain specific amounts that
are included in gross income, e.g. annuities (including commuted
annuities), rewards for services, lump-sum benefits, pension fund
benefits, fringe benefits, dividends, restraint of trade payments,
pension and provident fund surpluses and the proceeds of certain
policies.
6.5
Fringe benefits
The cash equivalent of the value of all fringe benefits, as
determined under the provisions of the Seventh Schedule, granted
in respect of employment or to the holder of any office must be
included in gross income. In terms of the Seventh Schedule the
following perks give rise to a taxable benefit if they are provided to
the employee or holder of office for consideration which is less
than the actual value or cost:
A9

the acquisition of an asset;

the right of use of any asset (other than residential
accommodation and motor vehicles);

private use of an employer-owned motor vehicle (company
car);

meals and refreshments or a voucher for such meals or
refreshments;

the use of residential accommodation;

free or cheap services;

interest-free or low-interest loans;

housing loans or subsidies;

payment of an employee’s debt or release from obligation to
pay a debt;

contributions to a medical aid fund.
Note:
It has been proposed that employer contributions to retirement
funds be fringe benefit taxed. [Proposed effective date: 1 March
2014]
“Employee” in relation to any employer is defined in the Seventh
Schedule as any person who is an employee in relation to such
employer for purposes of the Fourth Schedule, i.e. for purposes of
employees’ tax, including a person who was previously employed
by, or was a director of, a private company if such person is or
was the sole shareholder or one of the controlling shareholders in
such company. Also included are persons who were released by
their employer from an obligation which arose before retirement to
reimburse the employer for an amount paid by the employer on
their behalf or to pay any amount which became owing by them to
the employer before their retirement.
6.6
Subsistence allowances (section 8(1)(c))
A subsistence allowance is not regarded as taxable provided that it
does not exceed a set daily rate (See Government Gazette
35044):
A10
(i)
R303 per day (previously R286), inside the RSA (if the
allowance is paid to defray cost of meals and other incidental
subsistence expenses).
(ii)
R93 per day (previously R88), if the allowance is paid to
defray cost of incidental subsistence expenses.
(iii)
Where the accommodation to which the allowance or
advance relates is outside the RSA and is paid to defray the
cost of meals and incidental costs, the amount per day is
determined in accordance with a table for the country in
which the accommodation is located (among them: Angola:
US$340, Australia: Aus$188, Botswana: Pula518, Canada:
Can$157, Democratic Republic of Congo: US$288, Egypt:
US$118, France: EUR141, Germany: EUR107, India: 4791
Indian
Rupees,
Pakistan
5775
Pakistani
Rupees,
Mozambique: US$69, United Kingdom: GBP124, USA:
US$142, Zimbabwe: US$120).
(iv)
The employee may be entitled to a larger allowance if
he/she can prove that such larger amount was actually
expended.
(v)
These amounts apply in respect of year of assessment
commencing 1 March 2012.
6.7
Travelling allowances (section 8(1)(b))
(i)
Any portion of a travelling allowance received which is not
expended on business travel is included in the employee’s
taxable income.
(ii)
Travel between the employee’s place of residence and
his/her place of work is not business travel.
(iii)
Where the taxpayer receives a travelling allowance, the
amount of the deduction to be claimed for business travel
may be based on the actual cost incurred or on a kilometre
rate established in accordance with the tariffs set out in a
notice published by the Minister of Finance in the
Government Gazette.
(iv)
Where a travel allowance has been given to an employee
who has also been granted the use of an employer-owned
vehicle, that portion of the travel allowance which is not
subject to tax in the employee’s hands is based on the
A11
employee’s actual business travelling expenditure and not
the deemed expenditure determined according to the
statutory rate per kilometre scale.
(v)
The following formulae may be used in calculating the
amount expended on business travel:
(a)
(b)
actual business km
total km travelled
x
actual costs
1
actual business km x km rate
An accurate log book must have been kept.
(vi)
In determining the rate per kilometre, a distinction is drawn
between
the
fixed-cost
element
(which
includes
depreciation, licence fees, registration fees, etc.), the fuel
element and the maintenance element. These elements are
based on the determined value of the vehicle.
(vii)
Determined value in relation to a motor vehicle means:
o
where the vehicle was acquired under a bona fide
agreement of sale or exchange concluded by parties
dealing at arm’s length, the original cost thereof,
including sales tax or VAT, but excluding any finance
charges or interest payable; or
o
where the vehicle is/was held under a financial lease the
cost to the lessor or the selling price of the vehicle plus
any sales tax or VAT paid; or
o
in any other case the market value of the vehicle at the
time when the taxpayer first obtained the vehicle or the
right of use thereof plus any sales tax or VAT which
would have been payable had it been purchased.
(viii) Where any motor vehicle which is owned or leased by an
employee, his/her spouse or child, whether directly or
indirectly, by virtue of an interest in a company or trust or
otherwise, has been let to the employer or any associated
institution in relation to the employer, the sum of the rental
paid and any expenditure defrayed in respect of the vehicle,
shall be deemed to be an allowance paid to the employee in
respect of transport expenses.
A12
(ix)
The fixed-cost element (which includes depreciation, licence
fees, registration fees, etc.) allowed in any year is a fixed
amount ascertained according to the determined value of
the vehicle in accordance with the gazetted table.
(x)
The rate per kilometre will be the fixed amount divided by
the total number of actual kilometres travelled, whether for
business or private purposes. A separate rate per kilometre
is provided in respect of the fuel element and the
maintenance element.
(xi)
The scale setting out the three components of the gazetted
rates per kilometre (see Government Gazette 35064) which
may be used in determining the allowable deduction for
business travel, where no records are kept (effective 1
March 2012) is as follows:
Where the value of the
Fixed cost
Fuel cost
Maintenance
vehicle (including VAT)
(R p.a.)
(c/km)
(c/km)
R0 – R60 000
19 492
73.7
25.7
R60 001 - R120 000
38 726
77.6
29.0
R120 001 - R180 000
52 594
81.5
32.3
R180 001 – R240 000
66 440
89.6
36.9
R240 001 – R300 000
79 185
102.7
45.2
R300 001 – R360 000
91 873
117.1
53.7
R360 001 – R420 000
105 809
119.3
65.2
R420 001 – R480 000
119 683
133.6
68.3
R480 001 and above
119 683
133.6
68.3
Note:
The fixed cost must be reduced on a pro-rata basis if the vehicle is
used for business purposes for less than a full year.
Where the allowance is based on the actual distance travelled on
business or the recipient can prove the actual distance and the
distance travelled in the vehicle for actual business purposes
during the year of assessment does not exceed 8 000 kilometres,
the rate per kilometre shall, at the option of the recipient, and
provided that no other compensation in the form of an allowance
or reimbursement is payable by the employer to the employee in
respect of such vehicle, be determined in accordance with a scale
of 316 cents per kilometre.
(xii)
A13
The steps in calculating the deductible travel expenses are
as follows:
Step 1: List:
(a) total km actually travelled:
…………….
(b) determined value:
…………….
Step 2: Use the amount in Step 1 and the “fixed cost” amount
from the above table to work out the fixed cost:
= fixed cost / total kilometres) x (y/365)=
…………...
y: If the motor vehicle was used for business purposes
for less than 365 days, the fixed cost must be
apportioned accordingly.
Step 3:
Obtain the fuel and maintenance costs per km from
the above table:
Fuel costs
= ……….… cents per km
Maintenance costs
= …….…… cents per km
Note: The fixed cost amount is a rand amount so convert the fuel
and maintenance amount (in cents) into a rand amount for step 4.
Step 4: Add Step 1 and Step 3 amounts together to get the total
cost per km:
Fixed cost + fuel costs + maintenance costs
= …….…… total R costs/km
Step 5: Now work out the deduction allowable against allowance:
Business kilometres (per logbook) x total cost per kilometre (step
4)
=
R .......
Note:

The deduction may not exceed the amount received as a
travel allowance.

To ensure that the correct amount of income tax is collated
through the PAYE system during the year, 80% of a person’s
monthly vehicle allowance will be subjected to tax.
A14
6.8
Private use of employer-owned motor vehicles
(company cars) - Paragraph 7 of Seventh
Schedule
(i)
The value of the taxable benefit is calculated according to a
scale based on the determined value of the vehicle.
(ii)
The exclusion from the determined value of the VAT paid on
the acquisition of the vehicle changed from 1 March 2011.
With effect from this date the determined value must now
include the VAT paid on the acquisition of the vehicle.
(iii)
The “determined value” is based on the original cost (to the
employer) excluding finance charges and interest but
including VAT and any maintenance plan purchased
(excluding extended maintenance plans).
(iv)
The monthly benefit is calculated
determined value of the vehicle by:
was
by
the
multiplying
subject
of
the
o
3.5% where the vehicle
maintenance plan, or
a
o
3.25% where the vehicle was the subject of a
maintenance plan at the time the employer acquired the
vehicle.
(v)
With effect from 1 March 2011, only 80% of the taxable
value of this benefit is subject to the deduction of
employees’ tax. Where the employer is satisfied that at least
80% of the use of motor vehicle will, during the year of
assessment be for business purposes, then 20% of the
taxable value of the benefit is subject to the deduction of
employees’ tax.
(vi)
On assessment, the fringe benefit for the tax year is reduced
by the ratio of distance travelled for business purposes
(substantiated by a logbook) divided by the actual business
travelled during the tax year.
(vii)
Further relief may also be available on assessment in
respect of the cost of licence, insurance, maintenance, and
fuel for private travel (where the full cost is borne by the
employee and if the distance travelled for private purposes
is substantiated by a logbook.)
A15
Exemptions:
“Pool vehicle”

A vehicle available to and used by other employees; and

the private use is of an infrequent nature or merely
incidental to its business use; and

the vehicle is not kept at or near the employee’s residence
outside of business hours.
“Restricted use
Where the nature of the employee’s duties requires the use of the
vehicle out of business hours and the only private use permitted is
travel between his/her residence and work.
6.9
Residential accommodation - Paragraph 9 and
10A of the Seventh Schedule
(i)
No taxable benefit arises where the employee is provided
with accommodation away from his/her normal place of
residence for purposes of performing his/her duties.
(ii)
The benefit is taxed on the basis of the employee’s level of
remuneration and not on the actual value of the housing
provided.
(iii)
The value of accommodation provided to expatriate
employees is taxable to the extent that it exceeds an
amount equal to R25 000 multiplied by the number of
months for which the benefit will apply. (Para 9(7B)(ii)(B) of
Seventh Schedule). The employee is exempt from fringe
benefits for a maximum of two years from date of first
arrival in the RSA. Fringe benefits tax will apply where the
employee was present in the RSA for a period exceeding 90
days during the year of assessment prior to arrival.
(iv)
The taxable benefit that is derived, may be the rental value
of such accommodation calculated in terms of the formula in
(v) below, less any rental actually paid by the employee for
the accommodation or any rental consideration paid by the
employee for household goods supplied and any charge
made to the employee by the employer in respect of power
or fuel provided with the accommodation.
A16
(v)
The rental value to be placed on any accommodation
provided to an employee is calculated in terms of the
formula:
(A - B) x
“A”
C
100
x
D
12
=
A
remuneration
factor
representing
remuneration derived by the employee from
his/her employer during the preceding year of
assessment, in terms of which the remuneration
received is deemed to be grossed up to an
annual amount where the employee worked for
the current employer for part of the previous
year, or is an amount equal to the employees
monthly salary divided by the amount of days in
that month and multiplied by 365 where the
employee worked for a different employer in the
previous year.
“Remuneration” includes directors’
excludes (amongst others):
but

the benefit derived
accommodation;

the benefit derived from the private use
of any motor vehicle;
“B” = an abatement of
2012).
from
fees
residential
R59 750 (from 1 March

The abatement is not available where:

the employer
the employee
the company
controlling the

the employee, his/her spouse or minor
child owns or has some right to acquire
the property.
is a private company and
or his/her spouse controls
or is one of the persons
company.
“C” = a factor which determines the value to be
placed on the accommodation and varies
A17
depending on the size of the accommodation
and facilities supplied:

17, if less than four rooms, or more than
four, but unfurnished and without power;

18, if four or more rooms with either
furnishing or power supplied;

19, if four or more rooms with both
furnishing and power supplied.
“D” = the number of months in the year of
assessment during which the employee was
entitled to occupation of the accommodation.
(vi)
Where the employee is provided with two or more residential
units the cash equivalent will be that of the unit with the
highest rental value over the full period during which the
employee was entitled to occupy more than one unit.
(vii)
Where accommodation which is provided as a benefit to an
employee is not owned by the employer or an associated
person in relation to the employer, or where the employee
has an interest in the particular accommodation, said
employee will be taxed on the amount equal to the greater
of:
o
the value determined or
o
total amount of rentals and other expenditure paid by
employer. Rental payable is not taxable in the hands of
the employee or connected person in order to avoid
double taxation.
An employee will be deemed to have an interest in the
accommodation if:

such accommodation is owned by the employee, his/her
spouse or child, or by a company in which the employee,
his/her spouse or child has a substantial shareholding, or by
a trust in which the employee, his/her spouse or child is a
beneficiary; or

any increase in the value of the accommodation in any
manner whatsoever, directly or indirectly, accrues for the
benefit of the employee, his/her spouse or child; or
A18

such employee, or a connected person in relation to such
employee, has a right to acquire the accommodation from
the employer.
The following criteria apply:

The formula above will not apply, where it is customary for
an employer in the industry concerned to provide free or
subsidised accommodation to its employees, and

It is necessary for the particular employer to provide free or
subsidised accommodation to its employees:

o
for the proper performance of their duties; or
o
as a result of the frequent movement of employees; or
o
as
a
result
of
accommodation.
the
lack
of
employer-owned
The benefit is provided solely for bona fide business
purposes.
The formula method in (v) above will, however, still apply.
6.10 Subsidies - Paragraph 2 and 12 of the Seventh
Schedule
(i)
Taxable benefit arises when an employer pays a subsidy in
respect of capital or interest payments due by the employee
on any loan.
(ii)
Cash equivalent of the taxable benefit in all cases is equal to
the full amount of the subsidy.
(iii)
Where a financial institution or other body grants a loan to
an employee of any employer at a low rate of interest
subject to an additional payment by the employer to
compensate the financial institution for the consequent loss
of interest income, the additional payment will be regarded
as a taxable subsidy in the hands of the employee, if the
payment by the employer - the amount calculated using the
official rate of interest. If it does not exceed this amount,
the benefit will be taxed as a low-interest loan.
A19
6.11 Housing and other loans - Paragraph 11 of the
Seventh Schedule
(i)
A low or no-interest loan to an employee gives rise to a
taxable benefit calculated with reference to the difference
between the interest charged at the official rate (7% pa with
effect from 1 October 2010) and the interest which the
employee actually pays.
(ii)
The value of the taxable benefit is the difference between
the amount of interest, which would be payable on the loan
at the official rate of interest and the amount of interest
actually paid by the employee on the loan.
(iii)
No taxable benefit arises from:
o
any casual loans which in aggregate do not exceed R3
000. (Para 11(4)(a) of Seventh Schedule)
o
a loan granted to enable an employee to further his own
studies.
6.12 Payment of employee’s debt or release from
obligation to pay a debt - Paragraph 13 of the
Seventh Schedule
(i)
Where an employer pays any amount owing by the
employee or releases him/her from the obligation to repay
any debt, a taxable benefit accrues to the employee.
(ii)
The employee will be taxed on the amount of the debt
he/she is released from paying.
(iii)
If an employer pays an employee’s subscriptions to a
professional body, membership of which is a condition of
employment, it is not regarded as a taxable benefit.
6.13 Free or cheap services - Paragraph 10 of the
Seventh Schedule
Travel facility
(i)
The general rule is that travel facilities paid for by an
employer for an employee’s private use will be taxable at
cost to the employer.
A20
(ii)
No taxable benefit is attached to a transport service
rendered by an employer to convey employees from home
to work.
(iii)
In certain circumstances employees of airlines, railways, etc.
will not be taxed on the benefit of free travel.
Other services
All other services are taxable at cost to the employer unless:
the services are rendered at the employer’s place of work to
enable employees to perform their services more effectively or (in
the case of recreational facilities) are rendered at a place set aside
for employee’s recreation in general.
6.14 Contributions to a medical aid fund
The full amount of any contribution made by the employer to a
medical scheme for the benefit of any employee or the employee’s
dependants is deemed to be a medical aid contribution made by
the employee and is a taxable fringe benefit, irrespective of the
employee’s age. (Effective 1 March 2012).
The value of the benefit is equal to the value of the monthly
employer contribution. Where a lump sum contribution is made by
the employer, a formula is used to determine the fringe benefit
based on an apportionment amongst all affected employees.
The fringe benefit has no value where the contribution is in respect
of either:

An employee retired due to superannuation (reaches normal
retirement age according to the rules of the employer’s
superannuation fund) or ill-health; or

Dependants of a deceased employee.
However, the amount of contributions paid by the employer on
behalf of an employee who is 65 years and older AND HAS NOT
RETIRED from that employer, will still be a taxable fringe benefit.
7.
Exempt income
Gross income less exemptions equals income. Some of the more
common exemptions are:
7.1
A21
The basic interest and foreign dividend
exemption s.10(1)(i)(xv) and (xvi)
The interest and foreign dividend exemption threshold has not
been revised. The domestic interest income exemption for the tax
year 2012/2013 remains unchanged at:

R22 800 per annum for taxpayers under the age of 65,

R33 000 per annum for taxpayers aged 65 years and older,
Interest includes distributions from property unit trusts and foreign
interest and dividends. As from 1 March 2012, the foreign interest
and dividend exemption falls away.
Example
If it is assumed that an investor can earn interest of 4.5% on a
money market investment:

Taxpayers younger than 65 can invest up to R506 667
before paying tax.

Taxpayers 65 and older can invest up to R733 333 before
paying tax.
Note:
The current exemptions for interest will possibly be phased out. To
encourage greater savings, tax-preferred savings and investment
accounts are proposed to be introduced by April 2014, as
alternatives to the current tax-free interest-income caps as above.
This will encourage a new generation of savings products. Whilst
returns generated within these savings and investment vehicles
(including interest, capital gains and dividends) and withdrawals
will be tax exempt, it is unclear what the impact will be on interest
earned in other investment vehicles, given the review of the above
mentioned tax-free interest income caps.
It is proposed that a cap of R30 000 per year (with a lifetime limit
of R500 000) per taxpayer be placed on aggregate annual
contributions, to ensure that high net-worth individuals do not
benefit disproportionately. The design and costs of these savings
and investment vehicles may be regulated to help lower-income
earners to participate.
A22
7.2
Dividends - s.10(1)(k)
The exemption for South African dividends has been retained
despite the introduction of a dividends withholding tax (DWT) from
1 April 2012, as DWT is a separate tax and withheld and paid to
SARS on behalf of the beneficial owner. Dividends are therefore
included in gross income but don’t affect taxable income as they
remain exempt.
(See section 3 on page A38 for more detail on DWT).
7.3 The tax-free portion of voluntary purchase
annuities - s.10A
The capital element of a voluntary purchase annuity is exempt
from tax in the hands of the purchaser or his/her spouse or
surviving spouse or deceased/insolvent estate of purchaser
spouse. The capital element includes the capital element of a
purchased annuity where the purchaser of the annuity has died or
has been sequestrated and where the final payment under the
annuity contract becomes payable to the purchaser’s deceased or
insolvent estate.
The following requirements must be met before this exemption
applies:

There must be an agreement between an insurer and a
natural person.

The annuity must be payable until the death of the annuitant
or the expiry of a specified term.

The annuity must be payable to the purchaser or his/her
deceased or insolvent estate or spouse or surviving spouse.

It must not be an annuity payable by the insurer under the
rules of a pension, provident or retirement annuity fund.
The capital element of the annuity is determined in accordance
with the following formula:
Capital element
A=
A
B
x C where:
the amount of the total cash consideration given by
the annuity purchaser.
A23
B=
the total expected return of all the annuities to be paid
(where the annuity is a temporary life annuity the
total expected return must be calculated using the life
expectancy tables based on age last birthday).
C=
the amount of the annuity.
Example
A male aged 66 buys a temporary life annuity for R70 000. He
receives an annuity of R8 000 per annum. His life expectancy is
13.131 years. The total expected return of all the annuities is
R8 000 x 13.131 = R105 048.
Capital element
R70 000
R105 048
x R8 000 = R5 331
The taxable portion of the annuity:
R8 000 - R5 331 = R2 669
If the annuitant is required to render a return, a copy must
be attached to the tax return.
Commutation of voluntary purchase annuity - s.10A(3)(c)
The commuted value of a voluntary purchase annuity is now
taxable as gross income less an exempt amount determined in
accordance with the following formula:
X = A - D,
in which formula:
X
=
the exempt amount;
A
=
the amount of the total cash consideration
given by the purchaser under the annuity
contract; and
D
=
the sum of the capital elements of all
annuity amounts payable under the
annuity contract prior to the
commutation.
Example
A taxpayer purchases a temporary life annuity for R50 000. The
annual annuity is R7 000 of which the capital element is R4 000.
A24
After three years the taxpayer commutes the annuity and receives
a commuted value of R41 000. What amount will form part of
gross income?
Exemption
=X
Taxable portion
7.4
=
=
=
A-D
R50 000 - R12 000
R38 000
=
=
=
commuted value - exemption
R41 000 - R38 000
R3 000
Transfer costs - s.10(1)(nB)
Where an employer bears certain expenses of transfer of any
employee:

on taking up employment;

on transfer from one place of employment to another;

on termination of employment;
no taxable benefit accrues to the employee.
The exempt expenses are:

transport of the employee, his/her household and his/her
possessions;

“settling-in” expenditure at the new place of residence;

the hiring of temporary accommodation (up to a maximum
of 183 days) pending the obtaining of permanent residential
accommodation.
7.5
Share incentive schemes - s.10(1)(nE)
An amount (including any taxable fringe benefits) received by or
accrued to an employee under a share incentive scheme operated
for the benefit of employees which was derived 
upon the cancellation of a transaction under which the
employee purchased the shares under the scheme; or

upon repurchase from the employee at a price not exceeding
the selling price to him/her of the shares under the scheme,
A25
is exempt from tax, if the employee does not receive
compensation or a consideration in excess of the purchase price
he/she actually paid for the shares.
7.6
Employment outside South Africa s.10(1)(o)
Income earned by a resident from employment outside South
Africa on behalf of any employer, resident or non-resident, will be
exempt if services are rendered outside South Africa and the
taxpayer was outside South Africa for periods exceeding 183 days
(in aggregate) during any 12-month period commencing or ending
during the year of assessment and for a continuous period
exceeding 60 full days during such 12-month period. Such service
must have been rendered during such periods.
A26
Basic steps to be followed in determining the exemption:
See also SARS Interpretation Note 16 - 27 March 2003.
Is the taxpayer a person referred to in a 9(1)(e) of the Income Tax Act?
Yes
No
Was remuneration received or did it accrue in respect of services
rendered outside the Republic during the year of assessment?
No
Yes
Was the taxpayer outside the Republic for more than 183 days in total
during a twelve-month period that commences or ends during the above
mentioned year of assessment?
No
Yes
Was the taxpayer’s absence continuous for more than 60 days during the
same twelve-month period above?
No
Yes
Were the services rendered during the 183-day and 60-day period?
No
No exemption
Yes
Exemption
7.7
A27
Foreign pensions
Foreign pensions received by or accrued to any resident are not at
present taxable s.10(1)(gC).
7.8
Bursaries - s.10(1)(q)
Bona fide scholarships or bursaries granted to any person to
enable or assist that person to study at a recognised educational
or research institute are exempt from tax. If the scholarship or
bursary is granted by an employer or any associated institution in
relation to the employer to an employee or to a relative of an
employee, the amount will be taxable in the following
circumstances:
8.

if the bursary is received by means of a current or future
“salary sacrifice”; or

if the bursary is received by a relative of an employee who
earns in excess of R100 000 per annum; and

so much of the bursary contemplated in (ii) above as in the
case of any such relative - R10 000 during the year of
assessment.
Deductions
8.1
General formula - s.11(a) read with s.23(g)
The general formula allows the deduction of:

expenditure and losses

actually incurred

during the year of assessment

in the production of income

not of a capital nature

laid out or expended for the purposes of trade.
The general formula provides for the deduction of those expenses
not covered in the list of special deductions. Included hereunder
would be travelling expenses, recurring business expenses,
advertising, legal costs, salaries, interest paid on money borrowed
to produce income, etc.
A28
The Income Tax Act specifies various special deductions allowable
against income. These deductions are generally meant to expand
the general deduction formula.
8.2
Entertainment expenditure
Self-employed taxpayers can deduct entertainment expenses
under the general deduction formula, (sec.11(a) and sec.23(g)).
Note:
Where an agent or representative derives an income “mainly” in
the form of commissions, qualifying expenditure may be deducted.
The word “mainly” has been interpreted to mean that more than
50% of the agents total remuneration is made up of commission
payments. See also SARS interpretation note 13.
8.3
Medical Aid Contribution and Expenses
Deduction
Effective 1 March 2012, the medical tax credit regime replaces the
previous medical aid contribution deduction for taxpayers under
the age of 65.
The new tax credit system aims to bring about greater equality
across income levels in terms of tax relief for medical aid
contributions.
This tax credit system will only apply to taxpayers under the age of
65. Taxpayers who are 65 years and older will, for the time being,
continue to enjoy a full deduction for all their medical related
expenses.
As it stands, the tax credit (applied in the same way as the rebates
to the final tax liability) for the taxpayer and the first dependent is
R230 and R 154 for each additional dependent.
In addition to this:

taxpayers under the age of 65 may deduct their out of
pocket medical expenses plus the amount of their medical
scheme contributions that exceed four times the medical tax
credit to which they are due, as, in aggregate, exceed 7.5%
of the taxpayers’ taxable income.

taxpayers with disabilities (including their spouses or
children with disabilities) may deduct their full out of pocket
A29
expenses as well as the amount of their medical scheme
contributions that exceed four times the medical tax credits
to which they are due.
Note:
The list of illnesses qualifying as “mental illnesses” exceed
200 and includes for example depression, anorexia, ADD,
ADHD, anxiety, bereavement, etc.
Qualifying expenses consist of:

Contributions paid to a registered medical scheme (Note:
where contributions are paid by an employer of a taxpayer,
they are deemed to have been paid by the taxpayer to the
extent that such amount had already been included in the
income of the taxpayer as a taxable benefit).

Expenses paid in respect of medical services and prescribed
medical supplies not recovered from a medical scheme; and

Other expenditure necessarily incurred
consequence of any physical disability.
and
paid
in
Example
Taxpayer 1 has a taxable income of R900 000 per year (before the
medical aid deduction), attracting a marginal rate of 40%. He has
a wife and 3 children who are dependants on his medical aid.
Previously, his allowable deduction was: (R720 + R720 + R440 +
R440 + R440) x 12 = R33 120. This reduced his annual taxable
income
by
R33 120
(equating
to
a
tax
saving
of
R13 248).
Taxpayer 2 has a taxable income of R150 000 per year (before the
medical aid deduction) with a marginal tax rate of 18%. He also
has a wife and 3 children who are dependants on his medical aid.
Previously, his allowable deduction was R33 120. This equated to
a tax saving of R5 961.60.
Higher income earners were seen to derive a larger benefit from
the previous regime as opposed to lower income earners.
Under the medical tax credits regime:

Taxpayer 1 has a tax liability of R349 245 before medical tax
credits. He qualifies for a credit of R11 064, and his final
liability will be R338 181.
A30

Taxpayer 2 has a tax liability of R16 245. As he has the
same number of dependents, he will have the same medical
credit of R11 064, and his final liability will be R5 181.
8.4
Donations to public benefit organisations
(PBO’s) - s.18A
Bona fide donations to any approved public benefit organisation
may be claimed as a deduction by a taxpayer. The deduction is
limited to 10% of the taxpayer’s taxable income before the
deduction of a claim in respect of any donation or medical
expenditure, but inclusive of any taxable capital gains.
Donations to transfrontier parks are deductable if the donation
equals, or is less than, the amount of R1 million with effect from 1
March 2008.
8.5
Deductions in respect of current and arrear
pension fund contributions - s.11(k)
See Retirement Planning.
8.6
Deductions in respect of current and arrear
retirement annuity fund contributions - s.11(n)
See Retirement Planning.
9.
A31
Calculating the tax liability
9.1
The tax tables
Different income tax rates apply to natural persons, non-natural
taxpayers and trusts. See section E for the tax rates applicable to
trusts. The tables that follow contain the income tax rates
applicable to natural persons for the current and previous two
years of assessment.
Income tax rates for natural persons and special trusts
Year of assessment ending 28.2.2013
Taxable Income (R)
Rate of tax
R0 - R160 000
18% of taxable income
R160 001 - R250 000
R28 800 + 25% of taxable income above R160 000
R250 001 - R346 000
R346 001 - R484 000
R484 001 - R617 000
R617 001
Taxable income (R)
Rate of tax
0 - 150 000
18% of each R1
150 001 - 235 000
R27 000 + 25% of the amount above R150 000
235 001 - 325 000
325 001 - 455 000
455 001 – 580 000
580 001 and above
A32
Taxable income (R)
Rate of tax
0 - 140 000
18% of each R1
140 001 - 221 000
221 001 - 305 000
305 001 - 431 000
431 001 - 552 000
552 001 and above
Deceased estates, special trusts (set up for the benefit of persons
suffering from mental or physical disabilities) and testamentary
trusts established for the benefit of minor children will also be
taxed at these rates. All other trusts are taxed at a flat rate of
40%.
Trusts do not qualify for any rebates or for the exemption on
interest granted to natural persons.
9.2
Tax Thresholds
2011/2012 Tax Year
2012/2013 Tax Year
Below age 65
R59 750
R63 556
Age 65 and over
R93 150
R99 056
Age 75 and over
R104 262
R110 889
This means that a taxpayer

younger than 65 and earning a taxable income of R63 556
or less per annum, or

a taxpayer older than 65 but younger than 75 and earning a
taxable income of R99 056 or less per annum, or

a taxpayer of 75 years and older and earning a taxable
income of R110 889 or less per annum,
will not pay any income tax in the 2012/2013 tax year.
9.3
A33
Tax rebates
Taxpayers who are natural persons are entitled to certain rebates.
These rebates are determined by the age of the taxpayer (section
7).
The rebates are as follows:
2011/2012 Tax Year
Primary Rebate
2012/2013 Tax Year
R10 755
R11 440
R6 012
R6 390
R2 000
R2 130
Secondary Rebate
(applicable only to
taxpayers aged 65 and
over)
Tertiary Rebate
(applicable only to
taxpayers aged 75 and
over)
The secondary and third rebate will also be available if the
taxpayer dies during the tax year in which he/she would have
turned 65 or 75 respectively.
Where the period of assessment is less than 12 months, the rebate
is reduced proportionately.
9.4
Small business: tax stimulus
(Section 12E(4)(a)(i))
The tax rates applicable to Small Business Corporations (gross
income under R14 million) for financial years ending on any date
between 1 April 2012 and 31 March 2013 are:
Taxable Income (R)
Rate of Tax
R0 - R63 556
0%
R63 557 – R350 000
7% of the amount above R63 556 but less than
R350 000
R350 001 and above
A34
To qualify as a small business corporation: in addition to the
turnover requirement:

all the shares must be held by individuals (none of whom
hold shares in any other company other than listed shares,
unit trusts, and shares in certain tax exempt entities. A
shareholding or members interest in an inactive close
corporation/company with assets less than R5000, or which
has taken steps to liquidate, wind-up or deregister is
permitted.)

not more than 20% of the gross income of the corporation
may comprise of investment income and income from
rendering a personal service

the business must not be an ‘employment company’ or
‘personal service provider’.
Turnover tax rates (elective) for micro businesses (qualifying
turnover does not exceed an amount of R1 million) for financial
years ending 29 February 2013 are:
Taxable Income (R)
Rate of Tax
0 - 150 000
0%
150 001 - 300 000
1% of the amount above R150 000
300 001 - 500 000
500 001 - 750 000
R5 500 + 4% the amount above R500 000
750 001 and above
Note:

Turnover tax is a tax based on the turnover of a business
and is available to sole proprietors, partnerships, close
corporations, companies and co-operations. It is a substitute
for VAT, Provisional Tax, Income Tax, and Capital Gains Tax.

With effect from years of assessment commencing 1 March
2012, a micro business can voluntarily exit the turnover tax
system at the end of any year of assessment (but will not be
permitted to re-enter).

From 01 March 2012 micro businesses that register for VAT
will not be barred from registering for Turnover Tax.
A35
Income Tax Calculation Sheet
GROSS INCOME
Salary
Trade Business
Commission
Interest
Dividends (subject to DWT)
Dividends (other foreign - see note)
Other …………………………………………………….
……………………………………………….……
Total
EXEMPTIONS
Basic Interest
Dividends (other foreign)
Foreign employment income……………………….
Other……………………………………………….……
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
-
R
R
-
R
R
R
R
R
INCOME
DEDUCTIONS
Expenses
Pension fund contributions
Retirement annuities contributions
Donations to PBC’s
Medical expenses
Other
Plus: Portion of travel allowance not expended
on business travel
Plus: Taxable Capital Gain
R
R
R
R
R
R
R
R
R
TAXABLE INCOME
Tax on
R……………….
+ ……% on
R……………….
+
TAX PER SCALE
REBATES
Primary
65+
75+
MEDICAL TAX CREDITS
Less: Medical Credit: Taxpayer plus
dependants
TAX PAYABLE
R
R
R
R
-
R
R
R
Note: Dividends declared from foreign companies not listed on JSE are taxed at
marginal rate subject to any eligible exemptions – See A41
(See page A28 (8.3) and page A30 (8.4) for calculation of medical
expenses and deductions for donations to PBO).
A36
Provisions relating to persons who are married
1.
Income deemed to have accrued to the spouse s.7(2)
To prevent married taxpayers from splitting their income with the
sole or main purpose of reducing or avoiding their liability for tax,
the Income Tax Act contains certain anti-avoidance measures
which deem the income of either spouse in certain circumstances
to be the income of the other spouse.
The circumstances in which the section applies are as follows:


Where income is derived by a spouse as a result of:
o
a donation, settlement or other disposition made on or
after 20 March 1991 by the other spouse; or
o
a transaction, operation or scheme entered into or
carried out by that other spouse on or after that date;
o
AND the sole or main purpose of the donation,
settlement or other disposition, transaction, operation or
scheme was to reduce, postpone or avoid that other
spouse’s liability for tax.
Where a spouse derives any income:
o
from a trade carried on by that spouse in partnership
with the other spouse or which is in any way connected
with any trade carried on by the other spouse; or
o
from any partnership of which the other spouse is a
member or from any private company of which the other
spouse is the sole or main shareholder or one of the
principal shareholders; and
o
the amount so earned is excessive having regard to the
nature of the relevant trade, the extent of the spouse’s
services or participation in the trade or any other
relevant factor.
2.
A37
Spouses married in community of property
In the case of spouses married in community, all rental income
from fixed property and all other income derived other than
from the carrying on of a trade will be deemed to have accrued
to both spouses equally, irrespective of which spouse earned the
income.
All income derived from the carrying on of a trade will be deemed
to have accrued to the spouse who is carrying on that trade.
Income derived by way of both voluntary and compulsory
purchase annuities is regarded as income from trade.
A38
Dividends Withholding Tax
With effect from 1 April 2012, the Secondary Tax on Companies
(STC) regime is to be replaced by a Dividends Withholding Tax
(DWT) regime.
All SA residents who are natural persons, and all foreign investors
will be subject to DWT. In anticipation of this, the STC rate was
lowered from 12.5% to 10%. Whilst dividends withholding tax was
expected to be introduced at 10%, the 2012 budget unexpectedly
proposed to introduce dividends tax at 15%.
Foreign dividends are also taxed at the maximum DWT rate,
subject to applicable exemptions or reduced rates.
A “dividend” for purposes of DWT is an amount transferred or
applied by a company for the benefit or on behalf of any person in
respect of any share in that company, whether that amount is
transferred or applied by way of distribution made by or as
consideration for the acquisition of the share in that company
(subject to certain exclusions), that is either paid by a South
African resident company, or paid by a non-resident company if
the dividend is paid in respect of a listed share.
For DWT purposes, a dividend is deemed to have been paid on the
earlier of the date on which the dividend is paid or becomes
payable by the company that declared the dividend. Share buybacks and capital distributions to shareholders are not subject to
DWT.
The following table compares STC to DWT:
STC
DWT
Liability triggered by declaration of
Liability triggered by payment of a
dividend.
dividend.
A tax on the declaring company.
A tax on the recipient (“beneficial
owner”/shareholder) which is withheld
by the declaring company/authorised
regulatory intermediary.
Levied on the first distribution (with
Levied on last distribution from
credits for subsequent distributions).
corporate chain to individual or nonresident.
Payable on top of the dividend distributed.
A39
Deducted before payment of dividend
(gross dividend less DWT). Shareholder
receives the net amount after DWT.
Rate of 10% (subject to exemptions) –
Rate of 15% (subject to exemptions or
previously 12.5%.
reduced rate).
Exemption is based on the nature/status
Exemption is based on the nature/status
of the company (for example s10 exempt
of the recipient (beneficial owner).
entities, fixed property companies, certain
gold miners, intra-group, registered micro
companies).
1. Regulated Intermediary (RI)
A RI is essentially a withholding agent interposed between the
company paying the dividend and the beneficial owner. It has the
responsibility of withholding the DWT and paying the DWT across
to the South African Revenue Service (SARS).
What that means for a financial services company like Old Mutual
is that various entities and funds in the Old Mutual group will be
RIs in respect of certain of their investment products and will be
required to put detailed systems in place to facilitate withholding
and payment of DWT, taking into account for example clients who
have notified OM in the prescribed manner that they are exempt
from DWT.
In relation to long term insurance products (for example
endowment policies), the tax is payable by the company issuing
the policy on behalf of its individual policyholders allocated to the
individual policyholders fund. The result will be a decrease in the
value of the assets backing those policies.
Other RI‟s are:

a portfolio of a collective investment scheme

a nominee that holds investments on behalf of clients as
contemplated in the Codes of Conduct for Administrative and
Discretionary Financial Service Providers (i.e. a nominee
company established by a Linked Investment Service
Provider (LISP))
A40

a central securities depository participant

authorized users or approved nominees under the Securities
Services Act,

a
transfer
secretary
approved
by
the
Commissioner.
2. Exemptions (s 64F, read with s 64FA(2),
64G(2), & s 64H(2)(a), Income Tax Act)
Categories of current exemptions which may be relevant for a
financial adviser are:

Public Benefit Organisations (PBO‟s)

South African resident Companies/Close Corporations

South African Retirement Funds (Pension, Provident,
Retirement Annuity, Benefit & Beneficiary funds as well as
medical schemes

A shareholder in a registered micro business (currently
qualifying turnover not exceeding R1 million for the financial
year) paying the dividend, where the dividend does not
exceed R200 000)

Shareholders (who are natural persons) where the dividend
constitutes a capital gain on a primary residence (limited to
the first R1 500 000 gain)

A non-resident shareholder where the dividend is paid by a
non-resident company if the share in respect of which that
dividend is paid is a listed share. (Dividends from dual-listed
shares are subject to DWT).
The effect of the exemption is therefore that, inter alia, South
African resident companies/South African retirement funds will not
pay DWT on receipt of a dividend from an SA company. Other
categories currently include:

Government - national, provincial & municipal administration

mining rehabilitation trusts

Certain tribal authorities and the Water Board

SANRAL, CSIR, the Development Bank of South Africa
2.1
A41
Declaration – s 64G
The onus is on the shareholder to notify the company paying the
dividend (prior to payment thereof) that they are exempt from
DWT. Failure to submit the required notifications (declarations and
undertakings in the form prescribed by SARS) prior to payment of
the dividend will result in dividends tax being withheld. Nonresidents would also need to notify the company if they qualify for
a reduced rate based on an applicable DTA (see below).
2.2
Refund Of DWT – s 64L and s 64M
Provision is made for a refund of an amount withheld by a
company or RI in respect of DWT where a declaration is not
submitted by the beneficial owner in time but is submitted within a
period of three years after the payment of the dividend & DWT
should not have been paid.
2.3
Foreign dividends – S 64D
To bring parity to the system, foreign dividends will also to be
taxed at 15% [effective 1 April 2012]. The foreign dividends
contemplated in this section pertain to dividends distributed from
foreign companies that are ALSO listed on the JSE. Therefore,
distributions from companies NOT LISTED on the JSE are not
subject to DWT and the exemptions in s64F (to be taxed at
marginal rate subject to any eligible exemptions).
2.4
STC credits – s64J
DWT will not apply to dividends covered by an STC credit. As STC
credits can be carried forward for a period of 5 years, no DWT is
payable by the recipient/beneficial owner during this period for as
long as the STC credits are carried forward.
2.5
Non-residents
2.5.1 Reduced Rates
Under the STC regime, a South African company paying dividends
to a non-resident investor was not able to reduce the rate of STC
regardless of whether a Double Trade Agreement (DTA) was in
place between the two countries.
Under the new DWT regime, it will now be possible for reduced
rates to be applied to the DWT for non-resident shareholders who
qualify based on an applicable DTA. Non-SA residents seeking to
qualify for a reduced rate should complete SARS Form DTD(RR).
A42
South Africa has a number of DTAs with its main trading partners.
The withholding tax rates per SA treaties for the following
countries (full list available on SARS website) are:
Country
Reduced rate of DWT
Mozambique
8% (minimum holding of 25% of capital by a beneficial owner
which is a company) [15% for other beneficial owners]
Mauritius
Namibia
Australia
5% (minimum holding of 10% of capital directly by a beneficial
owner which is a company) [15% for other beneficial owners]
France
5% (minimum holding of 10% of capital directly by a beneficial
owner which is a company) [15% for other beneficial owners]
Germany
7.5% (minimum holding of 25% of voting shares directly by a
beneficial owner which is a company) [15% for other beneficial
owners]
10%
India
United
5% (Control of at least 10% voting power by a beneficial owner
which is a company). [15% for other beneficial owners]
Kingdom
2.5.2 Rebates – s64N
If tax has been paid in another country (which cannot be
recovered from the foreign tax authority), a rebate equal to the
amount of foreign tax paid on the dividend may be deducted from
the South African DWT (only up to the amount of the South African
DWT).
A43
3. GENERIC PRODUCT EXAMPLES
3.1
Direct Unit Trust portfolio
A Collective Investment Scheme (CIS) is an RI. Local dividends are
received from underlying equity investments and dividends
distributed within 12 months are deemed to accrue directly to the
unit holder (s25B(A). DWT will therefore be withheld by the CIS
when the unit trust portfolio declares a distribution, unless the
dividend is paid to another RI or the beneficial owner is exempt as
above (for example, a retirement fund, an SA resident company,
or a PBO among others) and has submitted a declaration to that
effect to the CIS.
3.2 Linked Investment Service Provider (LISP)
products
The nominee company established by the LISP (because the LISP
does not own the units which it purchases in a CIS or direct shares
but acts as administrator only) will be the RI. Liability for DWT is
determined based on the identity of the beneficial owner. DWT will
be withheld by the RI on dividends generated within the underlying
unit trust investment by the LISP, unless the dividend is paid to a
RI or the beneficial owner is exempt as above (for example, a
retirement fund, an SA resident company, or a PBO among others)
and has submitted a declaration to that effect to the RI.
3.3
Life Assurance Endowment Policies – s64I
Life assurance endowment policies are governed by the Long Term
Insurance Act, and as such taxation is applied according to the
„four-funds‟ approach (s29A Income Tax Act).
Where investors are allocated to the Individual Policyholder Fund
(IPF), any dividend (for example from investment into a unit trust,
fund of funds, or direct share) which is allocated to the IPF is
deemed to be paid to a natural person that is a resident by the RI
on the date that the dividend is paid to the insurer and DWT is
payable. The tax is thus payable by the company issuing the policy
on behalf of its individual policyholders allocated to the IPF. The
result will be a decrease in the value of the assets backing those
policies.
The investments of investors allocated
Policyholder Fund, Corporate Policyholder
Policyholder Fund will not be subject to DWT.
to the Company
Fund, or Untaxed
A44
3.4 Provident Fund, Retirement Annuity, Pension
Fund, Preservation Fund –s 64F
Where a retirement fund is the beneficial owner of a dividend, such
dividend will be exempt from DWT. In order to qualify for the
exemption from DWT, retirement funds will have to provide an
exemption declaration to the paying entity (either the company or
the RI). An exemption declaration is not required in respect of a
policy issued by a life company.
3.5
Living Annuities
Investment returns within a living annuity are currently tax-free.
No DWT is therefore payable on dividends within a living annuity.
4. IMPACT OF DWT ON ALLOWABLE DEDUCTION
FOR RETIREMENT ANNUITY CONTRIBUTIONS
Dividends will not form part of Non Retirement Funding Income for
the purposes of the s11(n) calculation of the allowable deduction
for RA contributions.
5. IMPACT
OF
DWT
SHAREHOLDERS
ON
COMPANIES
AND
Essentially shareholders will pay a higher rate of tax under the
DWT regime than under the STC regime, as the dividend is
declared exclusive of any dividends tax. However, as with STC,
receipt of the dividend will not affect the taxpayer’s marginal rate
of tax.
A45
Capital gains tax
The implementation date for capital gains tax (CGT) was 1 October 2001
(the effective date) and only capital gains arising after the effective date
will be subject to CGT. Capital gains are determined and then a portion
thereof is included in the taxable income of a taxpayer. Capital gains are
therefore included in the determination of normal tax and incorporated
as part of the Income Tax Act.
1.
Who is liable for CGT?
1.1
Residents
All South African residents are liable for CGT, on the disposal of
any “asset” as defined whether the disposal is made in the
Republic or beyond its borders.
1.2. Non-residents
A non-resident will be subject to CGT on the disposal of:

any immovable property or any interest or
immovable property situated in the Republic, and
right
in

any asset of a permanent establishment through which a
trade is carried on in the Republic.
Note:
Where a non-resident disposes of immovable property in South
Africa for more than R2 000 000, the purchaser is obliged to
withhold tax (unless a directive indicates otherwise) in advance of
the CGT liability at the following rates: 5% of purchase price
(natural persons), 7.5% (company), 10% (trust).
2.
What is capital gain?
A capital gain is the proceeds (or deemed proceeds) from the
disposal (or deemed disposal) of an asset less the base cost. The
proceeds from the disposal will generally be the price at which the
asset is sold. In certain cases, when it is not possible to determine
the selling price of the asset (for example in the case of death,
donations, disposal of an asset at less than market value,
emigration or immigrations), the market value of the asset will be
the price that could have been obtained upon the sale of the asset
between a willing buyer and a willing seller dealing at arm’s length
in the open market. The base cost of the asset is deducted from
the proceeds to arrive at the capital gain. The capital gain is then
A46
multiplied by the inclusion rate to determine the taxable capital
gain.
3.
Assets
The term “asset” is defined as widely as possible and basically
includes any property of whatever nature and any interest in such
property. It will therefore include the following:

Shares; unit trusts; land; property and rights to property;
large boats (more than 10 m) and aircraft (more than 450
kg); plant and machinery; mineral rights; coins made mainly
from gold or platinum, e.g. Krugerrands and all other assets
except those specifically excluded.
The definition of “asset” specifically excludes any currency and the
distribution of money can therefore never be subject to CGT.
CGT applies to all assets disposed of after 1 October 2001,
whether or not the asset was acquired before, on, or after that
date.
4.
Disposals
A disposal for capital gains tax purposes is regarded as any event,
act, forbearance or operation of law which results in the creation,
variation, transfer or extinction of an asset. It is a very wide
definition that covers almost every situation where there is a
change of ownership of an asset.
The following events, amongst others, would fall within the
definition of disposal:

A sale, donation or cession; expiry or abandonment of an
asset; the scrapping, loss or destruction of an asset; the
vesting of an interest in an asset of a trust in the hands of a
beneficiary; the distribution of an asset by a company to a
shareholder; the granting, renewal, extinction or exercise of
an option; the decrease in value of a person’s interest in a
company, trust or partnership as a result of a value shifting
arrangement.
In addition to the list above, there are a number of events that are
to be treated as disposals for the purposes of CGT (i.e. deemed
disposals). The legislation deems that the asset(s) are disposed of
A47
a day before the event and reacquired immediately at market
value. Some of these events are the following:

When a person ceases to be a resident (par 12(2)), all that
person’s assets are deemed to be disposed of except
immovable property or rights in immovable property
situated in the Republic, and assets of a permanent
establishment through which that person carries on a trade
in the Republic during the year of assessment.

The assets of a person who is not a resident, which becomes
an asset of that person’s permanent establishment in the
Republic other than by way of acquisition, and is withdrawn
from the permanent establishment for personal or other use,
par. 12(2).

An asset of a person that is not held as trading stock, which
becomes trading stock.

A personal use asset held by a natural person, which ceases
to be a personal use asset of that person without being
disposed of.

An asset which is not held as a personal use asset, which
commences to be held as that person’s personal use asset.

When a person dies, all that person’s assets are deemed to
be disposed of, the day the person dies, at market value,
par. 40(d).
In determining when the capital gain or loss accrues to a person
the timing of the disposal becomes important. In most cases the
disposal will take place on transfer of ownership of the asset.
5.
Exclusions from capital gains tax
The list below contains some of the pertinent CGT exclusions.
5.1. Annual exclusion - Paragraph 5(1) of Eighth
Schedule
The first R30 000 of a natural person and a special trust’s capital
gains or capital losses are excluded in each year of assessment.
Where a person dies during a year of assessment, such person’s
annual exclusion for that year of assessment is R300 000.
(Paragraph 5(2), Eighth Schedule). [effective date 1 March 2012]
A48
5.2. Primary Residence Exclusion - Paragraph 5(2) of
Eighth Schedule
The general principle is that capital gains will be taxable on the
disposal of primary residences, with the first R2 000 000 of a
capital gain or loss being disregarded. Capital gains in excess of R2
000 000 will, therefore, be subject to CGT. [Effective date 1 March
2012]
The size of the residential property will also be subject to certain
exclusions. A primary residence includes the land upon which it is
actually situated and may include land adjacent to it that is used
mainly for domestic purposes. The total of all the land must not
exceed two hectares in order to fall out of the CGT net. If the size
of the property exceeds two hectares, a reasonable apportionment
would have to be made. If the property is not mainly used for
domestic purposes, that portion will not qualify for the exclusion.
Absence from primary residence for certain periods
Where a natural person or a special trust disposes of an interest in
a primary residence, but was not ordinarily resident in such
residence for the whole period prior to the disposal date, the
exclusion will be determined with reference to the period(s) during
which the person, beneficiary or spouse was actually ordinarily
resident.
Even if a person, beneficiary or spouse was not
ordinarily resident in the residence for a maximum period of 2
years, he or she will still be deemed to be a resident, if the
absence was due to the following reasons:

The residence was being put up for sale and vacated with
the intention to acquire a new primary residence.

The residence was in the process of being built on land
acquired for purposes of building a primary residence.

The residence was accidentally rendered uninhabitable, for
example, as a result of flood or fire.

The death of that person.
5.3. Personal use assets
Personal use assets are also not subject to CGT. Examples of
personal use assets are cars, furniture and garden appliances.
A49
The following are not regarded as personal use assets:

A coin made mainly from gold or platinum, e.g. Krugerands; immovable property; an aircraft exceeding 450 kg; a
boat exceeding 10 m in length; all financial instruments; a
fiduciary, usufructuary or other like interest, the value of
which decreases over time, a right or interest in any of the
aforementioned assets and certain policy contracts.
5.4. Lump sums from pension, provident or
retirement annuity funds
Lump sums from local retirement funds or from foreign funds of a
similar nature are not subject to CGT.
5.5. The proceeds of a long-term insurance policy
Insurance policies are not subject to CGT in the hands of the
owner provided that such owner is the owner of first instance
(original owner) or his/her spouse, dependant or beneficiary.
5.6. Prizes from a South African source (gambling,
games and competitions)
5.7. A gain of up to R1 800 000 on the sale of assets
of a small business on retirement.
“Small business” means a business of which the market value of all
its assets, as at the date of disposal of the asset or interest does
not exceed R10 000 000 (Para 57(1) of Eighth Schedule).
The person must have, at the time of disposal, held for his/her
own benefit that active business asset, interest in the partnership,
or interest in the company for a continuous period of at least 5
years prior to disposal and must have been substantially involved
in the operations of that small business during that period. The
person must have attained the age of 55 years or the disposal
must be in consequence of ill-health, other infirmity,
superannuation or death.
The sum of the amounts to be disregarded may not exceed R1 800
000 during that person’s lifetime (Para 57(3) of Eighth Schedule).
A50
6.
Determining the base cost
Capital gains or losses are the difference between the base cost of
the asset and the sum received on its sale or disposal. The base
cost is calculated by adding up the following expenses:

Acquisition costs; costs associated with the acquisition and
disposal of the asset (for example legal fees, agent’s
commission, stamp duty, advertising costs, broker’s fees
and transfer duty); VAT; improvement costs and any legal
costs incurred (for example, the legal costs incurred in
defending a right to an asset owned by the taxpayer).

Business assets: All current expenses incurred in respect of
business assets can be included in the base cost.

Shares and unit trusts: Up to one third of any interest
incurred on a loan taken to purchase shares or unit trusts
will form part of the base cost.
6.1
Assets acquired after to 1 October 2001
As mentioned earlier, CGT only applies to gains made after 1
October 2001. The base cost of an asset, purchased after that
date, is simply the purchase price plus any allowable expenses (as
discussed above).
6.2
Assets acquired before 1 October 2001
Before the base cost can be determined, the valuation date value
(value of the asset as at 1 October 2001) has to be determined.
Once this value has been determined, any allowable expenses
incurred after 1 October 2001 must be added to determine the
base cost.
6.3
Market value
The market value of the asset at 1 October 2001 can be used as
the valuation date value.
Taxpayers had until 30 September 2004 to obtain the market
value of the asset.
Even though the valuation may occur
subsequent to 1 October 2001, the valuation must be the value as
at 1 October 2001.
A51
For shares, bonds and other securities traded on the open market,
the market value will be calculated by taking the average closing
price of the asset for the five trading days before 1 October 2001.
6.4
Time apportionment method
This method involves looking at the total capital gain made over
the period during which the asset was owned and then determining
the gain made after 1 October 2001.
6.5
The 20% rule
In terms of this rule 20% of the proceeds received by the seller
will be deemed to be the base cost in the event that an asset held
before 1 October 2001 is sold thereafter. Allowable expenditure
incurred after 1 October 2001 must be deducted from the proceeds
before the 20% rule is calculated.
A taxpayer need only inform the Commissioner of the South
African Revenue Service of the option chosen once the asset is
disposed of.
However, where a taxpayer opts for the market value as the
valuation method, proof of the valuation must be submitted with
the first tax return submitted after 30 September 2004 in the
following instances:
Type of asset
Applies
Where market
value exceeds
Intangible assets
Unlisted shares
Per asset
R1 million
All shares held by the shareholder in the
R10 million
company
All other assets
6.6
Per asset
R10 million
Roll-overs
The CGT legislation provides for the roll-over of certain capital
gains. In such cases a CGT liability does not arise upon disposal or
transfer of ownership, but is rather deferred until a subsequent
CGT event. In all cases the “pre-exchange” base cost is rolled
over. Some pertinent roll-overs are listed below.
A52
6.7
Involuntary disposals - in the case of
expropriation, loss or destruction of an asset
If an amount equal to the proceeds has or will be used in replacing
the asset; a contract is entered into for the replacement,
reconstruction or rectification within one year; and the
replacement asset has or will be brought into use within 3 years of
the disposal of that asset, the roll-over may be applied. The
Commissioner may extend these periods by no more than 6
months if all reasonable steps were taken by the taxpayer. In the
event that this time frame is not adhered to, the gain will be taxed
at the applicable rate for the year in which the asset was originally
disposed of, plus interest at the prescribed rate.
6.8
Reinvestments in replacement assets where
capital gains arise on the disposal of assets that
qualify for capital allowances or deductions
This is the case where an asset utilised in the production of income
is disposed of and the proceeds are reinvested in a similar asset,
provided that the base cost is no less than that of the asset
disposed of. Tax on the capital gains on such assets may be
deferred and paid in annual instalment as per the prescribed
formula.
Where the asset disposed of is a depreciable asset, the roll-over
only applies to the capital gain or loss and not to any recoupment
required in terms of normal income tax provisions.
6.9
Transfers of assets between spouses
The base cost of an asset is transferred to a person’s spouse
where the asset is transferred to that person’s spouse during that
person’s lifetime. The base cost will also be rolled over to that
person’s spouse as a result of that person’s death, or as a
consequence of a divorce order/agreement of division of assets
that has been made an order of court.
7.
Attribution of capital gains
In certain instances capital gains will be attributed to entities other
than those that have disposed of the assets. The following are
examples of where capital gains will be attributed to entities other
than those that made the disposal:
A53

Attribution of capital gains to spouses

Attribution of capital gains to parents of minor children

Attribution of capital gains subject to conditional vesting

Attribution of capital gains subject to revocable vesting

Attribution of capital vesting in a person who is not a
resident

Attribution of income, as well as capital gain
(These CGT attribution rules are similar to the income tax
provisions contained in section 7 of the Income Tax Act.)
7.1
Rate at which the capital gains is included in
taxable income (inclusion rate)
Once a net capital gain for the year of assessment is determined,
such amount is multiplied by the inclusion rate to determine the
individual or entity’s taxable gain.
Inclusion rate x statutory tax rate = effective rate.
Type of Taxpayer
Inclusion
Statutory Tax
Effective Tax
Rate
Rate
Rate
Individuals
33.3%
0 - 40%
0 – 13.32%
Unit Trusts
N/A
N/A
N/A
Other (local) Trusts
66.6%
40%
26.64%
Special Trusts
33.3%
0 - 40%
0 – 13.32%
Individual Policyholders
33.3%
30%
9.99%
Corporate Policyholders
66.6%
28%
18.648%
Company Policyholders
66.6%
28%
18.648%
Untaxed Retirement
N/A
N/A
N/A
Untaxed: Other
0
0
0
Companies
66.6%
28%
18.648%
Life Assurance
8.
Aggregate capital gain or aggregate capital loss
A capital gain or loss is first determined separately for each asset
disposed of by a taxpayer during a year of assessment.
A54
In determining a person’s aggregate capital gain or loss, two steps
need to be followed:

First of all a person’s capital gains and/or losses are added
together; and

Thereafter, the total amount of such capital gains and/or
losses is reduced by the annual exclusion, R30 000, in the
case of a natural person.
8.1
Determination of a net capital gain or assessed
capital loss
After determining a person’s aggregate capital gain or aggregate
capital loss, the person’s assessed capital loss for the previous
year of assessment, if any, must be deducted from the aggregate
capital gain or added to the aggregate capital loss to determine
the net capital gain or assessed capital loss for the current year of
assessment. There is no limit as to the length of time that a
capital loss can be carried forward.
9.
Capital losses
Capital gains must be included in taxable income, but capital
losses can only be offset against capital gains. It is not possible to
offset capital losses against income.
9.1
The limitation of capital losses
Although capital losses may generally be offset against capital
gains, capital losses made on the disposal of certain assets must
be disregarded. These include losses made on the disposal of
personal use aircraft, boats, as well as certain intangible assets
acquired prior to valuation date from connected persons.
The capital loss on the sale of shares will be disregarded if the
share has not been held for more than 2 years before resale.
The limitation above will exclude distributions from unit trusts,
foreign dividends and the dividends between group companies.
10. Record-keeping
It is the taxpayer’s responsibility to supply proof of the base cost
of an asset. As a minimum, the following records should be kept:

The date the asset is acquired

The price paid

Any money spent on the purchase (transfer fees)

Any money spent improving the asset

The date the asset was disposed of

The profit or loss made on the disposal
A55
When an asset is disposed of, the records pertaining to the asset
must be kept for at least four years after the Commissioner
acknowledges receipt of the disposal.
A56
Summary of capital gains tax liability calculation
(Income Tax Act 8th Schedule)
Disposal or deemed disposal of an asset
Proceeds or deemed proceeds
Deduct base cost of the asset
Exclusions
Sum of all capital gains and losses reduced by the
annual exclusion of R20 000 (R200 000 on death)
>R0
or
Aggregate capital gain
<R0
Aggregate capital loss
Deduct previous assessed capital loss
(if applicable)
Net capital gain x inclusion rate
Assessed capital loss carried forward
Taxable gain included in taxable income
NOTES
A57
A58
Investment Planning
Investment
Planning
Investment Planning
Investment Planning
B1
General notes
What is Investment Planning?
Investment Planning is the process of identifying and implementing
appropriate investment strategies to create and accumulate the financial
resources for achieving financial planning goals.
Investment planning seeks to accomplish two equally important goals
that naturally conflict with each other. The first goal is to maximise
returns on investments. The second is most often to minimise
investment risk. Effective investment planning seeks to balance these
two goals in all areas of the investment planning process so that the
investor can achieve the desired outcomes.
Broadly speaking, every investor seeks to achieve one or a combination
of the following objectives:

Wealth creation

Wealth protection

Income generation
Because these objectives are usually not compatible, an investment
planning exercise will often involve trying to reach the best compromise
or balance.
The Investment Planning Process
The investment planning process must take place within the framework
of the six- step financial planning process, which is the internationally
recognised and preferred methodology. The steps are as follows:
1.
Establishing and defining a relationship
The financial planner must use this step to achieve the following:

Discuss the financial planning process

Manage the investor’s expectations (e.g. whether
portfolio will be actively or passively managed)

To clarify his/her responsibilities

To establish the investor’s level of financial knowledge and
attitude toward investments

Comply with the FICA ‘know your client’ requirements
the
B2
Investment Planning

2.
Comply with the FAIS disclosure requirements
Gathering client data
This step involves gathering as much information about the
investor’s assets and liabilities as possible. Without a full
understanding of the client’s circumstances, it is not possible to
make appropriate recommendations.
A financial planner should use this step to collect details (including
values) of all the investor’s existing:

Short-term investments
accounts etc)
(e.g.
bank
accounts;
savings

Long-term investments (e.g. fixed deposits; bonds etc)

Equity investments (e.g. shares and unit trusts)

Other investments (e.g. rental, property investments etc)

Insurance, retirement annuity, pension, provident fund
investments

Liabilities
It is also at this stage that the investor’s specific needs must be
established. The following factors must be established at this
stage:
3.

The investor’s liquidity requirements

The investor’s current tax position

The intended investment horizon (term)

The measure of risk the investor is prepared to take to
achieve his/her objectives.
Analysing Information.
The financial planner should analyse the client’s information to
assess the investor’s current situation and determine what the
investor must do to achieve their objectives. This could include
analysing the investor’s assets, liabilities and cash flow, current
insurance coverage, investments and tax strategies.
Investment Policy
Investment Planning
B3
It is at this stage that the investment policy must be established.
The investment policy refers to the asset allocation decision and
how the investor’s wealth will be distributed between the various
asset classes.
Portfolio Strategy
The decision must be taken whether the portfolio will be actively
managed or passively managed.
4.
Preparing and presenting recommendations and
solutions
The
financial
planner
should
offer
financial
planning
recommendations that address the investor’s goals, based on the
information the investor provides.
The planner should go over the recommendations with the investor
to enable him/her to make informed decisions. The planner should
also listen to the investor’s concerns and revise the
recommendations as appropriate.
5.
Implementation
Once the strategy has been devised and agreed to, the advisor and
investor must decide on implementation. If for example money is
to be invested offshore, the necessary exchange control
procedures have to be followed.
6.
Reviewing and monitoring
The portfolio needs to be monitored on a regular basis (depending
on the investment strategy chosen). The investor should be always
be made aware of how his/her funds are invested and what, if any,
changes have occurred in the portfolio. The investor’s objectives
must also be reviewed periodically to determine if any changes to
the investment objectives are required, and subsequently to the
investment policy and strategy.
B4
Investment Planning
Main factors affecting client’s investment strategy
The main factors that affect a client’s investment strategy are risk,
liquidity, taxation and inflation.
1.
Risk
Risk refers to the uncertainty of whether an investment will earn
its expected rate of return (i.e. the possibility that the actual
return of an investment will deviate from the expected return).
1.1
Risk and Return
It is a widely accepted principle of investing that risk increases
with the potential for higher returns. Low levels of uncertainty (low
risk) are associated with low potential returns. High levels of
uncertainty (high risk) are associated with high potential returns.
It should be noted however, that investing in high risk assets does
not always equate to high returns.. The risk/return tradeoff tells us
that the higher risk gives us the possibility of higher returns. There
are no guarantees. Just as risk means higher potential returns, it
also means higher potential losses.
Art and Antiques
Warrants
Ordinary Shares
Return
Real Estate
Preference Shares
Corporate Bonds
Government Bonds
Treasury Bonds
Risk
Investment Planning
1.2
B5
Types of Risk
Market or Benchmark Risk
Refers to the risk that is inherent in a particular market. Market
risk is indiscriminate and affects all investors in a particular
market. Equity markets for example, are extremely volatile and
susceptible to market crashes.
Market Timing Risk
The risk that an investor takes when trying to buy or sell a stock
based on future price predictions. Timing risk explains the
potential for missing out on beneficial movements in price due to
an error in timing. This could cause harm to the value of an
investor’s portfolio because of purchasing too high or selling too
low.
Currency Risk/Exchange Control Risk
This is the risk when otherwise good investment returns will be
eroded by a weak currency. For example, if money must be
converted into a different currency to make a certain investment,
changes in the value of the currency relative to the Rand will affect
the total loss or gain on the investment when the money is
converted back.
Geographic Risk
Refers to the risk associated with the country in which your
investment lies. The risk of investing in a country which is
politically volatile will be greater than the risk of investing in a
country that is stable.
Sector Risk
Sector risk refers to the danger that the stocks of many of the
companies in one sector (like health care or technology) will fall in
price at the same time because of an event that affects that entire
sector/industry.
Fund Manager Risk
Fund manager risk refers to the potential loss which an investor
could incur as a result of the failure of a fund manager to perform
on his mandate.
B6
Investment Planning
Liquidity Risk
Liquidity risk is the risk that a given asset cannot be traded quickly
enough in the market to prevent a loss (or make the required
profit).
Term or time horizon risk
Generally speaking, the risk inherent in a growth investment tends
to decrease the longer the term of the investment. Thus, for
example, it is recommended that one invests in unit trusts
preferably over the medium to long term (five years and longer). A
time horizon for an investment does affect the investor’s ability to
accept risk. The longer the time horizon of the investment, then
generally the lower the standard deviation and, therefore, the
lower the risk the longer the term. A five-year view can therefore
differ substantially from a ten-year view. It is therefore
recommended that a risk analysis should be done per investment
need.
1.3
Measuring Risk
Risk may be measured by means of the standard deviation and the
coefficient of variation. These measures are based on the expected
rate of return of a particular asset.
Standard Deviation
Standard deviation is a statistical measure as to the volatility of an
investment portfolio and is therefore a good indicator of the risk
associated with that investment.
Example
Over a 3 year period the expected return of a portfolio is 12% per
annum. If the standard deviation is 15%, this means that the
range of expected returns could statistically be between -3% and
27%.
Coefficient of Variation
The coefficient of variation allows an investor to determine how
much volatility (risk) he/she is assuming in comparison to the
amount of return he/she can expect from his/her investment.
Simply stated, the lower the ratio of standard deviation to mean
return, the better your risk-return tradeoff.
Investment Planning
B7
To calculate the coefficient of variation, the standard deviation is
divided by the expected return.
Coefficient of Variation =
1.4
Standard Deviation
Expected Return
Diversification
Diversification refers to the spreading of a portfolio over many
investments to avoid excessive exposure to any one source of risk.
The prices of shares, bonds, property, precious metals and other
investments often do not rise and fall in tandem. Therefore, when
one type of investment is on the rise, another may be declining.
Consequently, by investing in two or more types of classes of
investments, the possibility is increased that when an investment
in a portfolio is under-performing, then another investment in the
portfolio could be performing well. These investments perform well
under differing economic conditions. Diversification of investments
therefore should result in a less volatile overall portfolio
performance. A well-diversified portfolio should therefore,
theoretically, achieve higher returns for a given level of risk.
Diversification does not, however, eliminate market risk.
Ways to diversify

Invest across asset classes.

Invest in South African as well as foreign assets.

Invest in managed portfolios rather than directly in
individual shares. (In principle asset managers of
managed funds have a pool of funds from many
investors, they are then able to buy a range of shares
within an asset class, as well as investing in a number
of different asset classes.)
Diversifiable Risk / Unsystematic Risk
The risk that is specific to an industry or firm. Examples of
diversifiable risk include losses caused by labor problems or
weather conditions. Because these events occur somewhat
independently they can be largely diversified away so that their
negative effects are offset by positive results from another firm or
sector.
B8
Investment Planning
Non- Diversifiable Risk
Risk of an investment asset (bond, real estate, share) that cannot
be reduced or eliminated by adding that asset to a diversified
portfolio. This includes general economic conditions; the impact of
monetary and fiscal policies, inflation and political events that
affect all sectors of the economy.
1.5
Risk Assessment
The amount of risk that an investor is prepared or can afford to
accept will vary from investor to investor as well as from one
investment need to another. A problem is that defining risk and
tolerance is difficult, in that objective as well as subjective factors
are applicable. Some of the factors that should be taken into
consideration in determining an investor’s risk profile are:
Objective considerations
Generally:

the older the person the more risk averse because of
the shorter term of the investment.

the longer the term the higher the potential risk that
can be absorbed.

the larger the disposable income the higher the risk
that could potentially be absorbed.
Subjective considerations

The investor’s investment experience. (Investors who
have such experience will appreciate the implications
associated with high-risk investments such as
equities.)

The investor’s reaction to market fluctuations.

If the investor does not have short-term insurance
this could indicate a high-risk tolerance.
There are a number of risk profiles available in the market place
and the majority have either a three or five-risk profile
differentiation. What is important is that the risk profile of the
investor indicates the risk that can be tolerated. Once established,
the investor’s risk profile should be aligned with the risk profile of
the investment itself.
Investment Planning
B9
The investor risk profile analysis
Before any investment vehicle is recommended to the investor, the
following should be determined:

The investor’s risk profile;

The investor must understand that the higher the risk,
the higher the potential return and the lower the risk,
the lower the potential return;

The need for diversity in investments in relation to the
investor’s investment needs.

The term of the investment in relation to the
investor’s short and long-term investment needs.

The appropriate type of portfolio in relation to the
investor’s risk profile.
Typical questions contained in a risk profile analysis are:

What is your current age?

This investment will be required in how many years?

What percentage is this investment of your investment
portfolio?

Have you made provision for an emergency fund, e.g.
hospital, repairs to vehicle, replacement of household
appliances, etc.?

Do you expect your earnings to:
o
increase
o
decrease, or
o
remain the same over the next few years?

What experience have you had in equities, i.e. what
percentage of your portfolio is invested in equities?

Your attitude towards investing:
o
I am averse to risk and do not want to be exposed to
volatile high-risk investments.
o
I want the potential of a return higher than inflation and
am prepared to invest between 55% and 75% of my
investment in shares.
B10
Investment Planning
o



2.
I want the potential of a return higher than inflation and
am prepared to invest in excess of 75% of the
investment in shares.
What would your reaction be if there was a stock market
crash and the value of your investment reduced by 50%:
o
Surrender/liquidate the investment immediately?
o
Hold on to the investment until the market corrects itself
and then surrender/liquidate the investment?
o
Take a long-term view and remain invested until maturity
date of the investment?
What is your current state of health?
o
Chronic illness or disability
o
No chronic illness or disability and healthy
You are participating in a TV game show and are offered a
choice of the following prizes. Which one would you choose?
o
R5 000 cash
o
Risk the R5 000 on a spinning
50 - 50 chance of winning R25 000
o
Risk the R5 000 on a spinning wheel with a 5% chance of
winning R250 000
wheel
with
a
Liquidity
One needs to ensure that enough cash is kept on hand to be able
to meet emergency expenses (e.g. medical costs, replacement of a
major appliance) and planned future expenses (e.g. new car,
overseas trip).
Traditionally there has been a relationship between the liquidity of
an investment, and the return that the investment will yield. The
general rule is that the longer the term (less liquid) the higher the
yield. However, when the economy is going through periods of
rapid change the reverse can be true.
3.
Taxation
The investment with the highest yield is not necessarily always the
best investment.
Investment Planning
B11
Tax implications will vary depending on the investment chosen by
an investor and accordingly the after-tax return of an investment
plays a vital role in selecting the most suitable investment.
Fixed interest investments with banks are interest bearing and
fully taxable subject to R22 800 for tax payers under that age of
65 and R 33 000 for taxpayers of 65 years or older [Section 10
(1)(i)]
There is no longer any exemption for foreign dividends and
interest earned.
Formula to calculate after-tax returns on fixed-interest
investments
Whenever financial planners have to advise prospective investors
on fixed-interest investments, they are expected to recommend a
portfolio that will give the investor the highest after-tax yield, i.e.
the best rate on an investment after the payment of taxes.
The net after-tax return can be calculated by using the following
formula:
Net after tax yield = gross yield x
100 − marginal rate
100
+ tax-exempt yield,
where:

gross yield is the taxable portion of the interest (applicable
to the type of fixed deposit) paid by the financial institution
where the funds are placed.

marginal rate is the investor’s marginal rate of tax, i.e. the
rate the taxpayer pays on an increase in his taxable income.
The marginal rate is calculated as follows:
Net increase in tax as a result of increase in taxable income
Increase in taxable income
x 100 = marginal rate%

tax-exempt yield is the percentage of the total yield the
investment provides that is exempt from tax.
B12
Investment Planning
Once the investor’s marginal rate has been established, the
formula is a quick and effective means of comparing the after-tax
yield of different investments - whether fully or partially taxable.
Example - investment fully taxable
Bank fixed deposit = 12 months. Interest rate = 11%. Marginal
tax rate = 35%.
Note: The above calculation ignores the effect of the interest
exemption (s.10(1)(i)).
Step 1
Gross yield
11%
Step 2
Investor’s marginal rate of tax
35%
Step 3
Net after-tax yield
11 x
100 − 35
100
+0
7.15
11 x 0.65 + 0
Example - investment partially taxable
A unit trust investment where the income distribution is as follows:
7% dividends and 4 % interest. Marginal tax rate = 40%.
Step 1
Gross yield
11%
Step 2
Taxable portion of yield (interest)
4%
Step 3
Tax-exempt portion of yield (dividends)
7%
Step 4
Investor’s marginal tax rate
40%
Step 5
Net after-tax yield
9.4%
4x
100 − 40
100
+ 7%
4 x 0.6 + 7%
Note: The above calculation ignores the effect of the interest
exemption (s.10(1)(i)).
Investment Planning
4.
B13
Inflation
“Inflation is a rise in the general level of prices of goods and
services in an economy and the subsequent erosion of the buying
power of money over a period of time.
Inflation is measured by defining a basket of goods and services
used by a “typical" consumer and then keeping track of the cost of
that basket.
In the twelve months up to January 2012, the cost of that basket
rose by 6.1per cent. This increase of 6.1 per cent in the so-called
consumer price index is referred to as the inflation rate. From
1981 to 2010 the average inflation rate in South Africa was 10 per
cent. It has been brought down to less than 10 per cent per
annum since 1993.
The rule of 72 is used as a guideline to determine how long it will
take for the purchasing power of money to halve at a given
inflation rate.
72
Present inflation rate
E.g.
Assume inflation rate of 8% p.a. over the period concerned:
72
8
= 9 years
In terms of this example the value of money will halve in 9 years if
the inflation rate is 8%.
The need to maintain, and preferably increase, the real value of an
investment in times of inflation has become a major factor in
investment planning. Fixed- interest deposits are subject to a
steady loss in real value. An investor who wishes to protect the
purchasing power of his/her income is forced to put his/her money
in investments that have the possibility of growth but which carry
a greater degree of risk.
Inflation as well as guarantees in investments are also linked to
the risk that an investor should consider. The investor should bear
in mind that a guaranteed investment, while providing security of
a return, could also provide the risk of providing a below inflation
return. This, once again, emphasises the need for diversification of
investments.
B14
Investment Planning
Miscellaneous Investment Formulae
1.
Bank acceptances
Discount =
The yield =
2.
Face value x days to maturity x discount rate
385 x 100
Face value x rate
Purchase price
Values of gilts (e.g. Eskom stock) in phases of
rising and falling interest rates
An example
An investor wishes to invest in Eskom 167 stock.
Coupon rate = 12%. Market-related interest rates = 18%. Nominal
value of stock is R100 000. Term to maturity is six years. Calculate
the purchase price.
Purchase price = present value of all future interest payments +
present value of the nominal value of stock at date of redemption.
Interest payments are R12 000 p.a. for six years.
These payments must be discounted over the period concerned at
the market-related rate:
Therefore, R12 000 x 3,4976 (“Present value of R1 per period”
table - six years - 18%)= R41 971,20
Add:
Present value of the nominal value of stock at date of redemption
= R100 000 x 0,370432 (“Present value of R1" table - six years 18%)
= R37 043,20
Purchase price
=
R41 971,20 + R37 043,20
=
R79 014,40
Investment Planning
B15
Assume that market rate now moves to 16%.
The future interest payments, as well as the nominal value of the
stock at redemption, now have to be discounted at 16%.
So, R12 000 x 3,68474 (“Present value of R1 per period” table six years - 16%) = R44 216,88
Add:
Present value of the nominal stock at date of redemption:
R100 000 x 0,410 442 (“Present value of R1" table - six
years - 16%) = R41 044,20
Total price = R44 216,88 + R41 044,20 = R85 261,08.
An interest rate move from 18% to 16% caused the price of the
stock to increase from R79 014,40 to R85 261,08. Conversely, an
increase in market interest rates would cause the price to fall. This
example clearly illustrates the inverse relationship between gilt
prices and market interest rates. Note, however, that the interest
payments on this type of stock is usually paid six monthly in
arrears and would, therefore, also be discounted six monthly. The
face value at redemption should, however, be discounted annually.
This would require two separate calculations.
3.
Calculation to determine return on redemption of
existing debt (e.g. bond on house or motor
vehicle lease)
The question that often arises when an investor receives a lump
sum payment is whether they should either:

reduce an outstanding debt, or

continue repaying the debt on a monthly basis and invest
the capital.
To determine the appropriate course of action in such a case, the
effective cost of the debt must be compared to the taxable return
of the investment. If the taxable return of the investment is higher
than the cost of the debt, then it would be advisable not to repay
the debt in full and to invest the available capital. It is also
important to know whether the debt repayments are tax
deductible, as this will have an effect on the cost of the debt.
The following scenarios can be distinguished:
B16
Investment Planning
3.1 If the investment is fully taxable and the debt not tax
deductible
Interest rate on debt
1 − (Marginal rate divided by 100)
= x%
If one could earn a taxable return of greater than x% p.a. on an
alternative investment, then the debt should not be redeemed and
one should rather opt for the alternative investment. If one could
only earn on an alternative investment a taxable return equal to or
less than x% p.a., one should rather redeem the debt.
Step 1
Bond interest rate
15%
Step 2
35%
Step 3
23.08%
15
1 − (35 divided by 100)
Step 4
E.g.
Minimum taxable return required from
investments
23.08%
Housing bond interest = 15%
Marginal rate of tax
= 35%
If one cannot earn a taxable return of greater than 23,08% p.a.,
the debt should be redeemed.
3.2 If the investment is partially taxable and the debt is
not tax deductible
Step 1
Bond interest rate
15%
Step 2
35%
Step 3
Investment 30% tax exempt
4.5%
Step 4
Investment 70% taxable
10.5%
Step 5
10.5
16.15%
1 − (35 divided by 100)
Step 6
Minimum taxable return required for
investment Step 3 + Step 5
20.65%
If one cannot earn a taxable return of greater than 20,65% the
bond should be redeemed.
Investment Planning
B17
3.3 If the investment is fully taxable or
taxable and the debt repayment is tax deductible
partially
One must take into consideration whether the debt repayments
are tax deductible, for example bond or lease repayments. If the
full payment is deductible, then the taxable return (inclusive of
income tax due) of the investment must at least be more than the
effective cost of the bond.
Fully taxable investment
Step 1
Bond interest rate
14%
Step 2
40%
Step 3
Effective cost of bond after deduction:
14% - (14% x 40%)
8.4%
Step 4
Minimum taxable return of investment required:
14%
8.4
1 − (40 divided by 100)
Note:
Bond repayment must be fully tax deductible.
If one cannot earn an after-cost taxable return of greater than
14%, the bond should be redeemed.
Partially taxable investment
Step 1
Bond interest rate
14%
Step 2
40%
Step 3
Effective cost of bond after deduction:
14% - (14% x 40%)
8.4%
Step 4
Investment 70% taxable (8.4% x 70%)
5.88%
Step 5
Investment 30% tax exempt
2.52%
Step 6
5.88
9.8%
1 − (40 divided by 100)
Step 7
12.32
Step 6 + Step 5
Note:
Bond repayment must be fully tax deductible.
If one cannot earn an after-cost taxable return of greater than
12,32%, the bond should be redeemed.
B18
Investment Planning
3.4
How does tax on fringe benefits affect the calculation?
A potential investor has a bond of R100 000 at 4% p.a. His
marginal tax rate is 40%. He inherits a large sum and is unsure
whether to redeem the bond. Assume the prescribed interest rate
is presently 13% p.a. Therefore, the investor is taxed on 13% 4% = 9% of R100 000. Therefore, it costs him an extra R3 600
(40% x (9% x R100 000)) per year.
In total, therefore, the bond costs him R7 600 and not R4 000 (4%
x 100 000) per year.
In the formula, the interest rate on debt is 7,6% (
7 600
100 000
x 100)
and not 4%.
Step 1
Bond interest rate
7,6%
Step 2
40%
Step 3
7.6
12,67%
1 − (40 divided by 100)
Step 4
12,67%
If one cannot earn a taxable return of greater than 12,67%, the
bond should be redeemed.
Investment Planning
4.
B19
A guide to interest rate calculations using basic
interest tables
Basic interest calculations can be done with either a financial
calculator or present value and future value tables as set out in the
general sections.
Interest rate calculations
Future Value
Present Value
Recurring
Single
Recurring
Single
payment
payment
payment
payment
(Tables B and C)
(Table D)
(Table E)
(Table F)
Note: The tables referred to above can be found in Section F.
B20
Investment Planning
1.
Examples of future value calculations using basic
tables
(i)
Recurring payments
Principle:
Determine the future value of recurring payments
made at the beginning of the period earning
compound interest.
See Table B for monthly payments and Table C for
yearly payments.
Example:
(ii)
Annual payment in advance :
R2 400
Period
20 years
:
Interest rate
:
12 %
Factor
:
80.699
Future value
:
R193 677.60
Single payment
Principle: Determine the future value of a single
payment earning compound interest. See Table D.
Example:
Single payment
:
R80 000
Period
:
10 years
Interest rate
:
12 %
Factor
:
3,106
Future value
:
R248 480.00
Investment Planning
2.
B21
Examples of present value calculations using basic
tables
(i)
Recurring payments
Principle:
Determine the present value of future payments in
arrears. See Table E.
Example:
(ii)
Annual payment in arrears
:
R1 500
Period
:
15 years
Interest rate
:
14 %
Factor
:
6,14217
Present value
:
R9 213.26
Single payment
Principle: Determine the present value of a single
future payment. See Table F.
Example:
Future payment
:
R10 000
Period
:
5 years
Interest rate
:
8%
Factor
:
0,680583
Present value
:
R6 805.83
B22
Investment Planning
Bond Redemption Table
Monthly repayments to redeem a mortgage bond
of R1 000 at an interest rate of % p.a.
Yrs
8,5
9,0
9,5
10,0
10,5
11,0
11,5
12,0
Yrs
1
2
3
4
5
87.22
45.46
31.57
24.65
20.52
87.45
45.68
31.80
24.89
20.76
87.68
45.91
32.03
25.12
21.00
87.92
46.14
32.27
25.36
21.25
88.15
46.38
32.50
25.60
21.49
88.38
46.61
32.74
25.85
21.74
88.62
46.84
32.98
26.09
21.99
88.85
47.07
33.21
26.33
22.24
1
2
3
4
5
6
7
8
9
10
17.78
15.84
14.39
13.28
12.40
18.03
16.09
14.65
13.54
12.67
18.27
16.34
14.91
13.81
12.94
18.53
16.60
15.17
14.08
13.22
18.78
16.86
15.44
14.35
13.49
19.03
17.12
15.71
14.63
13.78
19.29
17.39
15.98
14.90
14.06
19.55
17.65
16.25
15.18
14.35
6
7
8
9
10
11
12
13
14
15
11.69
11.10
10.61
10.20
9.85
11.96
11.38
10.90
10.49
10.14
12.24
11.66
11.19
10.78
10.44
12.52
11.95
11.48
11.08
10.75
12.80
12.24
11.78
11.38
11.05
13.09
12.54
12.08
11.69
11.37
13.38
12.83
12.38
12.00
11.68
13.68
13.13
12.69
12.31
12.00
11
12
13
14
15
16
17
18
19
20
9.54
9.28
9.05
8.85
8.68
9.85
9.59
9.36
9.17
9.00
10.15
9.90
9.68
9.49
9.32
10.46
10.21
10.00
9.81
9.65
10.77
10.53
10.32
10.14
9.98
11.09
10.85
10.65
10.47
10.32
11.41
11.18
10.98
10.81
10.66
11.74
11.51
11.32
11.15
11.01
16
17
18
19
20
21
22
23
24
25
8.52
8.38
8.26
8.15
8.05
8.85
8.71
8.59
8.49
8.39
9.17
9.04
8.93
8.83
8.74
9.51
9.38
9.27
9.17
9.09
9.85
9.73
9.62
9.52
9.44
10.19
10.07
9.97
9.88
9.80
10.54
10.42
10.33
10.24
10.16
10.89
10.78
10.69
10.60
10.53
21
22
23
24
25
26
27
28
29
30
7.96
7.88
7.81
7.75
7.69
8.31
8.23
8.16
8.10
8.05
8.66
8.58
8.52
8.46
8.41
9.01
8.94
8.88
8.82
8.78
9.37
9.30
9.25
9.19
9.15
9.73
9.67
9.61
9.57
9.52
10.10
10.04
9.99
9.94
9.90
10.47
10.41
10.37
10.32
10.29
26
27
28
29
30
To calculate the factor for interest rates below 12,5%, reduce the 12,5%
factor by 0,24 for every 0,5%, e.g.:
Year 1: 12% = 89,08 - 0,24 = 88,84.
The reverse applies for factors for percentages in excess of 24%, i.e.
0,24 is added for each 0,5%.
Investment Planning
B23
Yrs
12,5
13
13,5
14
14,5
15
Yrs
1
2
3
4
5
89,08
47,30
33,45
26,58
22,49
89,31
47,54
33,69
26,82
22,75
89,55
47,77
33,93
27,07
23,01
89,78
48,01
34,17
27,32
23,26
90,02
48,24
34,42
27,57
23,52
90,25
48,48
34,66
27,83
23,79
1
2
3
4
5
6
7
8
9
10
19,81
17,92
16,52
15,46
14,63
20,07
18,19
16,80
15,75
14,93
20,33
18,46
17,08
16,04
15,22
20,60
18,74
17,37
16,33
15,52
20,87
19,01
17,65
16,62
15,82
21,14
19,29
17,94
16,92
16,13
6
7
8
9
10
11
12
13
14
15
13,97
13,43
12,99
12,63
12,32
14,27
13,74
13,31
12,95
12,65
14,58
14,05
13,63
13,27
12,98
14,88
14,37
13,95
13,60
13,31
15,19
14,68
14,27
13,93
13,65
15,50
15,00
14,60
14,27
13,99
11
12
13
14
15
16
17
18
19
20
12,06
11,84
11,66
11,50
11,36
12,40
12,18
12,00
11,84
11,71
12,73
12,52
12,35
12,20
12,07
13,07
12,87
12,70
12,55
12,43
13,42
13,22
13,05
12,91
12,80
13,76
13,57
13,41
13,28
13,16
16
17
18
19
20
21
22
23
24
25
11,24
11,13
11,04
10,97
10,90
11,60
11,50
11,41
11,34
11,27
11,96
11,86
11,78
11,71
11,65
12,33
12,23
12,16
12,09
12,03
12,69
12,61
12,53
12,47
12,42
13,07
12,98
12,91
12,85
12,80
21
22
23
24
25
26
27
28
29
30
10,84
10,79
10,74
10,70
10,67
11,22
11,17
11,13
11,09
11,06
11,60
11,55
11,51
11,48
11,45
11,98
11,94
11,90
11,87
11,84
12,37
12,33
12,30
12.27
12,24
12,76
12,72
12,69
12,66
12,64
26
27
28
29
30
To calculate the factor for interest rates below 12%, reduce the 12,5%
Year 1: 12% = 89,08 - 0,24 = 88,84.
B24
Investment Planning
Yrs
15,5
16
16,5
17
17,5
18
Yrs
1
2
3
4
5
90,49
48,72
34,91
28,08
24,05
90,73
48,96
35,15
28,34
24,31
90,96
49,20
35,40
28,59
24,58
91,20
49,44
35,65
28,85
24,85
91,44
49,68
35,90
29,11
25,12
91,68
49,92
36,15
29,37
25,39
1
2
3
4
5
6
7
8
9
10
21,41
19,57
18,23
17,22
16,44
21,69
19,86
18,52
17,52
16,75
21,96
20,14
18,82
17,82
17,06
22,24
20,43
19,12
18,13
17,38
22,52
20,72
19,42
18,44
17,69
22,80
21,01
19,72
18,75
18,01
6
7
8
9
10
11
12
13
14
15
15,82
15,33
14,93
14,60
14,34
16,14
15,65
15,26
14,94
14,68
16,46
15,98
15,60
15,29
15,03
16,78
16,31
15,94
15,63
15,39
17,11
16,65
16,29
15,98
15,74
17,44
16,99
16,63
16,33
16,10
11
12
13
14
15
16
17
18
19
20
14,11
13,93
13,77
13,64
13,53
14,47
14,29
14,14
14,01
13,91
14,82
14,65
14,51
14,38
14,28
15,18
15,01
14,87
14,76
14,66
15,54
15,39
15,25
15,14
15,04
15,91
15,75
15,62
15,52
15,43
16
17
18
19
20
21
22
23
24
25
13,44
13,36
13,30
13,24
13,19
13,82
13,75
13,68
13,63
13,58
14,20
14,13
14,07
14,02
13,98
14,58
14,52
14,46
14,41
14,37
14,97
14,90
14,85
14,81
14,77
15,36
15,30
15,25
15,20
15,17
21
22
23
24
25
26
27
28
29
30
13,15
13,12
13,09
13,06
13,04
13,55
13,51
13,49
13,46
13,44
13,94
13,91
13,89
13,87
13,85
14,34
14,31
14,29
14,27
14,25
14,74
14,71
14,69
14,67
14,66
15,14
15,12
15,10
15,08
15,07
26
27
28
29
30
To calculate the factor for interest rates below 12%, reduce the 12,5%
Year 1: 12% = 89,08 - 0,24 = 88,84.
Investment Planning
B25
Example
Assuming that the variables will remain constant over the term and
payment is in arrears, i.e. at the end of the month:
Bond
Term
Interest
Monthly Instalment
R400 000
30
13%
R4 424
R400 000
20
13%
R4 684
R400 000
15
13%
R5 060
R400 000
10
13%
R5 972
If the instalment in the above scenario is increased from R4 424 to
R4 684,
i.e. R320 more per month, then the term of repayment is reduced by 10
years.
B26
Investment Planning
Investment Planning Worksheet
General
The objective of this investment planning worksheet is to give the
financial adviser an understanding of the fundamental principles
applicable to an investment plan where an investor requires both an
income as well as capital growth. This type of worksheet is often used
when an investor reaches retirement stage.
The procedure, as set out in the twelve steps below, is simply a method
for determining the structure for a ten-year investment plan. The
purpose of the procedure is to establish the amounts to be invested in
growth and income investments, respectively, without referring to
specific types of investments. Further consideration must be given
specifically to which growth and income investments should be chosen.
Factors that will play a role in this choice between various investment
vehicles are risk, term, inflation, cost, tax and liquidity.
When investment planning is done at retirement, the term of the plan is
vitally important. Normally the term would be the same as the life
expectancy of the retiree, which can be as much as 30 years or even
longer. In the investment plan, the whole term has to be taken into
account. Doing a 30-year cash flow analysis manually may, however, not
be practical. It is, nevertheless, necessary to calculate whether there is
sufficient capital (in addition to expected future income, e.g. pension,
retirement annuity) to provide the required level of income. If not, the
initial required income level should be adjusted accordingly, or assets
would have to be sold at some stage in order to prevent a situation in
the future where the capital is exhausted and a dramatic reduction in
income is experienced. Where the life expectancy is longer than ten
years, a ten-year cash flow analysis does not deal with the capital
adequacy properly.
By assuming the rate of inflation and the rate of return on the
investment to be identical over the term of the investment plan, an
indication of the capital adequacy can be obtained by dividing the capital
amount by the number of months in the investment plan. This will give
an indication of the monthly income that can be expected to be produced
by the capital amount.
Example
After retirement Mr A will receive no monthly income from any
source. However, he has R500 000 available to invest in order to
produce an income. His life expectancy is 15 years. He wants to be
conservative and plan for 20 years. What level of income can he
expect to receive if the income has to increase annually with the
inflation rate? If the assumption is made that the rate of return on
Investment Planning
B27
his investment and the inflation rate over the term will be identical
and that the capital will be consumed, the answer will be:
500 000
20 x 12
= R2 083 p.m. before the deduction of personal income
tax.
Conversely, an indication of the capital amount needed to provide
a required level of income can be calculated by multiplying the
required income level by the number of months in the investment
plan, if the same assumptions as above apply.
Once it has been established that in principle the capital amount is
sufficient to produce the required level of income through the
duration of the investment plan, the specific growth and income
investments can be decided on. They may have varying terms
(from one day to ten years) and should be reviewed periodically to
assess their suitability. Income investments should be made only
as and when required.
Personal details
Name:
Age:
Retirement Age
Marital Status
Step 1:
1.1
Financial data
Capital available for plan
Asset
Self
Policies
Fixed deposits
Unit Trusts
Share portfolio
Property portfolio
Cash on call
Other
Total capital available
Spouse
B28
Investment Planning
1.2
Outstanding liabilities
Liability
Interest Rate
Instalment
Outstanding
payment (p.a.)
amount
Mortgage bond
Hire purchase
Lease agreements
Overdraft
Other
Total
1.3
Income (present) (p.a.)
Source
Self
Spouse
Employment
Pension
Retirement annuities
Interest
Dividends
Other income
Totals
1.4
Income (future) (p.a.)
Source
Year due
Self
Spouse
Employment
Pension
Retirement Annuities
Interest
Dividends
Other income
Total
Investment Planning
1.5
B29
Deductions (present) (p.a.)
Pension contributions
R……………
Retirement annuity contributions
R……………
Other
R……………
1.6
Future capital injections
Maturing endowments/retirement annuities
Year
Amount
Note
Other capital injections
Year
1.7
Year
Amount
Note
Capital expenditure
Amount
Note
B30
Investment Planning
1.8
Year
1.9
Year
Step 2:
Required income
Amount
Note
Emergency fund requirements
Amount
Note
Income growth objective
At what rate does the client wish his/her annual
to increase? (Normally equal to the inflation rate.)
.
Step 3:
income
. . . .%
Determine investor’s marginal rate of tax.
The worksheet on the next page can be used.
Investment Planning
B31
Income Tax Calculation Sheet
GROSS INCOME
Salary
Trade Business
Commission
Interest
Dividends (other foreign - see note)
Other …………………………………………………….
……………………………………………….……
Total
EXEMPTIONS
Basic Interest
Dividends (other foreign)
Foreign employment income……………………….
Other……………………………………………….……
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
-
R
R
-
R
R
R
R
R
INCOME
DEDUCTIONS
Expenses
Pension fund contributions
Retirement annuities contributions
Donations to PBC’s
Medical expenses
Other
Plus: Portion of travel allowance not expended
on business travel
Plus: Taxable Capital Gain
R
R
R
R
R
R
R
R
R
TAXABLE INCOME
Tax on
R……………….
+ ……% on
R……………….
+
TAX PER SCALE
REBATES
Primary
65+
75+
MEDICAL TAX CREDITS
Less: Medical Credit: Taxpayer plus
dependants
TAX PAYABLE
R
R
R
R
-
R
R
R
Note: Dividends declared from foreign companies not listed on JSE are taxed at
marginal rate subject to any eligible exemptions – See A41
(See page A28 (8.3) and page A30 (8.4) for calculation of medical
expenses and deductions for donations to PBO).
B32
Investment Planning
Step 4:
Determine whether debt should be repaid
from capital available.
Fully or partially taxable investment and debt repayments
not tax deductible
Calculations as illustrated.
Fully or partially taxable investment and debt repayments
tax deductible
Calculations as illustrated.
If the investor can earn a taxable return of more than x% ...
Calculation
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
.............................................................................................
Investment Planning
Step 5:
B33
Invest the capital required for emergency
purposes at the best available call rate.
R. . . . . . . . . . invest at . . . . . . . .%
Step 6:
Provide for future capital needs.
Date . . . . . . . . . . . .
Rate . . . . . . . . . .
Investment . . . . . . . . . .
..
Date . . . . . . . . . . . .
Rate . . . . . . . . . .
Investment . . . . . . . . . .
..
Note:
The value of the future capital need must be established.
Accordingly, the term, rate of return and tax must be taken into
account in determining the amount that has to be invested now. If
the capital need would arise in less than five years, an interestbearing investment would probably be most suited, taking cost and
risk factors into account.
Step 7:
(a)
Determine income deficit in year 6.
Non-investment income available in year 6
Source
Present
Increase
Income
(per cent)
Salary
Pension
Retirement Annuities
Dividends
Unit Trust
Property
Total non-investment income in year 6
Factor
Value in
year 6
B34
Investment Planning
(b)
Determine income requirements in year 6.
Present actual income required (Year 0)
R. . . . per annum
Inflation rate factor for year 6
......
x
Actual income required in year 6
(c)
R. . . . .
Income deficit
Income deficit
=
Income required - total income
=
R. . . . . . . . . . - R. . . . . . . . . .
=
R. . . . . . . . . .
Therefore, the income required in year 6 from an income
portfolio is
R. . . . . . . . . .
Note:
A deficit usually occurs at some point during a ten-year investment
plan. Experience has shown that in calculating the size of the
income investment to be made in year 0 to counter these future
deficits, the deficit that would exist after 60% of the investment
term had expired (year 6) usually provides a satisfactory basis for
a paper-based calculation.
A more tax-efficient plan can be crafted through, for example, the
liquidation of certain investments at certain times. This
emphasizes the importance of creating a flexible plan as well as
revisiting the investor’s objectives, outcomes and scenarios on an
annual basis.
Step 8:
Determine the amount to be invested in
an income portfolio.
Income required from income portfolio
realistic yield
R. . . . . . . . /. .. . . . . . %
=
capital required
=
R. . . . . . . . . .
Investment Planning
B35
Step 9:
Determine future cash flows.
Projection of escalating income
End
year
Salary
Pension
Dividends
%
%
%
Unit
Trust
%
1
2
3
4
5
6
7
8
9
10
Other
Total
%
%
B36
Investment Planning
Step 10:
Determine total
income portfolio.
annual
income
from
Non-growth income summary
Immediate annuities
Step 11:
R. . . . . . . . . .
Retirement annuities
R. . . . . . . . . .
Bank
R. . . . . . . . . .
Call funds
R. . . . . . . . . .
Other
R. . . . . . . . . .
TOTAL
R. . . . . . . . . .
Incorporating the figures determined in
steps 7 to 10, do a comprehensive cash
flow analysis.
End
Escalating
Fixed
Total
Required
Surplus
Income
Fund
year
Income
Income
Income
Income
Income
Shelter
Value
1
2
3
4
5
6
7
8
9
10
Investment Planning
B37
Notes:

Escalating income, as calculated in step 9.

Fixed income, as determined in step 10. This income
will stay constant throughout the forecast period.

Aggregate of (a) and (b).

Income required in year 1, escalated annually at the
expected inflation rate.

Difference between (c) and (d).

Fund value in previous year plus a return equal to the
realistic yield used in step 8.

Aggregate of (e) and (f).
Income surplus is added to fund value.
Income deficit is deducted from fund value.
Notes on the cash flow analysis
Investment income, non-investment income as well as required
income are reflected before tax. Required income as specified in
step 1.8 should be based on a monthly expense budget. Provision
for income tax should also be made, the amount of which will
depend on the size, term and nature of the income investment
finally recommended. It should also be noted that the tax
implications of income investments based on voluntary purchase
annuities vary according to term, i.e. the shorter the term the
more tax efficient the investment is. If the initial investment
amount included an investment in an endowment policy, this
endowment policy can produce tax-free withdrawals after five
years. Refer to section A for capital gains tax implications. These
factors should be taken into account in the cash flow analysis.
B38
Investment Planning
Step 12:
Investment of balance of capital
The balance of the capital must be invested in growth investments.
The balance of the capital in this case is as follows:
R.......... (Total capital available)
Less R.......... (Invested for emergency fund)
Less R.......... (Invested for income)
Less R.......... (Repayment of liabilities)
Less R.......... (Invested for future capital expenses)
=
R.......... (Capital available for growth investments).
Investment Planning
B39
Investment comparison
Tank
containers
Managed
portfolio
Term
Long term.
Approximately
20 years
Refurbishment
10 years
No fixed term.
Medium to long
term
recommended.
Collective
investments like
Unit Trusts
No fixed term.
Medium to long
term
recommended.
For higher
return, five years
or longer
Collectables
No fixed term.
Long term
recommended.
Krugerrands
Nil. Dependent
on supply and
demand
Risk
Risk is influenced by
frequency of use and
fluctuations in the
value of the rand
Costs
Approximately purchase
price: R180 000.
Management fees –
percentage of distribution
Medium to high risk.
Medium risk if
managed by
experienced
investors. Share
values move in line
with stock market
which is volatile.
Bigger spread of
shares could reduce
risk.
High risk depending
on type of unit trust
fund. Managed by
experienced asset
managers. Unit
values move in line
with stock market
which is volatile.
After deregulation
brokerage charges are fully
negotiable. The sliding
scale used before
deregulation is still used as
basis. Charges apply to
purchases and sales
Marketable securities tax
(MST) of 0,25% & is
payable on all purchases.
Medium risk. Unlike
other investments
could be stolen,
destroyed by fire,
etc.
Risk dependent on
gold price and
rand/dollar exchange
rate. Values are
volatile. No
guarantees.
Costs generally applicable
in market:
Equity funds:
Initial charge max. 5.7%
incl. VAT.
Management fee 1.14% 1.17% p.a. incl. VAT.
Gilt & income funds:
Initial charges max 1.14%
incl. VAT.
Management fee 0.86%
p.a. incl. VAT.
Money market funds:
No compulsory or initial
charges.
Annual management fee
0.57% p.a. incl. VAT.
Costs could be high due to
high premium rates in
respect of short-term
insurance. Auctioneer’s
commission: 10% + VAT
No costs unless purchases
and sold through a broker.
B40
Investment Planning
Liquidity
Fairly illiquid, but
lucrative second-hand
market exists.
Tax
Tax effective – 20%
depreciation.
Increased effectiveness
through gearing.
Inflation
Rand hedged.
Return inversely
proportional to rand
exchange rate.
Liquidity dependent on
supply and demand and
on current desirability of
the shares being sold.
Dividends (excluding
foreign dividends)
taxable at 15%. Profits
on resale not income if
held for less than 3 year
Safe-haven option (see
Section A.)
Capital gains realised
may be subject to CGT.
Expected to outpace
inflation. Dependent on
performance of
particular shares on
stock exchange.
100% liquid.
However, for higher
return, hold for 5 years
or longer.
Dividends (excluding
foreign dividends
subject to R3 700 that
can be used if the full
interest exemption is
not utilised) are taxed at
15%. Interest fully
taxable in excess of
R22 800 (under 65
years) or R33 000 (65
and older). Proceeds on
sale of units may be
subject to CGT (no CGT
on build-up).
Historically returns
exceeded inflation rate
over medium to long
term.
supply and demand.
Proceeds on sale may be
subject to CGT.
Capital growth
dependent on the nature
of the particular asset.
supply and demand. No
loan value but has a
security value.
Profits on sale may be
taxed. Revenue practice
is currently to tax
profits.
Historically, long-term
inflation beaters.
However, over past few
years, performance
below inflation.
Investment Planning
Term
B41
Risk
Costs
Zerocoupon
bonds
Variable. Medium
term for higher
return.
Medium risk. Face value
guaranteed. Growth
dependent on fluctuating
Costs minimal.
Property
unit trusts
No fixed term.
Medium to long
term
recommended.
For higher
return, five years
or longer
Medium risk. Over short
term risk is less than in
shares. Property values
are more stable.
Broker’s Commission of
about 1.5% of the value
of in investment.
Marketable Securities Tax
of 0.25%.
Property
No fixed term.
Medium to long
term
recommended.
Medium risk – dependent
on factors such as
location, price range,
supply and demand,
commercial or residential
use, etc.
Retirement
annuities
Varies according
to age of
investor.
Minimum
maturity 55
a.l.b.
No maximum
maturity age
Medium risk. Could be
higher risk depending on
portfolio choice. Values
fluctuate in line with
underlying assets.
Protected against
creditors in event of
Fairly high costs.
Maintenance costs,
especially where property
is leased.
Transfer duty:
0% up to R600 000,
3% from R600 001 –
R1m, for above R1m but
below R1.5m will be
R12 000 +5% on the
value above R1m, above
R1.5m will be R37 000 +
8% above R1.5m. The
same will apply
irrespective of the juristic
nature of the acquirer of
the property.
VAT may be payable if
seller is a registered
vendor in which case, no
transfer duty. In addition,
cost of insurance.
Costs minimal – policy
fees and intermediary’s
commission
B42
Investment Planning
Liquidity
Not liquid. Cash values
usually only available
after 1-2 years. Loss on
investment if
surrendered in early
years.
Has loan value. Can be
ceded as security.
Tax
Proceeds tax-free (in
investor’s hands).
Second-hand policies may
be subject to CGT.
Inflation
Returns over ten years
often outpace inflation.
Returns exceed
inflation rate over long
term
Liquid – can be
discounted on the
secondary market prior
to maturity.
The income from property
unit trusts is usually paid
out every 6 months in the
form of a dividend. For tax
purposes this income is
treated as interest and is
fully taxable.
Should keep pace with
inflation depending on
return and on whether
interest taxed annually.
100% liquid.
Income distributions are
regarded as interest and
are fully taxable (R22 800
or R33 000 interest
exemption). Gains in the
value of units may be
subject to CGT.
Dependent on property
market.
Not liquid until minimum
maturity age. Can
however be commuted
on official emigration.
Also accessible if the
paid up value is below
R7000.
Contributions deductible
subject to specified limits.
At retirement a lump sum
determined in accordance
with the Second Schedule
to the Income Tax Act is
tax-free. Balance taxable .
Compulsory annuity is fully
taxed at marginal rates.
Have a record of
beating inflation, once
tax concessions have
been taken into
account.
Investment Planning
Participation
bonds
Eskom
Stocks
B43
Term
5-year minimum
term (except on
death).
Risk
Medium risk. Dependent
on property market and
fluctuating interest rates.
Risk lessened with
minimum guaranteed
return (floor rate).
Costs
No cost to investor.
Borrower charged
interest.
No fixed term.
Medium to long
term
recommended.
Very low risk.
Government controlled.
Brokerage costs.
B44
Investment Planning
Liquidity
Not liquid. After 5-year
term, 3 month notice
period required.
Tax
Interest fully taxable
(R22 800 or R33 000
interest exemption)
Fairly liquid. Can be
used as loan security.
Interest is fully taxable
(subject to R22 800 or R33
000 interest exemption).
Inflation
After-tax yield
historically below
inflation. No
protection against
inflation for either
capital or income.
Interest-bearing
rather than growth
investment.
Dependent on
interest rates. Highly
unlikely that return
would beat inflation.
Note:
In all cases the effect of capital gains tax, as set out in section A, should
be considered. Generally, capital assets are considered affected assets
and therefore potentially subject to capital gains tax.
Investment Planning
B45
Collective Investment Scheme
1.
What is a Collective Investment Scheme?
A collective investment scheme (CIS) is a trust based scheme that
comprises a pool of assets that is managed by a collective
investment scheme manager and is governed by the Collective
Investment Schemes Control Act no 45 of 2002. The concept
behind a CIS is simple: a group of investors pool their money in
order to get a spread of professionally managed investments.
1.1. Participatory Interests
Each investor has a proportional stake in the CIS portfolio based
on how much money he or she contributed. The word “unit” is
commonly used to describe the portion or part of the CIS portfolio
that is owned by the investor.
The funds from a group of investors are pooled or collected
together to form a CIS portfolio. The investment portfolio is
divided into equal parts. These are referred to as “units”. Each unit
represents a direct proportionate interest in every asset in the
portfolio. Units are notional assets (imaginary) and find their
market value in the total underlying assets.
With the new CISCA legislation the term “unit” was replaced by
“participatory interest in a collective investment scheme” but for
all purposes the industry still refers to units.
2.
Benefits of Collective Investment Schemes
They allow ordinary people to invest in shares that would normally
be out of their financial reach if their money had not been pooled
with that of other investors in the fund.
They provide a means to beat inflation, as returns are normally
higher than the inflation rate.
CIS are a flexible form of investment, as you can either invest a
lump sum or you can make a regular investment each month.
CIS offers liquidity. In other words, the unit holder may choose to
cash in a portion of the CIS or all of it. This means that your
money is always accessible, which is not the case with all long
term investments.
B46
Investment Planning
They can also be transferred to another party, and you can even
invest on somebody else’s behalf.
The investors can monitor the performance of their CIS on a daily
basis as it appears in the newspapers’ business reports.
Experts in the field of managing money, invest your money on
your behalf.
Investors may invest in markets all over the world, and reap the
benefits of rand hedging.
3.
Classification of Collective Investment Schemes
Collective Investment Schemes are grouped into sectors to enable
investors to compare the performance of portfolios with similar
objectives and benchmarks.
Geographic Categories
The first tier in the classification process is where Collective
Investment Schemes in Securities are categorised according to
where they geographically invest. This could be in:

Domestic markets,

Worldwide,

Foreign or regional.
Each of the geographic categories is further subcategorised into
the second tier of asset classes. They are named according to the
type of investment that such a fund would make. The categories
are:

Equities

Asset Allocation

Fixed Interest

Real Estate
Equity Funds
A minimum of 75% of the fund must be invested in equities at all
times. At least 80% of this equity portion must be invested in the
JSE and a maximum of 20% may be invested outside the JSE
sectors provided they comply with the category definition.
Investment Planning
B47
Asset Allocation Funds
Asset Allocation funds are funds that invest in a wide spread of
investments in the equity, bond, money and property markets.
These funds are also known as “balanced” funds or “managed”
funds. Managed funds aim to achieve medium to long-term
performance by investing in a combination of markets. This is a
way of decreasing the risk associated with investing in a single
market.
Fixed Interest
These funds invest only in interest bearing assets. The level of risk
for these funds is relatively low, but so is the likelihood of
exceptional growth.
Real Estate Funds
These funds invest predominantly in listed property shares.
DOMESTIC FUNDS
Invest 70% or more of their assets in South African local markets
Equity Funds
General
funds
Asset Allocation Funds
Prudential Flexible Flexible
funds
funds
property
funds
Bond
funds
Growth funds
Value funds
Large cap funds
Smaller
companies funds
Mining &
resources sector
funds
Financial &
industrial sector
funds
Financial sector
funds
Varied specialist
funds
Fixed-Interest Funds
Varied
Income
Money
specialist
funds
market
funds
funds
B48
Investment Planning
WORLDWIDE FUNDS
Invest between 15% and 50% of their assets in South African local
markets and a minimum of at least 30% in foreign markets.
Equity Funds
General
funds
Other theme
funds
Asset
Allocation
Funds
Technology
Varied
Flexible
sector funds specialist
funds
funds
Fixed-interest Funds
Bond
funds
Money
market
funds
FOREIGN FUNDS
Invest 85% or more of their assets in foreign markets.
Equity Funds
Asset Allocation
Funds
Flexible funds
General funds
Varied specialist funds
Income funds
Varied specialist
funds
REGIONAL FUNDS
Invest 85% or more of their assets in a single country or region,
excluding South Africa.
Equity Funds
Varied specialist fund
General
Varied specialist funds
Investment Planning
4.
B49
Funds not specifically categorised
Fund of funds
A fund of funds is a unit trust that invests in a range of other unit
trusts.
Index funds
Index funds are collective investment schemes that are designed
to match the performance of a particular index. Their mandate is
to track the performance of a benchmark index by buying the
shares in that index at their respective weightings (e.g. the JSE
Top 40 Companies Index).
Property unit trust funds
Property unit trusts enable investors to share in professionally
managed property portfolios without the disadvantages of direct
property ownership. They differ from other unit trust funds in that
they are closed ended. This means that there are a fixed number
of units and that you can only buy units if there is a seller
available. Unlike other unit trusts, there is no obligation on the
fund managers to repurchase units from the investor. This type of
fund provides an investment in a portfolio of properties that would
otherwise be unattainable by most investors because of the high
costs involved. This type of investment is, therefore, more liquid
than the usual type of property investment. The price of the units
is not determined by the value of the underlying assets, but rather
the demand and supply of the units on the JSE. Units are traded
and quoted on the JSE. Dividends are usually paid out biannually
and are taxable as interest in the hands of the investor.
Exchange Traded Funds
These are special types of tracker (index) funds which are listed on
a stock exchange. ETF’s are almost similar to other index funds in
that they also replicate the weighted constituents of an index.
5.
Factors to consider when investing in unit trusts
Apart from the factors which may affect investment strategy in
general the following factors should also be considered in the
context of unit trusts.
B50
Investment Planning
5.1
Timing
Timing of an investment is almost as important as choosing the
right investment and should be discussed with a potential investor
before the investment is made. The crucial moment is not so much
when an investor starts the investment in unit trusts, but rather
when he/she ends it by cashing in the units.
Because of the nature of unit trusts and their dependency on stock
market cycles which, based on world stock markets, last for
approximately five years on average, unit trusts should be seen as
a medium-term to long-term investment.
As more management companies are marketing unit trusts by
propagating the ease with which investors can switch between unit
trusts funds, the investor should appreciate the risks associated
with trying to time the market correctly. Such decisions are often
made because of emotions or hunches which can result in losses
for the investor. Switching costs also have to be considered.
5.2
Rand cost averaging as a method of reducing risk
For the investor who invests on a regular basis, as opposed to
making a lump-sum investment, the rand cost averaging method
can reduce the risk and minimise the importance of investment
timing.
6.
Categories of unitised investment products
6.1
Specialised Funds
In addition to these collective investments funds, there are
specialised funds regarded as packaged products that include a
number of collective investment schemes or investment portfolios
in one “bundle”. Do not confuse them with Specialist Equity Funds,
which are funds that invest in one specialised area of the JSE.
They enable the investor to spread his/her investment through a
range of collective investments, and are also known as split
investments. These packaged products include:

Funds of funds,

Wrap funds and

Multi-manager funds
Investment Planning
B51
Below are the main categories and features of split investment
products.
6.1.1 What is a linked product?
Linked product companies also called (Linked Investment
Service Providers or LISP) are administrators as they simply
channel investor funds through their own umbrella
investment vehicles into underlying unit trust funds of
various companies. The broad categories of these umbrella
investment vehicles are retirement products (e.g. retirement
annuities), specialist plans (e.g. capital guarantee products)
and general investments.
Usually linked product companies do not give advice on
investments. The investor should, therefore, work through a
reputable financial adviser.
The linked product company facilitates the switching of the
underlying investments for a substantially reduced fee.
However, overall investment costs may be higher due to the
aggregate costs of the linked product company’s
management fees, the management fees of the underlying
management company and the commission of the financial
adviser.
A feature of investing in a linked product company is its
computer software system which provides instant report
backs on what you are invested in and how your investment
is performing. However, the investor should be confident
that the linked product company has made adequate
provision for computer failure, as well as security provisions.
6.1.2 What is a multiple-manager product?
The emphasis here is on the investment strategy utilised
called the multiple-manager approach. The funds are called
multi-managed funds.
The multiple-manager approach is not purely an
administrative system as it is more active in providing the
investor with a limited choice of investments to suit the risk
profile of the investor.
The multiple-manager fund manager is the manager of a
number of independent asset managers who are selected for
their skill in a particular investment type. These specialist
B52
Investment Planning
asset managers, who have to handpick shares, take specific
instructions from the multiple-manager fund manager and
are closely monitored to ensure compliance with
instructions. This specialist control by a wide range of asset
managers is a feature of this type of investment strategy
which ultimately reduces the risk of relying on the expertise
and skill of one fund manager.
However, the multiple-manager fund manager may not have
access to the full selection of asset managers, and this could
detract from the attractiveness of this investment approach.
The “bundled products” offered by multiple-manager fund
managers are essentially the traditional product types such
as unit trusts, life assurance endowment policies, retirement
annuities and retirement funds.
6.2
Wrap funds
A wrap fund is a fund which holds all the investments of one
person. A wrap fund provider company can also place the
investor’s money directly into the underlying investments, e.g. an
endowment policy or unit trusts. A wrap fund may include a choice
of unit trusts, split investment products as well as portfolios of life
assurance companies. Together these products are sold to the
investor using an umbrella product, e.g. a retirement preservation
fund.
A wrap fund provider company offers the investor guidance on
aspects of risk profile and investment selection based thereon. The
investor should take cognisance of his/her own risk profile and
investment objectives when deciding on the mix of investments in
the wrap fund.
It is very important for the investor to know how his/her wrap fund
is being bundled, through what umbrella product he/she is
invested and also what the underlying investments are. An
investment trust is as the legal structure within which the wrap
fund operates.
As is the case with linked products, a feature of wrap funds is the
wrap fund provider company’s computer software system, which
provides instant report backs on what you are invested in and how
your investment is performing.
Investment Planning
6.3
B53
Structured funds
Structured funds are a type of multiple-manager fund.
Again the principle of unitisation is applicable with structured
funds, where the structured fund management company is free to
invest in any proportion of any investment type within the limits of
the fund’s mandate.
The structured fund consists of underlying investment portfolios
which are managed by different asset managers. The structured
fund manager then manages the aggregate portfolio which now
falls into the structured fund, again in terms of a specific mandate.
The importance of a good computer software system is again a
feature of this fund. It is important to note that, although a
structured fund eliminates the need for switching, offshore asset
swaps are not allowed in terms of exchange control legislation.
6.4
Fund of funds
A fund of funds is a unit trust fund that invests in a range of other
unit trusts. A dedicated fund manager makes the selection from
any unit trust fund with specific performance objectives in mind. A
fund of funds can offer reduced risk and lower volatility because of
unit trust diversification. The costs of a fund of funds are higher
than ordinary unit trusts, as they are invested in at least two
underlying unit trusts. The investor should ideally look for a
diversification of management styles of the underlying funds.
B54
Investment Planning
Offshore investments
1.
Introduction
The nature of offshore investments and factors influencing the
choice of these investments are becoming increasingly important
with the progressive relaxation of exchange controls.
The availability of offshore investments will of course place a
responsibility on the financial adviser to provide investors with
advice to make informed decisions on offshore investments.
There are many reasons for South African investors to consider
offshore investments, and many factors govern an investor’s
choice:
2.
Diversifying risk
Investing in an offshore portfolio means that the investment is not
influenced by one country’s political and economic stability alone.
The investor is also diversifying currency risk. Should the rand
drop in value the investor can actually expect a higher return on
his/her investment (in rand terms). The reverse is also true of
course.
3.
Exploiting international markets and enhancing
returns
The investor is not limited to his/her local market but has the
choice of investing where he/she perceives that the best possible
opportunities for a good return on the investments exist. The
availability of offshore investments could mean that the investor
who makes careful and informed choices of offshore investments
could enhance the return on his/her total investment portfolio
because he/she has a wider choice of investment options. A much
broader range of traditional and alternative investment strategies
(”hedge funds”) is available.
4.
Selecting an offshore centre
South Africans may now invest in the country of their choice, and
some will choose to invest in a major country, but many will seek
an “offshore” investment centre, rather than a major nation,
mainly because of the possibility that lower tax will be levied in the
so-called “tax havens”. Since the introduction of residence-based
Investment Planning
B55
tax in 2001 this has become less important, but using a low or
zero-tax environment can certainly simplify reporting in South
Africa
The better known offshore centres include:
Bahamas, Bermuda, Cayman Islands, Netherlands Antilles,
Panama, Guernsey, Jersey, Isle of Man, Liechtenstein,
Luxembourg, Monaco, Netherlands, Switzerland, Gibraltar, Cyprus
and Hong Kong.
The decision as to which offshore tax centre should be utilised may
be influenced by one or more of the following factors (this list is by
no means exhaustive):

Physical situation
Where is the country situated geographically?

Stability
How stable is the country from a political and economic
perspective?
How stable has the country been historically?

Facilities
Banking facilities?
Investment facilities?
Other professional facilities?

Tax treatment of non-resident income
Are there any taxes levied on non-resident investors?
How is tax on income, inheritance, wealth and profits dealt
with?

Confidentiality
Is there complete secrecy on investments? Offshore
investments offer greater confidentiality than local
investments. Local advisers should be careful when dealing
with the confidentiality issues, in view of the provisions of
the Prevention of Organised Crime Act (POCA) and the
Financial Intelligence Centre Act (FICA). Financial advisers
should avoid giving advice in situations where confidentiality
may be abused for illicit purposes.
B56
Investment Planning

Legal, language and time-zone compatibility
From the perspective of a South African investor, only the
Channel Islands and the Isle of Man offer all three of these.
In particular their trust and company laws and regulatory
environments have much in common with their South
African equivalents. Offshore trusts can be attractive estate
planning options for South African advisers and their clients,
particularly in relation to foreign-sourced wealth such as
inheritances

Estate and
advantages
tax
planning
opportunities
and
In addition to offshore trust services, the legal systems of
some tax havens, and particularly the Channel Islands and
the Isle of Man also permit the use of South African “branch”
arrangements with South African life assurers, where
investment policies are issued under the laws of the offshore
centre but are to a limited extent regulated in South Africa,
and are nominally taxed under S29A of the Income Tax Act.
Besides lower effective tax rates on the investments,
proceeds can be directed via beneficiary nomination,
allowing the funds to be retained offshore by SA
beneficiaries as well as avoiding executors’ fees and the
delays and costs associated with administration of the estate
in SA, or obtaining a grant of probate elsewhere. Recent
developments have seen growth in the use of life platforms
for the holding of a wide variety of assets in addition to
more traditional funds, giving investors the tax advantages
and estate planning flexibility of life policies together with a
wide variety of investment choices.

Regulation and consumer protection
Reputable offshore centres have a modern regulatory
environment. This will include anti-money laundering
regulation to the standard of the Financial Action Task Force
countries. The international investment environment is a
target area for unethical advisers and criminals.
Sophisticated consumer protection regulation is a critical
criterion in selecting an offshore investment. The “branch”
arrangement also provides a degree of consumer protection
and oversight by South African financial authorities
Investment Planning
5.
B57
Offshore investment options for SA residents

Source of Funds
An investor’s choice of an offshore investment vehicle will be
influenced by the source of the funds. The funds may be
sourced from South Africa under an exchange control
allowance (see Section F) or may already be legitimately
held outside South Africa from sources such as inheritances,
foreign earnings, immigrant funds, assets amnestied under
the official amnesty of 2003 or the Voluntary Disclosure
Programme of 2011.
In broad terms foreign investments can be classified into
two categories:
o
Those investments available in respect of funds which
have to remain under exchange control (”indirect” or
“asset swap” investments) and
o
Direct offshore investments of funds already held or
transferable offshore.
Advice given in South Africa regarding foreign financial
products will be subject to FAIS.

Indirect or “asset swap” investment
With the advent of relaxation of exchange control a number
of options were introduced. One of these was the asset swap
mechanism. Essentially this meant that certain types of local
institutions were allowed to take a percentage of the value
of assets under management offshore, provided they were
able to secure a reciprocal investment into South Africa. This
allowed South Africans to enjoy some of the benefits of
offshore investment, while ensuring that there was no drain
on the country’s foreign exchange reserves.
The asset swap mechanism was removed in 2001, and
replaced by rules governing portfolio investments by South
African institutional investors. Institutions are now allowed
to invest client funds outside South Africa, subject to certain
“prudential foreign exposure limits”. Currently the
percentages permitted are 25% of total assets for pension
funds and life assurers’ underwritten policies, and 35% for
collective investment schemes, investment managers and
B58
Investment Planning
the investment-linked business of long-term insurers. A
further 5% may be invested in African countries.
o
Advantages:
Currency hedging: any fall in the value of the local
currency will enhance an investor’s returns.
Familiarity: asset swaps are available in most familiar
local investment vehicles, such as unit trusts,
endowment policies, retirement annuities, etc.
Low entry levels: asset swaps in local investment
vehicles are usually available with much lower
contribution levels than direct offshore investments,
and with regular monthly contributions.
o
Disadvantages:
No political risk hedging: the investment proceeds will
be paid out in South Africa regardless of the political,
fiscal and exchange control regimes in effect at that
time.
Higher cost: often there is a double layer of
management, with a local product provider and a
foreign fund manager.
Tax: the investment will be subject to whatever tax is
applicable to the relevant local vehicle.
Capping: institutions may have reached the limits
imposed, meaning that they cannot accept further
investment. Also, if the value of their local assets
under management decreases, the offshore portion
may exceed the limit. Under these circumstances,
fund managers are sometimes forced to sell foreign
securities, and acquire local assets, usually so-called
“rand-hedged” shares on the JSE. Many asset swap
funds have had diluted offshore exposure because of
this.
Limited options: choice of vehicles and funds is
limited.
Investment Planning

B59
Direct offshore investment
There are two categories of assets which South African
residents may legitimately hold outside South Africa, and
which may be invested directly into offshore investment
vehicles.
Firstly, there are amounts exported from South Africa under
an exchange control investment allowance concession. The
principal concession allows individual SA residents to invest
up to R4 000 000 per annum (per person) in offshore
markets. The concession is available to natural persons over
the age of 18 and is subject to the obtaining of a tax
clearance from the Receiver of Revenue. From 2012, South
African residents may also utilise the Single Discretionary
Allowance for investment purposes as well as travel, gifts,
maintenance etc. This totals R1 000 000 per annum and is
not subject to a tax clearance. Residents may also now
apply to the Financial Surveillance Dept of SARB to exceed
these limits subject to a certificate of good standing from
SARS.
Secondly, South African residents may also legitimately hold
certain categories of foreign-sourced assets. These would
include immigrants’ foreign-held funds, foreign income and
inheritances from non-South African residents. To these
must be added assets or funds in respect of which amnesty
has been granted, or which have been regularised during the
2003 exchange control and tax amnesty process or the 2011
Voluntary Disclosure Programme. There are few limitations
on what the investor may do with these funds in terms of
expenditure or investment, although transfer to another SA
resident or investing back into South Africa may not be
permissible.
o
Advantages:
Currency hedging: any fall in the value of the local
currency will enhance performance.
Hedging political risk: the investment is in a stable
political environment.
Lower cost: direct offshore investment usually has a
lower cost.
B60
Investment Planning
Choice of currency: both the investment and the
proceeds may be in the currency of the investor’s
choice.
Freedom from exchange controls: the investment may
be made, and proceeds may be paid wherever the
client wishes.
Income tax, estate duty and donations
advantages, depending on circumstances.
o
tax
Disadvantages:
High entry levels: direct offshore investments are
denominated in strong currencies, and entry levels
can be high by South African standards.
Tax and estate planning: specialist advice must be
sought in these areas.
6.
Estate planning and tax implications

Estate planning and Offshore Trusts
Offshore trusts have been extensively used by South African
residents for estate planning purposes, asset protection and
confidentiality. These can be expensive, with trust fees
varying widely between different managers in various
locations.
Post-amnesty, South African planners need to reassess the
need for a trust. They are most effective for holding foreignsourced assets, and assets acquired by immigrants before
becoming resident. The benefits include freedom from
probate (estate administration) costs, freedom from estate
duty for current and future generations, and the usual trust
benefits such as protection from creditors and on divorce.
They can be used for funds transferred from South Africa,
but transfers may be subject to donations tax or Section
31(2) of the Income Tax Act. SA-resident donors to foreign
trusts may also be taxed in terms of Section 7(8), and
beneficiaries in terms of Section 25B (2A). Corresponding
sections of the 8th schedule may apply to capital gains.
Planning using foreign trusts can be
professional assistance should be sought.
complex
and
Investment Planning

o
B61
Tax implications
Residence-based tax
Since 2001 South Africans have been taxed on a residence
basis on their worldwide income. Where offshore income is
concerned this means that there is, in theory, little
difference to the taxation of similar local investments.
However, practical considerations make it necessary to look
at the effect on some specific types of offshore investments:
o
Collective investment schemes:
South Africa taxes unit trusts differently to most other
countries. In South Africa, local dividends have been taxfree, and the interest income attributable to an individual
unit holder is taxable in the unit holder’s hands. The unit
trust manager has issued a certificate detailing the interest
portion. Most unit holders have elected to have the income
reinvested, but this did not prevent the income from
accruing to them. Reinvested income purchased further
units in the selected fund/s. This may change with the
introduction of a withholding tax on dividends in 2012, which
will probably bring South Africa closer to international
practice.
In many other countries there is a withholding tax levied on
interest and/or dividends, before payment to the investor.
Thus, the income received by a fund is after-tax income. It
is unnecessary to account to individual unit holders for
different types of income, and income, together with
intrinsic capital growth, is automatically reinvested, and
simply “rolled up” in the funds. Hence the commonly used
term, “roll-up” funds. The effect of automatic reinvestment
in the fund is to increase the price per unit, rather than
purchase additional units, as in South Africa. This practice
made it difficult to levy tax on these funds in South Africa,
and in many cases a withholding tax will already have been
levied on the assets in the country where they are held. The
way the Income Tax Act used to read, withdrawals should
have been treated as foreign company dividends. There was
considerable uncertainty about this, until 2007 when the
uncertainty was clarified. Foreign Unit Trusts or CIS are
included in the CGT net at the full rate applicable to
individuals. The administrative burden of reporting gains and
B62
Investment Planning
losses in each tax year will remain with the individual
investor.
o
Branch-issuedfunds:
or
local
policies
with
offshore
Some South African life assurers offer offshore investments
through the medium of policies sold under the auspices of a
local head office, under a “branch” arrangement, whereby
the policy is issued by the offshore branch. Other local
insurers offer locally issued policies denominated in foreign
currencies. In both cases these are at least partially
regulated under the Long-term Insurance Act. This has
generally been permitted where the Financial Services Board
is satisfied with the level of regulation in the country where
the funds are managed, such as the Isle of Man, Jersey and
Guernsey. Regulation of this arrangement has been
formalised in FSB directive 127 B.i(LT). These are suitable
for amounts exported in terms of the foreign exchange
concessions and for other money held legitimately offshore.
It is logical that for tax purposes they will be treated in the
same way as local long-term insurance policies, that is,
taxation in terms of the four-fund approach under S29A. The
effect of income tax is usually minimal because of the “rollup” nature of the underlying funds, and other reasons,
including reinsurance agreements with foreign insurers. In
some circumstances capital gains tax, at the lower effective
rate applicable to insurers, may be payable by the insurer.
Proceeds on maturity will be free from income tax and from
CGT in terms of the Eighth Schedule to the Income Tax Act.
Apart from the disclosure requirements of the Act, there is
no administrative burden.
o
Foreign policies:
In the past certain foreign insurers have marketed offshore
investment policies to South African residents without any
form of approval. Anyone assisting in the promotion and
marketing of such polices will be in contravention of the
Long-term Insurance Act. Because the South African
Revenue Service has no jurisdiction over the foreign issuer
Investment Planning
B63
of the policies, or the managers of the underlying funds,
there can be no income tax implications during the term of
these policies. It is for precisely this reason (according to
the explanatory memorandum to the 2001 Taxation Laws
Amendment Act) that the CGT exclusion granted to South
African policies will not be extended to foreign policies. It is
also worth noting that the basis for tax-free maturity of local
long-term policies is that the policyholder has already been
subjected to taxation in terms of the trustee principle
embodied in four-fund taxation. Intermediaries and
policyholders need to be aware that there is nothing in
legislation to prevent SARS from levying income tax on the
entire gain of a foreign policy held by a South African
resident. In addition SARS BPR 105, issued in 2011, has
made it clear that portfolio assets in such unapproved
policies will be regarded as being held by the policyholder
and taxed accordingly. If they are not invested in “roll-up”
funds this could mean having to account for portfolio income
on an annual basis as well as capital gains on any disposal of
assets.
It should also be noted that there is no legal recourse
against the assurer in South Africa, should anything go
wrong with this type of investment.
7. Exchange Control Odds and Ends
See Exchange Control Guidelines on page F3
B64
Investment Planning
Notes
Retirement Planning
Retirement
Planning
Retirement Planning
Retirement Planning
C1
Retirement Planning Worksheet
1. Retirement income required (Present Value)
Monthly expenditure x 12
:
R……. x 12
or percentage of annual salary :
R……. x %
R
2. Less: Income available at retirement (Present Value)
If client/partner belongs to a defined benefit fund:
Pension: Years service x percentage x average salary (in present value)
Client :
….. years x ….. % x R…..
Partner :
….. years x ….. % x R…..
(R
)
If client/partner belongs to a defined contribution fund
Pension that could be purchased with the projected retirement benefit
(in present value)
Client:
(R……………..)
Partner
(R……………..)
Other income (e.g. rental)
(R………………)
INCOME SURPLUS/SHORTFALL
R
3. Conversion of income shortfall to capital shortfall
Preliminary questions:
Preserve (Table A) or consume (Table B) capital
Inflation rate
.…%
Investment period/life expectancy at retirement
.…years
Interest rate
….%
Shortfall x factor (Table A or B)
= capital required
R....
x R....
R
4. Add: Lump-sum expenses at retirement (present value)
R
Total capital required
R
5. Less: Present value of a defined contribution fund benefit (only
(R
)
if not already in step 2 above)
6. Less: Present value of future capital amounts
Projected maturity value x factor (use discount tables to obtain factor) e.g. assurance policies
(1) R……………… x R……….………
=
R
(2) R……………… x R……….………
=
R
(3) R……………… x R……….………
=
R
(R
)
7. Less: Present value of OTHER EXISITNG INVESTMENTS (e.g. unit trusts, fixed
deposits)
(1) …………………………………
=
R
(2) …………………………………
=
R
(3) …………………………………
=
R
(R
)
CAPITAL SURPLUS/SHORTFALL
R
8. Monthly investment needed to eliminate shortfall
Shortfall
÷
years to retirement
÷
12 months
R……….
÷
……….. years
÷
12 months
9. Less: Contributions to other existing investments (see above)
(R
)
Additional monthly investment to eliminate shortfall
R
C2
Retirement Planning
Notes to Retirement Planning Worksheet
The first section in the worksheet indicates the income the investor
requires at retirement. This could be based on expected monthly
expenditure. If all calculations in the worksheet are done with pre-tax
amounts, this monthly expenditure must make provision for income tax.
The assumption is made that pension income and other income entered
in section 1 will keep pace with inflation.
Please note that in step 2 a distinction is made between a defined benefit
and defined contribution fund member. If the client belongs to a defined
benefit fund, simply use the formula in the fund rules to determine the
pension. If the client belongs to a defined contribution fund his/her
projected retirement benefits would normally be expressed as a lump
sum. You can follow one of two routes:

Draw a quote based on the projected amount that would be
available to obtain an income figure that could be entered in
this section. Remember to always use present values. (The
income amount from the quote needs to be discounted to a
present value.)
or

Take the defined contribution benefit expressed as a lump
sum and enter this amount in Step 5 (again using present
values).
In section 2 of the worksheet the income shortfall is converted to a
capital shortfall. The investor should indicate whether he/she wishes to
preserve capital or consume the capital over the identified investment
period (term of retirement).
In step 6 of the worksheet, where future capital amounts are deducted,
the assumption is made that all capital amounts will be available at
retirement. This means that the future value of the investment at
retirement date is worked back to a present value. Certain amounts
might, however, not be available at the chosen retirement date, because,
for example, the term of the investment extends past the chosen
retirement date. The same procedure will be followed in these cases.
Use the compound interest tables (Table F in the General section of this
book) to work back from the future value to the present value of the
capital amounts. Remember, however, to use the full term of the
investment to work back to present value.
Retirement Planning
C3
Example
Retirement date is in ten years’ time. The investment has a 15-year
term. Projected value of the investment is R500 000. Assume inflation of
8% over the term:

Work back the projected value of the investment with the
factor obtained from table F, over a 15-year term to a value
in today’s terms. R500 000 x 0,315242 = R157 621 (Please
note that the same result can be achieved by using a
financial calculator.)

Enter the present value (R157 621) under the appropriate
category in the worksheet, i.e. “Present value of future
capital amounts”.
In this way the investor can see the total capital position at
retirement, even though some of these amounts might not
be available at retirement date. In order to plan effectively,
the investor should be aware that not all capital amounts will
be available at retirement.
In step 9 you will see the monthly investment needed to eliminate the
potential shortfall as calculated in the previous steps. The assumption is
made that the monthly investment will increase annually in line with the
inflation rate and the invested capital will also grow at the inflation rate.
The monthly investment calculated to eliminate the shortfall, in step 9,
will provide for the shortfall in Present Value terms. The shortfall at the
end of step 7, could be converted to a Future Value (using the inflation
rate and years to retirement) and then step 8 and step 9 could be
applied to calculate the monthly requirement to achieve the future
shortfall.
Note that the worksheet is a very simplified capital needs analysis and
the accuracy of calculated results can therefore not be guaranteed.
C4
Retirement Planning
Table A: Capital preservation
Table to calculate the capital required to:
(i)
provide a R1 yearly annuity payable in advance and
escalating at e% p.a. for n years, and
(ii)
return the capital sum after n years.
Assume an interest rate of i% p.a.
Interest
(i)
9%
9%
9%
Yrs
(n)
10
15
20
3%
13.5974
14.3307
14.9862
Escalation rate/Inflation (e)
4%
5%
6%
7%
15.9516
14.1434
14.7168
15.3193
18.2208
15.1924
16.1238
17.1311
20.5330
16.1605
17.4654
18.9169
8%
16.6158
19.4000
22.3343
10%
10%
10%
10
15
20
12.3233
12.9546
13.5026
12.8089
13.7117
14.5206
13.3187
14.5293
15.6495
13.8539
15.4124
16.9027
14.4158
16.3668
18.2953
15.0055
17.3985
19.8446
11%
11%
11%
10
15
20
11.2802
11.8294
12.2913
11.7171
12.5013
13.1827
12.1749
132259
14.1691
12.6552
14.0079
15.2620
13.1593
14.8521
16.4741
13.6882
15.7638
17.8200
12%
12%
12%
10
15
20
10.4121
10.8923
11.2842
10.8073
11.4935
12.0713
11.2217
12.1411
12.9406
11.6564
12.8393
13.9016
12.1124
13.5922
14.9655
12.5906
14.4044
16.1444
13%
13%
13%
10
15
20
9.6771
10.1000
10.4344
10.0375
10.6416
11.1344
10.4153
11.2245
11.9058
10.8114
11.8522
12.7570
11.2267
12.5283
13.6974
11.6620
13.2569
14.7375
14%
14%
14%
10
15
20
9.0471
9.4215
9.7081
9.3777
9.9124
10.3345
9.7242
10.4401
11.0233
10.0872
11.0077
11.7819
10.4677
11.6185
12.6184
10.8664
12.2760
13.5417
15%
15%
15%
10
15
20
8.5011
8.8341
9.0806
8.8060
9.2813
9.6442
9.1253
9.7615
10.2627
9.4597
10.2775
10.9425
9.8101
10.8321
11.6905
10.1770
11.4285
12.5146
16%
16%
16%
10
15
20
8.0235
8.3207
8.5334
8.3058
8.7299
9.0430
8.6014
9.1689
9.6010
8.9109
9.6400
10.2131
9.2349
10.1459
10.8853
9.5741
10.6894
11.6245
17%
17%
17%
10
15
20
7.6021
7.8683
8.0524
7.8646
8.2443
8.5151
8.1393
8.6472
9.0208
8.4267
9.0791
9.5744
8.7275
9.524
10.1811
9.0424
10.0396
10.8470
18%
18%
18%
10
15
20
7.2277
7.4667
7.6264
7.4725
7.8134
8.0482
7.7286
8.1845
8.5083
7.9965
8.5819
9.0110
8.2768
9.0077
9.5609
8.5700
9.4643
10.1632
19%
19%
19%
10
15
20
6.8927
7.1079
7.2467
7.1218
7.4286
7.6327
7.3613
7.7715
8.0529
7.6118
8.1384
8.5110
7.8737
8.5311
9.0112
8.1476
8.9516
9.5581
20%
20%
20%
10
15
20
6.5912
6.7854
6.9064
6.8062
7.0830
7.2607
7.0309
7.4009
7.6458
7.2658
7.7405
8.0647
7.5112
8.1037
8.5213
7.7678
8.4923
9.0195
Retirement Planning
C5
Interest
(i)
9%
9%
9%
Yrs
(n)
10
15
20
9%
17.3133
20.6765
24.3437
10%
11%
12%
13%
20.4710
18.0459
18.8151
19.6229
26.9335
22.0586
23.5554
25.1768
35.0281
26.5868
29.0929
31.8944
14%
21.3615
28.8315
38.5352
10%
10%
10%
10
15
20
15.6246
18.5142
21.5696
16.2745
19.7211
23.4919
16.9567
21.0269
25.6358
17.6728
22.4400
28.0286
18.4243
23.9696
30.7007
19.2131
25.6256
33.6866
11%
11%
11%
10
15
20
14.2432
16.7487
19.3157
14.8255
17.8130
20.9795
15.4365
18.9634
22.8318
16.0776
20.2073
24.8958
16.7502
21.5525
27.1969
17.4558
23.0075
29.7641
12%
12%
12%
10
15
20
13.0922
15.2820
17.4522
13.6182
16.2273
18.9043
14.1700
17.2492
20.5181
17.7487
18.3580
22.3131
15.3556
19.5457
24.3111
15.9921
20.8346
26.5366
13%
13%
13%
10
15
20
12.1185
14.0425
15.8891
12.5970
14.8897
17.1655
13.0987
15.8037
18.5814
13.6247
16.7901
20.1536
14.1761
17.8548
21.9006
14.7542
19.0044
23.8433
14%
14%
14%
10
15
20
11.2842
12.9842
14.5620
11.7220
13.7472
15.6908
12.1809
14.5696
16.9408
12.6618
15.4562
18.3262
13.1657
16.4124
19.8631
13.6938
17.4438
21.5694
15%
15%
15%
10
15
20
10.5614
12.0720
13.4236
10.9641
12.7610
14.4273
11.3859
13.5047
15.5368
11.8278
14.3057
16.7643
12.2907
15.1688
18.1237
12.7756
16.0990
19.6303
16%
16%
16%
10
15
20
9.9293
11.2736
12.4382
10.3013
11.9016
13.3351
10.6907
12.5773
14.3247
11.0986
13.3043
15.4175
11.5256
14.0863
16.6257
11.9728
14.9295
17.9625
17%
17%
17%
10
15
20
9.3719
10.5735
11.5787
9.7168
11.1469
12.3837
10.0778
11.7632
13.2701
10.4557
12.4256
14.2474
10.8512
13.1380
15.3259
11.2652
13.9044
16.5172
18%
18%
18%
10
15
20
8.8767
9.9540
10.8238
9.1977
10.4794
11.5491
9.5334
11.0435
12.3465
9.8848
11.6493
13.2239
10.2523
12.3002
14.1905
10.6370
12.9998
15.2564
19%
19%
19%
10
15
20
8.4340
9.4022
10.1566
8.7336
9.8853
10.8127
9.0468
10.4034
11.5325
9.3745
10.9592
12.3233
9.7172
11.5558
13.1928
10.0756
12.1965
14.1500
20%
20%
20%
10
15
20
8.0359
8.9082
9.5638
8.3163
9.3536
10.1592
8.6094
9.8308
10.8114
8.9158
10.3423
11.5264
9.2361
10.8908
12.3114
9.5710
11.4792
13.1739
C6
Retirement Planning
Table B: Annuity Rates
Table to calculate the capital required to:
(i)
Provide a R1 yearly annuity payable in advance and
escalating at e% p.a. for n years, and
(ii)
Capital is consumed / deleted after n years. Assume an
interest rate of i% p.a.
Interest
(i)
9%
9%
9%
Yrs
(n)
10
15
20
3%
7.8537
10.3964
12.3122
4%
5%
6%
7%
8.691
9.2134
8.5003
8.8481
11.0215
13.2185
11.6972
12.4279
13.2770
16.8693
14.3490
15.5415
8%
9.5971
14.0740
18.3492
10%
10%
10%
10
15
20
7.5721
9.8534
11.4955
7.8705
10.4293
12.3622
8.1838
11.0511
13.3233
8.5126
11.7228
14.3902
8.8579
12.4487
15.5759
9.2203
13.2334
16.8948
11%
11%
11%
10
15
20
7.3079
9.3570
10.7667
7.5905
9.8884
11.5476
7.8871
10.4617
12.4117
8.1983
11.0802
13.3690
8.5248
11.7480
14.4308
8.8674
12.4691
15.6097
12%
12%
12%
10
15
20
7.0597
8.9023
10.1144
7.3276
9.3936
10.8199
7.6086
9.9230
11.5991
7.9034
10.4936
12.4605
8.2125
11.1089
13.4141
8.5368
11.7728
14.4708
13%
13%
13%
10
15
20
6.8263
8.4851
9.5289
7.0805
8.9401
10.1681
7.3471
9.4298
10.8726
7.6265
9.9571
11.6499
7.9194
10.5251
12.5087
8.2265
11.1373
13.4586
14%
14%
14%
10
15
20
6.6067
8.1016
9.0017
6.8481
8.5239
9.5825
7.1011
8.9775
10.2213
7.3663
9.4656
10.9247
7.6441
9.9908
11.7002
7.9352
10.5562
12.5564
15%
15%
15%
10
15
20
6.3998
7.7485
8.5258
6.6293
8.1407
9.0549
6.8697
8.5619
9.6357
7.1214
9.0144
10.2739
7.3852
9.5009
10.9762
7.6614
10.0240
11.7499
16%
16%
16%
10
15
20
6.2047
4.4227
8.0949
6.4230
7.7878
8.5783
6.6516
8.1793
9.1077
6.8909
8.5996
9.6883
7.1415
9.0509
10.3260
7.4038
9.5357
11.0272
17%
17%
17%
10
15
20
6.0206
7.1217
7.7039
6.2285
7.4620
8.1465
6.4460
7.867
8.6304
6.6736
8.2176
9.1600
6.9119
8. 6369
9.7405
7.1612
9.0870
10.3776
18%
18%
18%
10
15
20
5.8467
6.8431
7.3480
6.0448
7.1608
7.7544
6.2520
7.5010
8.1977
6.4687
7.8652
8.6821
6.6954
8.2555
9.2119
6.9326
8.6739
9.7922
19%
19%
19%
10
15
20
5.6823
6.5848
7.0233
5.8712
6.8820
7.3973
6.0687
7.1997
7.8046
6.2752
7.5395
8.2486
6.4911
7.9033
8.7333
6.7169
8.2929
9.2633
20%
20%
20%
10
15
20
5.5267
6.3450
6.7263
5.7070
6.6233
7.0713
5.8954
6.9205
7.4463
6.0923
7.2381
7.8544
6.2981
7.5778
8.2990
6.5132
7.9411
8.7842
Retirement Planning
C7
Interest
(i)
9%
9%
9%
Yrs
(n)
10
15
20
9%
10.000
15.000
20.000
10%
11%
12%
13%
11.8238
10.4231
10.8674
11.3340
19.5392
16.0027
17.0886
18.2648
28.7780
21.8429
23.9018
26.2035
14%
12.3382
20.9201
31.6593
10%
10%
10%
10
15
20
9.6007
14.0821
18.3634
10.000
15.000
25.000
10.4192
15.9932
21.8252
10.8591
17.0680
23.8623
11.3209
18.2315
26.1372
11.8056
19.4911
28.6793
11%
11%
11%
10
15
20
9.2269
13.2481
16.9199
9.6042
14.0900
18.3774
10.000
15.000
20.000
10.4153
15.9839
21.8079
10.8510
17.0479
23.8236
11.3082
18.1988
26.0724
12%
12%
12%
10
15
20
8.8768
12.4892
15.6430
9.2335
13.2626
16.9446
9.6076
14.0978
18.3911
10.000
15.000
20.000
10.4415
15.9748
21.7909
10.8431
17.0282
23.7856
13%
13%
13%
10
15
20
8.5485
11.7972
14.5102
8.8861
12.5090
15.6758
9.2400
13.2768
16.9689
9.6110
14.1055
18.4046
10.0000
15.0000
20.0000
10.4078
15.9658
21.7741
14%
14%
14%
10
15
20
8.2403
11.1652
13.5025
8.5601
11.8213
14.5491
8.8952
12.5284
15.7081
9.2464
13.2908
16.9928
9.6144
14.1131
18.4179
10.000
15.000
20.000
15%
15%
15%
10
15
20
7.9508
10.5869
12.6034
8.2539
11.1927
13.5458
8.5715
11.8450
14.5875
8.9041
12.5476
15.7400
9.2526
13.3046
17.0163
9.6176
14.1205
18.4309
16%
16%
16%
10
15
20
7.6785
10.0568
11.7991
7.9661
10.6171
12.6499
8.2673
11.2198
13.5886
8.5827
11.8624
14.6253
8.9129
12.5665
15.7714
9.2588
13.3182
17.0395
17%
17%
17%
10
15
20
7.4222
9.5702
11.0776
7.6953
10.0892
11.8477
7.9812
10.6470
12.6958
8.2805
11.2466
13.6308
8.5937
11.8914
14.6626
8.9216
12.5251
15.8023
18%
18%
18%
10
15
20
7.1807
9.1226
10.4287
7.4403
9.6042
11.1275
7.7119
10.1212
11.8958
7.9961
10.6764
12.7412
8.2935
11.2730
13.6725
8.6046
11.9141
14.6994
19%
19%
19%
10
15
20
6.9530
8.7104
9.8435
7.1999
9.1579
10.4793
7.4582
9.6378
11.1769
7.7283
10.1528
11.9433
8.0108
10.7055
12.7860
8.3063
11.2990
13.7136
20%
20%
20%
10
15
20
6.7381
8.3300
9.3143
6.9732
8.7465
9.8942
7.2189
9.1927
10.5294
7.4758
9.6710
11.2258
7.7444
10.1839
11.9902
8.0253
10.7342
12.8303
C8
Retirement Planning
Retirement planning vehicles: A Comparison
ADMINISTRATIVE
REQUIREMENTS
DEDUCTIBLE
CONTRIBUTION
Provident
Fund
Must be approved by the
Registrar (Pension Funds Act).
Pension
Fund
Retirement
Annuity
Must be approved by
Commissioner of SARS.
Must be approved by
Must be approved by
Membership agreement
between employer and
employee:
New fund - employee choice
Existing fund - compulsory
Fund must be registered.
Employer
Membership agreement
between employer and
employee:
New fund - employee choice
Existing fund - compulsory
Employer
No agreement between
employer/employee required.
10% of approved
remuneration for pension,
provident funds and medical
aid schemes. In practice up to
20% is allowed if justifiable.
10% of approved
remuneration for pension,
provident funds and medical
aid schemes. In practice up to
20% is allowed if justifiable.
Contribution
made
by
employer deemed to have
been made by the employee
to the extent that the
contribution is included in the
employee’s income.
(Section 11(I))
(Section 11(I))
(Section 11(n)(ii))
Employer
It has been proposed that employer contributions (with effect 1 March 2014) to
approved provident, pension and retirement funds are to be included as a fringe
benefit for the employee.
Retirement Planning
DEDUCTIBLE
CONTRIBUTION
(continued)
C9
Provident
Fund
Employee
Not tax deductible
Current
Pension
Fund
Employee
Deductible with max. of the
greater of:
R1 750
or
7,5% of pensionable
remuneration.
(Limit also applies to
government employees.)
(Section 11(k)(i))
Any disallowed excess may
not be carried forward to the
following year of assessment.
The disallowed excess is
allowed as a deduction at
retirement
Retirement
Annuity
Member/taxpayer
Deductible with max. of the
greater of:
15% of nonretirement funding
taxable income
(excluding
retirement fund
lump sums or
severance
benefits);
or
R3 500 –allowable
pension fund
contribution;
or
R1 750.
(Section 11(n)(aa))
Any contribution made by an
employer for the benefit of the
tax payer to the extent that
the amount is included in the
income of the taxpayer as a
taxable benefit, will be deemed
to have been made by the
taxpayer with effect 1 March
2010.
As from 1 March 2012,
preservation fund benefits may
C10
Retirement Planning
Arrear
DEDUCTIBLE
CONTRIBUTIONS
(continued)
RETIREMENT
BENEFIT
Not tax deductible
R1 800 deductible p.a. as a
past period contribution.
Any excess above R1800 may
be carried forward to the
following year of assessment.
be transferred to a retirement
annuity.
R1 800 deductible p.a. as a
reinstatement of membership.
Any excess may be carried to
the following year of
assessment.
(Section 11(k)(ii)(aa) & (bb))
(Section 11(n)(bb))
It has been proposed (with effect 1 March 2014) that all taxpayer contributions to approved
pension, provident and retirement annuity funds are consolidated with the following caps:
contribution deductions will be capped at 22.5% of the higher of employment or taxable income
with a maximum rand amount of R250 000 for those younger than 45 years and 27.5% with a
maximum rand value of R300 000 for those older than 45 years. These limits will include risk and
administration costs as well employer contributions that have been fringe benefits taxed. A
minimum annual deduction of R20 000 will apply.
Provident
Pension
Retirement
Fund
Fund
Annuity
Cash lump sum
Cash lump sum
Cash lump sum
1/3 of total value (if 2/3 of the
Entire amount or surrender
1/3 of total value (if 2/3 of the
total value is less than
value of policy.
total value is less than
R50 000 the full benefit may
R50 000 the full benefit may
be paid.)
be paid.)
(Section 1 “RA fund” (b)(ii))
(Section 1 “pension fund”
(c)(ii)(dd))
Balance used to purchase a
Balance used to purchase a
comp. annuity taxed; at the
comp. annuity; taxed at the
annuitant’s marginal rate.
annuitant’s marginal rate.
Taxable Lump sum
Taxable Lump sum
Taxable Lump sum
The taxable retirement fund
lump sum is the benefit
derived in consequences of
retirement, less the following
Retirement Planning
C11
amounts, if they have not
enjoyed deductions before:
 Contributions;
 Contributions;
 Contributions;
 Previously taxed transfer
of divorce awards to the
retirement fund;
retirement fund;
retirement fund;
of benefits to a retirement
fund; and
fund; and
fund; and
 The pre-1998 amounts
transferred from public
sector funds.
sector funds.
sector funds.
Provident Fund, Pension Fund and Retirement Annuity
The taxable retirement fund lump sum accrued from 1 Oct 2007 ,withdrawal benefits accrued from
1 March 2009 and severance benefits from 1 March 2011 are aggregated. The aggregated lump sum is taxed
as follows at retirement:
Taxable income from lump sum benefits
Rate of Tax
R0
- R315 000
0% of taxable income
R315 001 - R630 000
R0 plus 18% of taxable income exceeding R315 000
R630 001 - R945 000
R56 700 plus 27% of taxable income exceeding R630 000
R945 001 and above
R141 750 plus 36% of taxable income exceeding R945 000
The tax is reduced by the tax calculated in accordance with the above table on such lump sum
benefit accrued prior to the lump sum in respect of which the tax is being determined.
(Section 1 and Appendix 1 to the Income Tax Act)
C12
Retirement Planning
RETIREMENT
BENEFIT
Public Sector
Funds
Provident
Fund
Taxable portion
Lump sum benefits paid from
a public sector fund were
tax-free until 1 March 1998.
Pension
Fund
Taxable portion
Lump sum benefits paid from
a public sector fund were
tax-free until 1 March 1998.
Thereafter parity between
public and private sector fund
taxation. Vested rights are
protected by formula C in the
Second Schedule to the
Income Tax Act. If a Public
Sector fund is involved, the
following calculation must be
done:
Thereafter parity between
public and private sector fund
taxation. Vested rights are
protected by formula C in the
Second Schedule to the
Income Tax Act. If a Public
Sector fund is involved, the
following calculation must be
done
Retirement
Annuity
Taxable portion
Not Applicable
Retirement Planning
RETIREMENT
BENEFIT
(continued)
Public Sector
Funds
C13
1.
Provident
fund
Apply formula C:
A= B x D, where
C
1.
Pension
fund
Apply formula C:
A= B x D, where
C
A = the taxable portion of the
lump sum to be included
in gross income (subject
to any further deductions
allowed by paragraphs 5
and 6 of the Second
Schedule).
A = the taxable portion of the
lump sum to be included
in gross income (subject
to any further deductions
allowed by paragraphs 5
and 6 of the Second
Schedule).
B = the number of completed
years of employment,
after 1 March 1998,
including previous or
other periods of service
approved as pensionable
service after 1 March
1998.
B = the number of completed
years of employment,
after 1 March 1998,
including previous or
other periods of service
approved as pensionable
service after 1 March
1998.
C= the total number of
completed years taken
into consideration for the
purpose of determining
the amount of benefits
payable to the member
by the fund.
C= the total number of
completed years taken
into consideration for the
purpose of determining
the amount of benefits
payable to the member
by the fund.
D = the lump-sum benefit.
D = the lump-sum benefit.
Retirement
annuity
C14
Retirement Planning
RETIREMENT
BENEFIT
(continued)
Public Sector
Funds
2.
Deduct the following from
the taxable portion
calculated ito Formula C:
2.
Deduct the following from
the taxable portion
calculated ito Formula C:

Contributions previously
disallowed;
Previously taxed transfer
of benefits to retirement
funds

Contributions previously
disallowed;
Previously taxed transfer
of benefits to retirement
funds
Apply table under
retirement benefit to
taxable amount.
3.

3.

Apply table under
retirement benefit to
taxable amount.
Retirement Planning
WITHDRAWAL
BENEFIT
C15
Provident
Fund
Cash Lump sum
Subject to the rules of the
fund. A minimum benefit in
terms of Section 14A of the
Pension Funds Act must be
paid
Pension
Fund
Cash Lump sum
Subject to the rules of the
fund. A minimum benefit in
terms of Section 14A of the
Pension Funds Act must be
paid
Retirement
Annuity
Cash Lump sum
No withdrawals prior to age
55; except upon death or
disability
or
where
contributions are discontinued
prematurely and:
 The member’s interest in
the fund is less than
R7 000; or
 The member emigrated
from
RSA
and
the
emigration is recognised
by the SARB;
The following documents must
be submitted to SARS upon
emigration:
 Tax clearance certificate;
 Tax directive on the lump
sum;
 Supporting documents in
the
tax
directive
application; and
 Proof of emigration.
(Section 1 “RA fund”)
C16
Retirement Planning
WITHDRAWAL
BENEFIT
(Continued)
Provident
Fund
Taxable portion
The
taxable
lump
sum
retirement fund withdrawal
benefit is the lump sum benefit
derived other than iro death,
retirement
or
retrenchment/redundancy, less
the following amounts:
Pension
Fund
Taxable portion
The
taxable
lump
sum
retirement fund withdrawal
benefit is the lump sum benefit
derived other than iro death,
retirement
or
retrenchment/redundancy, less
the following amounts:
(i)
If they have not enjoyed
deductions before:
 Contributions;
retirement fund;
of
benefits
to
the
retirement funds; and
 Pre-1998
amounts
sector funds.
(i)
If they have not enjoyed
deductions before:
 Contributions;
retirement fund;
of
benefits
to
the
retirement funds; and
 Pre-1998
amounts
sector funds.
(ii) Amounts transferred taxfree to another retirement fund
ito par 6 of the Second
Schedule to the Income Tax
Act.
(ii) Amounts transferred taxfree to another retirement fund
ito par 6 of the Second
Schedule to the Income Tax
Act.
(Par 6 of Second Schedule )
(Par 6 of Second Schedule )
Retirement
Annuity
Taxable portion
Should
a
withdrawal
be
allowed, such a withdrawal will
be taxed as a withdrawal from
a Provident / Pension fund.
Retirement Planning
WITHDRAWAL BENEFIT (Continued)
Provident Fund, Pension Fund and Retirement Annuity
The taxable lump sum withdrawal benefit which accrued from 1 March 2009 and retirement lump sum
benefits which accrued from 1 Oct 2007 are aggregated. This aggregated amount is taxed according to the
table below:
Taxable income from lump sum benefits
Rate of Tax
R0
- R22 500
0% of the taxable income
R22 501 - R600 000
18% of the taxable income exceeding R22 500
R600 001 - R900 000
R103 950 plus 27%of the taxable income exceeding R600 000
R900 001 and above
R184 950 plus 36% of the taxable income exceeding R900 000
The tax is reduced by the tax calculated in accordance with the above table on such lump sum
benefit accrued prior to the lump sum in respect of which the tax is being determined.
(Section 1 and Appendix 1 to the Income Tax Act).
C17
C18
Retirement Planning
Provident
Fund
Subject to the rules of the fund a minimum benefit
Pension Fund Act must be
Members who withdraw from their
WITHDRAWAL AS
Provident funds as a result of
A RESULT OF
retrenchment/redundancy in the
RETRENCHMENT or
REDUNDANCY



A member whose termination
of employment is due to the
employer ceasing trade or
intending to do so; or
Redundancy is a result of an
employer effecting a general
deduction in personnel in a
certain class; and
Member’s
are
not
shareholders with more than
5% share capital or members
interest in the employer;
Pension
Fund
in terms of section 14A of the
paid.
Members who withdraw from their
Pension fund as a result of
retrenchment/redundancy in the



Retirement
Annuity
Not applicable.
A member whose termination
of employment is due to the
employer ceasing trade or
intending to do so; or
Redundancy is a result of an
employer effecting a general
deduction in personnel in a
certain class; and
Member’s
are
not
shareholders with more than
5% share capital or members
interest in the employer;
will be taxed in terms of the
Retirement table and not the
withdrawal table.
will be taxed in terms of the
Retirement table and not the
withdrawal table.
The same deductions will be
available as for retirement or
withdrawal.
The same deductions will be
available as for retirement or
withdrawal.
(Par 2(a) of Second Schedule)
(Par 2(a) of Second Schedule)
Retirement Planning
DEATH BENEFIT
C19
Provident
Fund
Cash lump sum
Full fund value.
Pension
Fund
Cash lump sum
Full fund value.
Retirement
Annuity
Cash lump sum
Full fund value.
(Section 1 “Pension Fund”)
Taxable portion
Tax free portion is calculated as
explained
under
Retirement
Benefit above.
Taxable portion
explained
under
Retirement
Benefit above.
(Section 1 “Retirement Annuity
Fund”)
Taxable portion
explained
under
Retirement
Benefit above.
The taxable portion will be taxed
as per the table included under
Retirement Benefit above.
C20
Retirement Planning
Preservation Funds
1.
Regulations
Preservation funds are defined as “pension preservation funds” and
“provident preservation funds” in the Income Tax Act. In addition
to the Income Tax Act, preservation funds are also governed by
Practise Note RF1/2011 (which replaced RF1/98 with effect from
30 September 2010) as well as the rules of the particular
preservation fund.
2.
Contributions
No recurring contributions are allowed.
The Income Tax Act provides for membership to a preservation
fund by former members of pension and provident funds, where
membership was terminated by:
3.

resignation of a member;

retrenchment of a member;

winding up of a fund;

a transfer of a business from one employer to another in
terms of S197 of the Labour Relations Act; and

former members of any other preservation fund.
Eligibility
Any person may transfer a retirement fund benefit to a
preservation fund of choice. Eligibility of membership is no longer
based on the employer being a participating employer of the fund.

A non-member spouse may transfer a divorce award to a
preservation fund.

Unclaimed benefits
preservation fund.

Upon retrenchment, the benefits from pension- and
provident funds may be transferred to a preservation fund.

Pension preservation funds, may receive transfers from
pension funds, other pension preservation funds or
provident preservation funds.
may
also
be
transferred
to
a
Retirement Planning

4.
1
C21
Provident preservation funds, may receive transfers from
provident funds and other provident preservation funds.
Translocation benefits

Amounts transferred to a preservation fund may not be paid
or transferred in such a way that it is split between more
than one preservation fund.

A split transfer between one preservation fund and one
retirement annuity is allowed. The one withdrawal facility is
not influenced where a member transfers to a preservation
fund and retirement annuity. SARS has indicated that this
practice may be amended. 1

It is not a requirement that the full fund benefit in the
retirement fund must be transferred to a preservation fund.
A member may take a cash withdrawal and transfer the
balance to a preservation fund. The cash withdrawal or
deductions prior to transfer to a preservation fund will not
prevent the member from making a withdrawal after
transferring to a preservation fund. (Definition of
preservation fund in the Income Tax provides for “any lump
sum benefit” to be transferred to a preservation fund.) SARS
has indicated that this practice may be amended. 2

Divorce award payments made in terms of section 37D of
the Pension Funds Act will not prevent transfers to a
preservation fund and will not affect the one withdrawal
option available to members of a preservation fund. SARS
has indicated that this practice may be amended. 3
A draft Retirement Fund Practice Note (RF1/2012) has indicated that this
practice may change; at the time of publication further submissions by the
industry were still to be made in terms of such draft note.
2
id
3
id
C22
5.
Retirement Planning
Retirement benefits
A member of a preservation fund does not have to retire at the
same time as he/she leaves his/her employment.
In a pension preservation fund, only one third of the retirement
interest may be paid as a lump sum, except where two-thirds of
the total value does not exceed R50 000. There is no maximum
age of retirement from a preservation fund.
6.
Disability benefits
If an employee is retired early due to disability, he/she may retire
from the preservation fund. Self-employed persons will have to
satisfy the trustees of the preservation fund that they are
permanently disabled in order to receive an early retirement
benefit.
7.
Withdrawal benefits
No more than one withdrawal may be made by a member of a
preservation fund (Definition of preservation fund in the Income
Tax).
Take note of the following:

The one withdrawal facility applies separately to each
preservation fund.

A withdrawal from a preservation fund will be taxed as any
withdrawal from a retirement fund.

A deduction from a member’s benefit in a retirement fund
before the balance is transferred to a preservation fund is
not payment to the member during his/her membership of
the preservation fund and is not regarded as the member’s
one withdrawal. SARS has indicated that this practice may
be amended.

A divorce award payment before or after transferring to a
preservation fund is not regarded as the one withdrawal
from a preservation fund.
Retirement Planning
C23
Severance Benefits
Severance benefits are taxable in terms of the retirement fund lump sum
tables. The definition of “severance benefit” as per section 1 of the
Income Tax Act:
Any lump sum amount:

other than a lump sum from a retirement fund;

received by or accrued to a person;

from or by arrangement with the person’s employer;

in respect of the relinquishment, termination, loss,
repudiation, cancellation or variation of the person’s office or
employment or of the person’s appointment (or right or
claim to be appointed) to any office or employment.
If one of the following applies:

the person is 55 years or older; or

the relinquishment or termination is due to the person being
permanently incapable of holding his employment or office
due to sickness, accident, injury or incapacity through
infirmity of mind or body; or

the termination or loss is due to:
-
the employer retrenching the person, due to ceasing
carrying on the trade in which the person was appointed;
or
-
the person is retrenched due to a reduction in personnel.
The retrenchment provision will not apply where the person being
retrenched holds more than 5% of the shareholding of the company.
C24
Retirement Planning
Comparison between defined benefit and defined contribution
funds
Retirement benefits
Resignation benefits
Employee contributions
Employer contributions
Risk
Pension increases
Capital preservation
Defined Benefit
Determined by a formula
contained in the fund rules, e.g.
2% x years service x final
salary.
Early retirement penalties may
apply.
Employee can plan more
effectively for possible shortfalls
since the pension formula is
fixed.
Usually linked to years’ service.
A scale is used to determine
benefits.
See “Retirement Planning
Vehicles: A comparison”.
(No difference between defined
benefit and defined
contribution.)
Varies according to cost for the
employer to provide pensions
for the members. Usually
involves an actuarial
calculation. See “Retirement
Planning Vehicles: A
comparison” for tax
implications.
Employer carries the risk of
investment returns. Pensions
are fixed by a formula and has
to be provided regardless of
fund performance.
Usually at the discretion of a
board of trustees. Increases
may or may not keep pace with
inflation
No automatic preservation of
retirement capital after member
and dependants die.
Defined Contribution
Retirement benefit is the total
fund value (“savings account”)
at retirement date consisting
of:
 member contributions +
 employer contributions +
 investment returns.
Usually no early retirement
penalties. Member receives the
balance in the savings account.
No fixed pension formula.
Pension will depend largely on
investment returns of the fund.
Makes planning for possible
shortfalls difficult.
Usually no scale used. Member
receives the full value in the
“savings account”.
See “Retirement Planning
Vehicles: A comparison”. (No
difference between defined
benefit and defined
contribution.)
Employer contribution is a fixed
percentage of the identified
portion of the employee’s
remuneration. See “Retirement
Planning Vehicles: A
comparison” for tax implications
Employee carries the risk of
future investment returns.
Member controls increases by
the annuity option chosen by
him/her at retirement.
Depends on the annuity option
chosen by the member at
retirement.
Retirement Planning
C25
Retirement Annuity Calculation Sheet
GROSS INCOME
Salary
Trade Business income
Commission
Interest
Unit Trust Interest
Dividends
Other dividends
Other …………………………………………………….
……………………………………………….……
Total
EXEMPT
Basic Interest
Dividends
Other …………………………………………………….
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
(R
)
R
(R
)
R
Less: Allowable deductions (only applicable to non-retirement funding
income excluding the following deductions: Lessor’s expenditure on
soil erosion; medical, dental and physical disability expenses;
donations to certain public benefit organisations; farming capital
expenditure)
Expenditure in the production of income
R
Other
R
R
R
NON-RETIREMENT FUNDING TAXABLE INCOME
R
#
(Lump sums received from retirement funds upon retirement
or withdrawal from a retirement fund and severance benefits
may not be included in Non-Retirement Funding Income)
MAXIMUM DEDUCTIBLE CURRENT CONTRIBUTIONS
The greater of:
(A) 15% of R……#
OR
R
(A)
(B) R3 500
- allowable pension fund contributions
R3 500
- R. . . . .
OR
R
(B)
(C) R1 750.
R
(C)
The greater of (A), (B) or (C)
R
INCOME
Less: Retirement funding income
MAXIMUM (ADDITIONAL) CONTRIBUTIONS
Maximum deductible current contributions
Less existing contributions
MAXIMUM (ADDITIONAL) CONTRIBUTIONS
R
(R
R
)
C26
Retirement Planning
Calculating the tax payable where the taxpayer retires from more
than one retirement fund
(after 1 October 2007).
Step 1:
Summarise the amounts
Lump sum
Pension fund
Provident fund
Retirement annuity
Total
Step 2:
Calculate the tax-free portion from the
Retirement Funds

Contributions
deduction;

Previously taxed transfers of divorce awards;

Previously taxed transfers of benefits to the retirement fund;
and

Pre- 1998 amounts transferred from public sector funds.
Step 3:
which
did
not
previously
qualify
as
a
Calculate the tax payable on the lump
sum from Retirement Funds
Total lump sum from pension, provident
and retirement annuity funds
LESS: Tax-free amount
Total Taxable Amount
= R........ (Refer step 1)
(R.......) (Refer step 2)
R........
Retirement Planning
C27
Apply the following table to the taxable amount:
Taxable Income from
Lump sum
lump sum benefits
R0 – R315 000
0% of the taxable income
R315 001 – R630 000
R0 + 18% of the taxable income above
R315 000
R630 001 – R945 000
R56 700 + 27% of the taxable income
above R630 000
R945 001 and above
R141 750 +36% of the taxable income
above R945 000
C28
Retirement Planning
Calculating the tax payable where the taxpayer retires from a
retirement fund after having withdrawn or
retired from another fund previously and/or receiving a
severance benefit
Step 1: Calculate the taxable lump sum amount of the current retirement
fund and/or the current severance amount received.
Step 2: Identify and add previous amounts received:

Taxable lump sums received from retirement funds upon
retirement (from 1 Oct 2007) +

Taxable lump sums received from retirement funds upon
withdrawal (from 1 March 2009) +

Severance payments (from 1 March 2011)
Step 3: Add the taxable amounts in Step 1 + Step 2.
Step 4: Calculate the tax payable on the total amount calculated in
Step 3, applying the retirement tax table.
Step 5: Calculate the tax payable on the previously taxable withdrawal /
retiral lump sum amounts calculated in Step 2. Apply the
retirement tax table to arrive at a “hypothetical” tax amount.
Step 6:
Tax payable =
Tax calculated in Step 4
R. . . . . . . . . .
LESS : “hypothetical” tax calculated
in Step 5
=
Tax Payable
(R. . . . . . . . . .)
R. . . . . . . . . .
The same aggregation method is applied upon death, withdrawal and
retrenchment/redundancy where the applicable table is applied
depending on the event.
Retirement Planning
C29
Techniques to reduce income tax at retirement
Introduction
Prior to 1 October 2007, the taxable portion of a lump sum was taxed at
the taxpayer’s average rate of tax, this changed with the amendments to
the Income Tax Legislation in 2007. The lowering of the average rate of
tax will no longer effect the tax payable on lump sums from retirement
funds, since fixed rates were introduced in October 2007.
1.
Investment of capital in investments generating
tax-free returns
A technique of reducing the taxpayer’s taxable income is to invest
income-generating capital in tax-free investments. Investments
could be made in endowments or sinking funds, which could pay
tax-free income after maturity.
2.
Limiting lump sums to tax-free amount
The tax payable on lump sums can be avoided by limiting the lump
sum to an amount which may be taken tax-free. However, it
should be borne in mind that the amounts which would have been
taxable at a fixed rate will now be taken as a compulsory annuity
and be taxed at marginal rates, such marginal rates may be higher
than the fixed rates.
3.
Preserve
retirement
withdrawal
fund
benefits
upon
Should a tax payer withdraw from a retirement fund prior
retirement, the withdrawal will have an influence on the tax
payable at retirement.
Should a tax payer preserve retirement fund benefits upon
withdrawal by transferring to a preservation fund or a retirement
annuity, the tax payable will be limited at retirement.
4.
Retire later from Retirement Annuities
The legislation forcing a member to retire at age 70 has been
amended. A large number of retirement annuity funds have made
amendments to their rules to allow members to retire after the age
of 70. Members may thus retire at any age after 55.
C30
Retirement Planning
Divorce order awards from Retirement funds
A portion of a member’s interest in a retirement fund may be awarded to
a former spouse of the member in terms of:

Section 7(8) of the Divorce Act;

Section 37D of the Pension Funds Act and

General Financial Services Amendment Act, 2008
Pension Interest is defined as following in the Divorce Act:
In the case of a Pension Fund, Provident Fund, Pension Preservation
Fund and Provident Preservation fund:
The benefits to which a member would have been entitled had he/she
withdrawn from the fund on the date of divorce.
In the case of a Retirement Annuity:
The member’s contributions up to the date of divorce plus annual simple
interest at the rate as prescribed by the Prescribed Rate of Interest Act.
The maximum interest may not be more than the fund return.
The Pension Fund Act was amended in 2007, to introduce the “clean
break” principle whereby payments may be made to non-members
immediately after divorce. The non-member no longer has to wait for
the member to exit the fund.
Divorce Order granted before 13 September 2007
1.
2.
Date of deemed accrual:

Accrual date is the date of deduction from the fund.

Date of deduction is the date of election by non-member
spouse to take cash or transfer to another fund.

If no election and fund requests an election, it must be
made within 120 days.
Tax position:

Where the deduction was made between 1 November 2008
& 1 March 2009, the member was regarded as the taxpayer.
The divorce award was taxed at the member’s average rate
of tax.
Retirement Planning

C31
Where the deduction was made after 1 March 2009, no tax
is payable.
Divorce Order granted after 13 September 2007
1.
Date of deemed accrual:
Date of deduction from the fund is the date of accrual.
2.
Tax position:

Where the deduction was made prior to 1 March 2009, the
member is the taxpayer and the award is taxed at the
member’s average rate of tax.

Where the deductions were made after 1 March 2009, the
non-member is the tax payer if deducted from the member’s
minimum individual reserve. If not deducted from the
minimum individual reserve (e.g. former spouse makes an
election after the member exits the fund or public sector
funds which not governed by the Pension Funds Act), taxed
in the member’s hands and member may recover from
former spouse.

Withdrawal table applies where deductions is made after 1
March 2009.

Non-member may transfer to an approved retirement fund
and such a transfer is tax-free.

Upon retirement or withdrawal from retirement funds by the
non-member, the taxed divorce award would be aggregated
with other lump sums.
(Par 2(1)(b)(iA) and 2B of the Second Schedule)
C32
Retirement Planning
Divorce Orders and the Government Employees Pension Fund
(GEPF)
The GEPF was amended (14 Dec 2011) to allow the “clean break”
principles to apply to the GEPF. The amendment however does not
mirror the private sector-funds, and National Treasury proposed that it
should. In terms of the amendment to the GEPF; the divorce order
accrues to the member with tax implications for the member, unlike the
private sector-funds where the funds accrue to the non-member. It has
therefore been proposed that the regime, as from 1 March 2012, should
be as follows:

Divorce orders issued before 13 September 2007: neither the
member nor the non-member is taxed; irrespective of when the
non-member claims payment. (Similar to the private sector-funds)

Divorce orders issued on/after 13 September 2007: the nonmember is taxed, irrespective of when he/she claims payment of
the award. (Similar to the private-sector funds). It is intended that
Formula C will apply to the award to the non-member, so as to
apportion the tax-free portion of the member’s pensionable service
accruing prior to 1 March 1998.
Retirement Planning
C33
Notes
C34
Retirement Planning
Business Assurance
Business
Assurance
Business Assurance
Business Assurance
1.
Nature
2.
Membership
Sole proprietorship
The sole proprietorship is a
business which is owned
by one person in his/her
own name, administered to
his/her own advantage,
and exclusively and fully at
his/her own risk and
responsibility.
Any one individual (with
the necessary contractual
capacity) can be a sole
proprietor.
D1
Business Entities: A comparison
Partnership
Close corporation
A close corporation is a
A partnership is the legal
separate legal entity apart
relationship which arises
from its members which can
when at least two people
attract rights and obligations
and/or legal entities
in its own name.
contribute something (be it
money, skill or labour) to a
business enterprise with the
object of making and sharing
profits.
Only natural persons can be
Any individual (with the
members of a CC. The
necessary contractual
following persons can also
capacity) and/or legal entity
qualify for membership:
can be a partner. The
maximum number of parties
(i) A trustee under a
who can be party to a
testamentary trust propartnership is 20 (minimum
vided no juristic person
two).
is a beneficiary of the
trust and if the trustee is
a juristic person, it is not
controlled by a
beneficiary of the trust.
(ii) An executor or
administrator (who can
be a juristic person) in
the estate of a deceased
member.
Company
A company is a legal entity
separate from its
shareholders, which can
acquire legal rights and
obligations in its own name.
Any person, natural or
juristic, may be a shareholder in a company. Thus a
CC can be a shareholder in a
company.
A private company may have
only one shareholder
whereas a public company
must have at least seven
shareholders. A private
company is restricted to a
maximum of 50
shareholders, while there is
no limitation in respect of the
amount of shareholders n a
public company.
D2
Business Assurance
Sole proprietorship
2.
Membership
(cont.)
Partnership
Close corporation
(iii) A trustee or curator (who
can be a juristic person) of
an insolvent estate of a
member.
A trustee of an Inter Vivos Trust
can hold a member’s interest in
a Close Corporation provided
the following requirements are
met:
 a natural person was
immediately before 13/4/87
a member of the CC for the
benefit of the trust.
 no juristic person is a
beneficiary of the trust.
 the member personally has
all the rights and obligations
of a member.
 the CC is not obliged to
obligations of the trust.
 The total number of
members and trust
beneficiaries does not at any
time exceed 10.
A company or another CC cannot
hold an interest in a CC.
A CC can have between one and
ten members.
Company
Business Assurance
3.
Creation and
Organisation
Sole proprietorship
The sole proprietorship
is created by the
voluntary action of the
individual. There are
generally no formal
requirements which
have to be observed
before business can be
commenced expect for
compliance with possible
licence requirements.
D3
Partnership
A partnership is created by
the voluntary agreement of
the parties and there are
generally no formalities.
The agreement may be
either oral or in writing or
even by implication.
Usually there is a written
agreement to avoid and
resolve disputes re the terms
of the agreement.
Close corporation
Incorporation takes place
upon registration of the
founding statement by the
Registrar of Close
Corporations. This is a
document signed by or on
behalf of the members of the
CC and must contain various
particulars as prescribed by
the Act.
These include:
 The full name of the CC.
 The principal business to
be carried on.
 The postal address.
 The business address.
 The full names and ID
number of each member.
 The size of each
member’s interest,
expressed as a
percentage.
 The particulars of the
members’ contributions.
 The name and address of
the accounting officer.
 The date of the end of
the corporation’s
financial year.
Company
A company is formed
according to statute. The
company comes into
existence when the Registrar
of Companies issues a
certificate of incorporation.
The Memorandum of
Incorporation defines the
limits of the company’s
business activities and once
registered, serves as a notice
to the public of facts about
the company which are of
interest to those who deal
with it.
The board of the company
may make, amend or repeal
any necessary or incidental
rules relating to the
governance of the company
in respect of matters that are
not addressed in the
Companies Act 7 of 2008 or
the Memorandum of
Incorporation.
D4
Business Assurance
Sole proprietorship
3.
Creation and
Organisation
(cont.)
4.
Capital
Structure
There is no limitation on
the amount of capital
which a sole proprietor
can use in his/her
business. For obvious
reasons, however,
capital is limited to the
means of the proprietor,
and may be varied at
his/her will.
Partnership
There is no limitation on the
amount of capital in a
partnership, but for obvious
reasons capital is restricted
to what the individual
partners are prepared to
contribute. Capital can be
increased or decreased by
agreement.
* Capital in this context does
not only include monetary
contributions but labour and
skills as well.
Close corporation
The internal organisation of a
CC may be regulated by an
association agreement.
This could lay down the
voting rights of its members,
the transfer or disposal of a
member’s interest the
participation of members in
profits document and does
not have to be lodged with
the registrar.
The members’ contributions
constitute the “capital” of the
corporation. When a CC is
formed, each member must
make an initial contribution.
This contribution can be in
the form of:
(i) an amount of money
(ii) property (corporeal or
incorporeal);
(iii) services rendered in
connection with and for
the purposes of the
formation and
incorporation of the CC.
Company
The capital of a company is
limited to an amount
authorised in the
Memorandum of
Incorporation.
This amount can be
increased or diminished only
by proper amendment of the
memorandum as permitted
by law. Company capital is
often raised by means of
long-term liabilities,
debenture issues and loans
from directions or
shareholders.
Business Assurance
Sole proprietorship
4.
5.
D5
Partnership
Capital
Structure
(cont.)
Relationship –
Individual to
Business
The undertaking is not a
juristic person separate
from the owner. The
owner and his/her
business are one and
the same and thus. All
the rights and liabilities
of the business are
legally those of the
proprietor
himself/herself.
A partnership is not a juristic
person separate from the
parties who constitute it.
Therefore the partners can
be held jointly and severally
liable. However, when
parties enter a partnership
relationship, their
contributions do go towards
forming what can be called
the “partnership estate”
which is separate from the
partners’ personal estates.
All the property in this
“partnership estate” is
owned
jointly by the partners in
undivided shares in such
proportions as they have
agreed upon.
Close corporation
There is no restriction as to
the contributions of
members.
Note: It is not required that
the size of a member’s
interest in the corporation be
related to the value of
his/her contribution.
The corporation and its
members are separate
juristic persons. Each
member of the corporation
stands in a fiduciary
relationship to the CC.
In general, this means that a
member must act honestly
and in good faith and avoid
any material conflict between
his/her own interests and
those of the CC.
Company
The company is a separate
juristic person from its
shareholders. The
shareholders own the shares
in the company. The
company’s assets are
independent from those of
the shareholders.
D6
6.
Business Assurance
Liability for
Debts
Sole proprietorship
The proprietor is
personally liable for all
debts.
Partnership
The debts of the partnership
are shared by the members
in such proportions as they
have agreed upon. Should
the partnership estate be
unable to meet the claims of
creditors, the partners
personal estates will be
liable.
Close corporation
As a juristic person, the CC is
liable for its obligations.
Members can, however,
become jointly and severally
liable under certain
circumstances. These
include:
(i) where transactions are
entered into without
using the abbreviation
CC or BK in the name.
(ii) by failing to make
contributions as required
in the founding
statement.
(iii) where the number of
members exceeds 10 for
a period of six months.
(iv) where a person takes
part in the management
of the CC while he/she is
disqualified.
(v) where the office of the
accounting officer is
vacant for six months.
(v) where a court is satisfied
that the business has
been carried out
recklessly, with gross
negligence or with intent
to defraud.
Company
The liabilities of the company
are binding on the company
and not the shareholders.
However, in practice
directors/shareholders are
often required by creditors to
stand security for debts of
the company. In certain
instances, the directors can
be held personally liable.
Business Assurance
6.
Liability for
Debts (cont.)
7.
Period of Legal
Existence
D7
Sole proprietorship
Partnership
The sole proprietor can
sell or liquidate his/her
lifetime. If he/she is still
owner of the business at
his/her death, the
business assets will
either be sold by the
executor or transferred
to the heirs or
successor.
Any licence, goodwill or
legal agreements
entered into on behalf of
the business ceases on
the death of the sole
proprietor
Various circumstances can
cause the dissolution of a
partnership. These include:
 The expiry of the period
for which the partnership
for which the partnership
was formed:
 The completion of the
task for which it was
formed.
 The entry of a new
partner.
 The retirement of a
partner.
 The insolvency of the
partnership or a partner,
Close corporation
(vii)Where certain payments
are made to a member,
unless:
 After such payment the
CC’s assist, fairly valued,
exceed all its liabilities,
or
 The CC is able and will
continue to be able to
pay its debts as they
become due in the
ordinary course of
business.
A close corporation has
perpetual succession in that
the death, retirement, etc. of
a member does not cause its
dissolution. However, there
are circumstances where a
CC will cease to exist. These
include voluntary termination
by winding up or the
liquidation of a CC in terms
of an order of court.
Company
The life of a company is
perpetual, unless limited in
terms of a charter, by-laws
or statute, or unless it is
wound up. The death of a
shareholder, therefore, does
not affect the company
continuity as an independent
legal body.
D8
Business Assurance
7.
Period of Legal
Existence
(cont.)
8.
Taxation
Sole proprietorship
i.e. The sole
proprietorship does not
benefit for perpetual
succession.
All the profits of the
business belong and
accrue directly to the
sole proprietor. As a
result, all the profits are
taxable in the hands of
the sole proprietor at
his/her marginal rate of
tax. Sole proprietors are
provisional taxpayers.
Partnership
Inability of the
partnership to perform;
 Dissolution by mutual
agreement or court
order;
 death of a partner.
Each partner is taxed on
his/her share of the
partnership income whether
withdrawn or not. This share
is then added to the
partner’s other taxable
income. If a loss is made by
the firm, each partner may
deduct his/her share of the
loss from his/her other
income.
If a partnership receives
dividend income, the
dividend income is
apportioned to the partners
separately form the trading
income.
Close corporation
Company
A CC pays income tax at a
rate of 28% on its taxable
income.”
From 1 April 2012, a
withholding tax on profits
distributed is levied at a rate
of 15% on dividends, which
replaces STC and which is a
tax liability at member level.
It is required to pay
provisional tax each half year
during its financial year and
a third “topping up” payment
within six months after the
end of the tax year, if
necessary. Members of a CC
are provisional taxpayers.
A company pays tax at a rate
of 28% on its taxable
income.*
From 1 April 2012, a
withholding tax on profits
distributed is levied at a rate
of 15% on dividends, which
replaces STC and which is a
tax liability at shareholder
level.
Companies as provisional
taxpayers, are required to
pay tax each half year and a
third “topping-up” payment
within six months after the
end of the tax year, if
necessary.
Shareholders are not
provisional taxpayers purely
by reason of being
shareholders.

Partnerships are provisional
taxpayers.
Note : * Refer to the “Income and Capital Gains Tax” Section for the taxation of Small and Micro Businesses.
Business Assurance
CGT
9.
Estate Duty
Sole proprietorship
Inclusion rate: 33.3%
Effective rate: 0 - 13.32%
For estate duty purposes,
the value of the business
on the death of the sole
proprietor forms part of
his/her estate.
D9
Partnership
Effective rate 0 - 13.32%
A partner’s share in the
partnership is subject to
estate duty in the same
manner as his/her assets.
Close corporation
Effective rate 18.65%
A deceased member’s
interest is property in his/her
estate for estate duty
purposes.
Company
Effective rate 18.65%
A shareholder’s share in a
company is subject to estate
duty.
D10
Business Assurance
Business Entities: Advantages and
Disadvantages
1.
Sole Proprietorship
Advantages
Disadvantages
1.
Income earned accrues directly to the
sole proprietor.
2.
Unlike companies, no dividends are
declared.
1.
There is no limit to the proprietor’s
liability for business debts and any of
his/her assets are attachable to settle
those debts.
2.
An employer/employee relationship does
not exist between the sole proprietor and
his/her business.
Unlike partnerships, the net profits
earned by the business are not
distributed among various people, but
belong exclusively to the proprietor.
He/she is therefore prohibited from
making use of those provisions of the
Income Tax Act which apply between
employer/employee, e.g. Pension funds,
provident funds, deferred compensation
plans and fringe benefits.
This fact encourages enterprise and
sound management, as the proprietor’s
income relates directly to the successful
operation of his/her business.
3.
He/she is not responsible to a board of
directors or shareholders and freedom of
operation is virtually unlimited.
4.
Nothing prevents him/her, however, from
implementing one or more of these
schemes for his/her employees.
The sole proprietor can operate the
business entirely as he/she sees fit.
The business can be restricted or
expanded at will and, subject only to
license requirements, the proprietor can
at any time modify or add to the type of
business conducted by him/her.
5.
With the exception of tax returns, there
are no complicated statutory returns
which have to be made to government
authorities.
6.
Only if the sole proprietors marginal tax
rate is lower than the corporate tax rate
then it is better that the profits of the
business are not taxable as business
income, but are taxed only in the sole
proprietor’s hands. Capital gains are
taxed in the sole proprietor’s hands
which could be beneficial because the
effective tax rate for capital gains in the
3.
Unless some specific arrangement exists,
the sole proprietor business will
automatically terminate on the
proprietor’s death.
The business assets and liabilities are
regarded as falling into the sole
proprietor’s estate to be dealt with by
his/her executor
Business Assurance
hands of individuals is less than that of
companies and close corporations. Sole
proprietors also qualify for the primary
abatement, whereas companies and
close corporations do not qualify for an
annual abatement.

On death of the sole proprietor
he/she is deemed to have
disposed of all assets, including
business assets.

The sole proprietor may also
qualify for the R1 800 000
exemption on disposal of a small
business.
7.
The termination of a sole proprietorship
is far simpler than in other cases.
He/she simply ensures that all his/her
business obligations are met and then
ceases to conduct business;
or he/she may sell the business as
he/she may sell any other personal
asset.
No other formal requirements need to be
met.
D11
D12
2.
Business Assurance
Partnership
Advantages
Disadvantages
1.
Partnerships are cheaper and easier to
form than companies or close
corporations.
2.
Partners are not restricted in their
operations by the strict requirements of
the Companies Act.
3.
In terms of the Income Tax Act partners
are liable for tax in their individual
capacities. Each partner is therefore
taxed on his/her share of the partnership
profits, and the partnership itself is not
taxed. This may be an advantage in that
it allows the partner to structure his/her
personal tax planning.
1.
A partnership is automatically dissolved if
a partner leaves or a new partner joins.
2.
The partners are jointly and severally
liable for the debts of the partnership,
provided that the debs are incurred with
the authority of the partnership and in its
name.
It is only after the dissolution of the
partnership that a creditor can sue the
partners of the firm individually.
Until that stage he/she must proceed
against the partnership.
3.
4.
Partners also pay capital gains tax in
their personal capacities. In terms of the
8th Schedule to the Income Tax Act a
partner can disregard R1 800 000 of the
gain on disposal of the partnership
interest in the event of the death of the
partner. This exemption applies in
respect of small businesses and an
interest in a partnership qualifies as a
small business.
A partner may not be a member of the
partnership’s pension fund or provident
fund.
One exception: In terms of an
amendment to the Income Tax Act in
1978, any employee who is a member of
a partnership’s pension or provident fund
may remain as a member when he/she is
appointed as a partner, provided his/her
contributions are based on his/her
pensionable remuneration received
during the preceding twelve months and
his/her benefits from the fund are
calculated accordingly.
Business Assurance
3.
D13
Close Corporation
Advantages
1.
The CC is a separate legal entity.
2.
The main advantage is the simplicity in
its registration and the relative lack of
formalities.
Disadvantages
1.
Although each member has a fiduciary
duty to the CC, outsiders are not bound
by any restrictions on or disqualifications
of members of which they were not
aware.
This reduces the cost of acquiring and
retaining corporate status.
3.
A CC is not required to hold any
meetings, though these may be held if it
so wishes or if requested to do so by a
member.
4.
As no audit is required, no audit fees are
incurred.
5.
Annual financial statements are relatively
simple.
6.
2.
A member can be personally liable to a
CC for breach of fiduciary duty or for loss
through failure to act with the skill and
care that can reasonably be expected
from a person with his/her skill and
experience.
3.
The disposal of a member’s interest
requires the consent of all other members
of a CC.
Members’ interests do not have to be
proportionate to their contributions.
There are certain exceptions in respect of
an insolvent or deceased member but,
even in these instances, the CC has the
right to acquire such interest in
preference to any third party.
These interests may be varied from time
to time.
7.
A CC may acquire the interest of a
member or provide financial assistance
to acquire a member’s interest.
8.
It is simple and inexpensive to change
the particulars of the founding
statement.
9.
As there are no directors or shareholders
no special resolutions are necessary for a
CC to take any action it is legally entitled
to take. An association agreement may
provide that only certain members can
be involved in the management of the
business of the close corporation.
Every member is an agent for a CC and
can act on its behalf and participate in its
management (unless excluded from doing
so by way of an association agreement.)
4.
A CC cannot be sold to a company.
It would first have to be converted to a
company before it could be sold as a
going concern to another company.\
5.
A CC cannot become a subsidiary of a
company or another CC.
Consequently, it will not be possible to
include a CC in a group structure other
than as the top holding body.
6.
The restriction on the number of
members can be an inhibiting factor in
the expansion of a successful enterprise.
7.
Although an audit is not a statutory
requirement, banks or other financial
institutions may require it before they
D14
Business Assurance
advance funds.
8.
Close corporations are subject to capital
gains tax and have a higher inclusion rate
and effective rate of tax on capital gains
than individuals. Close corporations also
do not qualify for the primary abatement
applicable to individuals in respect of
capital gains.
9.
No new close corporations can be
registered (which was effective as from 1
May 2011)
Business Assurance
4.
D15
Company
1.
Advantages
It is a separate legal entity.
2.
Liability of shareholders is normally limited.
3.
Partners are normally limited to 20 and CC’s
may only have 10 members whereas the
shareholders of a private company can be 50.
4.
The Companies Act and memorandum and
articles of association provide clear guidelines
as to the conditions under which a company
can operate.
5.
A company is entitled to purchase its own
shares subject to the stringent requirements
set out in the Companies Act.
6.
Shares in a company are easily transferable:
1.
Allotment of shares cannot be
revoked. Capital profits are not
easily distributable.
2.
Constant rate of tax regardless of
income level.
3.
Greater disclosure required may
lead to closer scrutiny by SARS.
4.
An annual audit must be
performed.
5.
Companies are subject to capital
gains tax and have a higher
inclusion and effective rate of tax
on capital gains than individuals.
Companies also do not qualify for
the annual exclusion or the primary
residence exclusion applicable to
individuals in respect of capital
gains.
Additional shareholders can be introduced and
existing shareholders bought out, without much
difficulty.
Valuation of shares held may be more
favourable for estate duty purposes than direct
holding of assets.
7.
Continuity of family control over a business or
farm may be enhanced by company formation.
Shares can be passed on to heirs.
8.
A company is a separate entity for income tax
purposes.
9.
With a company it is relatively easy to arrange
for employees to participate in the concern’s
profits.
Disadvantages
Inflexibility in distribution of
capital.
By taking up shares, employees participate in
the company’s growth.
Share incentive schemes have become an
accepted way of rewarding workers.
D16
Business Assurance
Companies Act 71 of 2008
New structure of companies
As from 1 May 2011, the choice of companies would be broken up into
two main sections, i.e. Profit Companies and Non-profit Companies. A
further explanation of the companies that may be chosen under those
sub headings are explained below.
1.
2.
Non-profit companies

the old section 21 companies and companies limited by
guarantee

their names are to end with “NPC”

they are established for a public benefit purposes (such as
welfare, arts, culture) and are exempt from various
requirements

only reasonable compensation for services rendered may be
distributed to certain officials and incorporators, but not
income and property.
Profit companies are

state-owned companies;
o
o

an entity registered as a “company” as defined in terms
of this Act and

falls within the definition of a “state-owned
enterprise” in terms of the Public Finance
Management Act, or

is owned by a municipality in terms of the Local
Government: Municipal Systems Act and is
similar to an enterprise in paragraph a)
the company’s name must end with “SOC Ltd”
private companies
o
o
a company that is not a state owned company
Its Memorandum of Incorporation must:

prohibits the offering of its securities to the
public, and

restrict the transferability of its securities
Business Assurance
o
o

o
o
o
effectively the old section 53(b) companies
a company that meets the requirements for a private
company, and
its memorandum of incorporation states that it is a
personal liability company
has the effect that the directors and past directors are
jointly and severally liable with the company for any
debts and liabilities
company name is to end with “Inc”
public companies; name to end with Ltd
o
3.
there is no longer a maximum of 50 shareholders allowed
company name is to end with “(Pty) Ltd”
personal liability companies
o
o

D17
a profit company that is not a state-owned, private or
personal liability company.
Close Corporations
In terms of paragraph 2 of the 3rd Schedule to the Act, no new close
corporations may be formed once the Act becomes enforceable. With
regard to existing close corporations, paragraph 3 of the same Schedule
states that businesses may continue to run their operations out of an
existing close corporation if they so wish, until such time as that business
is deregistered, dissolved or converted into a private company governed
under the new Companies Act.
D18
Business Assurance
Company-owned policies
Summary of tax implications
In this section, for the sake of convenience, a policy effected by an
employer, company or close corporation on the life of an employee or
director will be referred to as a company-owned policy and any reference
to company will include all business undertakings where an
employer/employee relationship exists.
A policy owned by a company on the life of an employee or director could
be subject to income tax under the Income Tax Act. Previously, this was
as a result of paragraph (m) of the definition of “gross income” in section
1. As from 1 March 2012 however, company owned policies will also be
taxed in terms of a new paragraph (d) of the definition of “gross
income”.
1.
Paragraph (m) of the definition of gross income
As from 1 March 2012 paragraph (m) was replaced with the
following new paragraph:
“(m) any amount received or accrued in respect of a policy of
insurance of which the taxpayer is the policyholder, where the
policy relates to the death, disablement or severe illness of an
employee or director (or former employee or director) of the
taxpayer, including by way of any loan or advance; Provided that
(i)
(ii)
2.
any amount so received or accrued shall be reduced by the
amount of any such loan or advance which is or has been
included in the taxpayer’s gross income,
to the extent that paragraph (a) or (d) of this definition
applies to an amount, this paragraph does not apply to that
amount.”
Paragraph (d) of the definition of gross income
Paragraph (d) is amended from 1 March 2012 and is applicable
where the policy benefits are received by or accrues to the
employee/director or a dependant or nominee of that
employee/director.
Paragraph (d) reads as follows:
Business Assurance
D19
Any amount including a voluntary award received or accrued:
(i)
(ii)
(iii)
in respect of the relinquishment, termination, loss,
repudiation, cancellation or variation of any office or
employment (or right to be appointed) to any office or
employment
by or to a person, or dependant or nominee of the person,
in respect of proceeds from a policy of insurance where the
person is or was an employee or director of the
policyholder
by or to a person, or dependant or nominee of the person,
in respect of any policy of insurance (other than a risk
policy with no cash value or surrender value) that has been
ceded to:
aa. the person (employee/director);
bb. a dependant, or
cc. a pension fund, pension preservation fund, provident
fund, provident or retirement annuity fund for the
benefit of the person or dependant or nominee of the
person by
(A) the employer or former employer of the person; or
(B) the company of which the person is or was a director
There is also a proviso to paragraph (d) which states that the provisions
of (i) and (ii) do not apply to a lump sum award from a retirement fund.
It goes on to say that an amount which becomes payable in consequence
of the death of the person is deemed to have accrued to the person
immediately prior to his or her death and that any amount that is
received by or accrues to a dependant or nominee of the
employee/director of a person is deemed to be received by or accrued to
that person.
The important factor to take note of is how these two provisions change
of the manner that of the way that the policy in treated. Under the
previous methods, the proceeds of the policy would only be included in
gross income if the premium ranked for tax deduction.
As from 1 March 2012, the “policy proceeds” are included in gross
income irrespective of whether the premiums ranked for tax deduction or
not. Exemptions under section 10 are now used to render a policy
proceeds tax-free in particular circumstances.
D20
3.
Business Assurance
Deductibility of premiums - Section 11(w)
Much like the Taxation Laws Amendment Act 2010 had introduced
significant changes in respect of the deductibility of premiums paid
by employers on company-owned policies, the Taxation Laws
Amendment Act 2011 has replaced that section 11(w) in its
entirety (which ran for years of assessment commencing as from 1
January 2011) and stipulates that a deduction will be available to
employers who are the policyholders of long term insurance
policies in the following two scenarios:
The “new” section 11(w) provides for a deduction in respect of
expenditure incurred by a taxpayer in respect of premiums payable
under an insurance policy (but not a policy solely against an
accident as defined in section 1 of the Compensation for
Occupational Injuries and Diseases Act) of which the taxpayer is
the policyholder. It allows for deductions in respect of two
categories of policies, which are section 11(w)(i) and section
11(w)(ii). This will be referred to as (i) “fringe benefit” policies and
(ii) key person policies and is applicable in respect of premiums
paid on or after 1 March 2012.
3.1
Fringe benefit” policies – section 11(w)(i)
The first deduction allowed under section 11(w) is where the
following requirements are met:
(a)
(b)
3.2
the policy relates to the death, disablement or severe
illness of an employee or director of the taxpayer;
and
the premium paid by the employer/company is
deemed to be a taxable benefit granted to the
employee/director [paragraph 2(k) of the 7th
Schedule].
Key person policies – section 11(w)(ii)
The second deduction allowed under section 11(w)(ii)
applies in cases where the premium is not required to be
included in the gross income of the employee/director if a
number of requirements under the section are met. The
requirements to be met are:
Business Assurance
D21
(a) The taxpayer is insured against any loss by
reason of the death, disablement or severe
illness of an employee or director of the
taxpayer;
(b) The policy is a risk policy with no cash or
surrender value;
(c) The policy is not owned by a person other than
the taxpayer at the time of payment of the
premium, and
(d) In respect of a policy entered into:
a.
b.
on or after 1 March 2012 the policy agreement
states that this paragraph applies in respect of
premiums payable under that policy; or
before 1 March 2012, it is stated in an addendum
to the policy agreement by no later than 31
August 2012 that this paragraph applies in
respect of premiums payable under the policy.
Prior to the changes in the 2011 Amendment Act, some
employers were often elected to be issued with a policy that did
not conform to the regulations of 11(w) i.e. a non-conforming
policy. The 2010 Act however, removed the distinction between
“conforming” and “non-conforming” policies and as such had left
employers with the predicament in that, previously “nonconforming” policies had met the requirements of the then
s11(w), meaning that the premiums was deductible and the
proceeds taxable.
The 2011 Act then repealed the 2010 Act in its entirety as from its
effective date, i.e. from 1 January 2011. This means that the
“old” pre-2010 taxation regime was reinstated and applied up
until 29 February 2012. Therefore, up until 29 February 2012, the
OLD section 11 (w) was applicable, bringing back the distinction
between “conforming” and “non-conforming policies”. As
mentioned previously, the new changes to company owned
policies as discussed above applies to premiums as from 1 March
2012.
As mentioned in an earlier paragraph, the deduction of the
premiums does not affect whether or not the proceeds of a
particular policy will be deductible or not. The proceeds of these
policies are automatically included in gross income (either in
D22
Business Assurance
terms of paragraph (m) or paragraph (d)). The next question
however is to determine whether the proceeds or the policy is
subject to an exemption or not, which will be discussed in the
paragraphs below.
4.
Exemptions
The two new subparagraphs that were introduced in the Amendment Act
of 2011 are sections 10(1)(gG) and 10(1)(gH)
4.1
Section 10(gG)
The new section 10(1)(gG) exempts an amount that is
included in the gross income of the employee/director under
paragraphs (d)(ii) and (d)(iii) from tax in the following
instances:
(i) in the case of a policy that is a risk policy with no
cash value or surrender value, if the amount of
premiums paid in respect of that policy by the
employer of the person has been deemed to be a
taxable benefit of the person in terms of the
Seventh Schedule since the later of
a.
b.
the date on which the employer or
company
contemplated
in
those
subparagraphs became the policyholder
of that policy, or
1 March 2012
unless the amount of the premiums paid was
deductible by the person in terms of section 11(a);
(ii) in the case of any other policy, if an amount equal
to the aggregate of the amount of any premiums
has been included in the income of the person as a
taxable benefit in terms of the Seventh Schedule
since the date on which the policy was entered into;
The provisions of this exemption introduce certain
consequences. Firstly is that contained in paragraph (i)
pertaining to group unapproved Permanent Health
Insurance (PHI). Even though the premiums are included
as a fringe benefit, these policies will not receive an
exemption as a result of the employee being able to receive
a s11(a) deduction.
Business Assurance
D23
With regard to unapproved Group Life Assurance (GLA)
however, the exemption would apply to the proceeds as no
such deduction is available to the employee in terms of
s11(a).
Secondly, it is made quite clear that for paragraph (ii) to
apply, all the premiums since the date of inception should
have been included in gross income as a fringe benefit. As
stipulated in the provisions, paragraph (ii) applies to policies
that are NOT pure risk, therefore, Deferred Compensation
policies would fall under the ambit of this paragraph.
The reason for Deferred Compensation policies being dealt
with in a separate sub-paragraph, is that the legislature
makes a clear distinction between PURE RISK and NONPURE RISK policies with regard to the date from which
premiums must be included as a taxable fringe benefit for
the employee.
For PURE RISK policies, the inclusion of the premiums as a
fringe benefit, merely needs to take place as from 1 March
2012 for the exemption to apply. With regard to NON-PURE
RISK policies however i.e. Deferred Compensation policies,
paragraph (ii) makes it quite clear that all the premiums
since the date of inception of the policy must have been
included as a fringe benefit for the employee before the
exemption will apply.
4.2
Section 10(gH)
The new section 10(1)(gH) exempts an amount:
-
received or accrued in respect of a policy of insurance
contemplated in section 11(w)(ii),
where it is not stated that section 11(w)(ii) applies to
premiums payable in respect of that policy,
as contemplated in section 11(w)(ii)(dd)(A) or (B).
This is the exemption available for keyman policies. It is
also quite favourable as it has the effect that the employer
could have had a conforming policy for which they had
claimed the deduction for the premiums up until 29 Feb
2012 and then decided not to make the s11(w)(ii)(dd)
election from 1 March 2012, hence meaning that these
D24
Business Assurance
policy proceeds would then be tax-free for any death after 1
March 2012.
The wording of this exemption creates a bit of a minefield
though, as a result of the words “as contemplated in
s11(w)(ii). This essentially means that in order for the
exemption to apply, the policy still needs to comply with the
rest of s11(w)(ii) (excluding s11(w)(ii)(dd) of course).
The effect of this is that keyman policies with cash values
are not strictly speaking “as contemplated in s11(w)(ii) and
so do not fall within the exemption, meaning that such
policies are both non-deductible and taxable.
Even though it appears that this was not an intended
consequence of the exemption and there are current
discussions to correct this situation, to date (of this
publication) this is how the legislation stands.
Other notable amendments regarding the
company-owned policies include the following:
taxation
of

Prior to the amendments, the old s11(w) contained a
provision whereby a deduction for the premiums paid by an
employer in respect of a company-owned policy on the life of
an employee/director of the employer could only be claimed
under section 11(w). The new s11(w) contains no such
prohibition, but a new s23B(5), read together with s23B(3),
provides that no deduction shall be allowed under s11(a) in
respect of any expenditure incurred by a taxpayer in respect
of any premium paid under a policy of insurance
contemplated in section 11(w).

The new s23(p) prohibits a deduction for the employer in
instances where the employer cedes a policy to an
employee/director or a dependant of either. The reason for
this is that on cession of the policy no amount is included in
the employer’s gross income under paragraph (m) (as
paragraph (d) applies). Therefore, if a deduction were to be
allowed it would effectively be deducted from other trade
income as there is no policy proceeds in gross income to
deduct.
Business Assurance
D25
Stipulations of the Long-term Insurance Act relating to
company-owned policies
Apart from the requirements regarding company-owned policies
dealt with on the preceding pages, such policies are also required
to comply with the provisions in the Long-term Insurance Act
(section 54). A detailed discussion of the legislation can be found
in Section F of this publication.
Cession of a company owned policy
It often happens that a company-owned policy is ceded to the
employee or director when he/she leaves the company/employer’s
employment.
As stated in the afore-mentioned paragraph, on cession of the
policy the policy proceeds will not be included in the gross income
of the employer due to its inclusion into the gross income of the
employee under paragraph (d).
As a general rule the capital gains or losses in respect of second
hand policies are subject to CGT but there are certain exceptions.
Paragraph 55(1)(b) of the 8th Schedule to the Income Tax Act
provides for the situation where an employer has taken out a policy
on the life of an employee and paid the premiums on the policy
which were deductible in terms of Section 11(w). The policy is
ceded to the employee when he/she leaves the services of the
employer. This is technically a second hand policy but in terms of
the amendment to paragraph 55(1)(b) any capital gain or loss on
this disposal must be disregarded for CGT purposes.
Paragraph 55(1)(c) of the 8th Schedule provides for the situation
where a person takes out a policy to insure against the death,
disability or severe illness of a partner, member or co-shareholder
so that he or she can acquire the interest in the partnership or
shares or similar interest in the company if the partner or coshareholder dies, becomes disabled or suffers of a severe illness. If
the partnership is dissolved or the person is no longer a
shareholder the policy may be ceded to the person whose life was
insured and this paragraph provides that any capital gain is
disregarded.
The Amendment Act of 2011 also introduced two more additions to
the afore-mentioned paragraph 55 in the form of a sub-paragraph
(e) and (f), which provides that the capital gain on the following
insurance policies must be disregarded.
D26
Business Assurance
a)
A risk policy with no cash or surrender value [para 55(1)(e];
and
b)
Policies exempt from tax
10(1)(gH) [para 55(1)(f]
under
section
10(1)(gG)
or
Buy and sell policies that are pure risk policies will therefore be
exempt from capital gains tax even after the partnership has been
dissolved. There is no longer a need to take out new policies if a
partner/shareholder is replaced. The same would apply to key
person policies which are pure risk policies, as it would no longer
be necessary for the policy premiums to have been deductible
under section 11(w) for the exclusion to apply.
When the policy proceeds are paid to the policy owner.
Under paragraph (m) of the definition of “gross income”, policy
proceeds paid to the policy owner will be included in the company’s
gross income. This will of course not be the case should the
proceeds be paid over to the employee. In such a case, it will not
be included in the employer’s gross income but instead in the
employee’s gross income in terms of paragraph (d) as discussed
earlier.
As mentioned before, it is no longer necessary to determine
whether the policy premiums was deductible or not for the
proceeds to be included in the company’s gross income.
Furthermore, there will be a disregard of any gain on any policies
which were exempt from tax under sections 10(1)(gG) or (gH)
(which is discussed in more detail in 4.1 and 4.2 respectively)
5.
Summary of developments
As from 1 January 2011, there had been numerous changes
pertaining to the taxation of company owned policies through
numerous changes to the definitions of ‘gross income’ and section
11(w) of the Income Tax Act. This summary serves as a guide to
those developments, detailing the respective position prior to the
changes to the current position to date of this publication.
Business Assurance
D27
(a) Position prior to the Taxation Laws Amendment Act 7 of
2010 (the original position):
For a premium to have been deductible from income the
following requirements had to be met:

It had to be certain policies effected before 1 June 1982.

It had to be a term policy i.e. a policy where the only benefit
payable under the policy a benefit payable within a period
fixed in such policy upon or by reason of death or
disablement of the EE or director whose life is insured under
the policy or the policy is a disability policy.

It had to be a conforming policy.
The requirements for a policy to have been a conforming policy:

there was only one life assured and no other life assured
may be substituted therefor; and

the premiums were payable at regular prescribed intervals
and such premiums could not be increased by more than a
fixed ascertainable amount which could not exceed 15% of
the preceding year’s total premiums; and

there was life cover on the policy totalling an amount not
less than 80% x the term of the policy x lowest premium
payable; and

these terms and conditions were contained in the policy
contract.
A maximum amount equal to 10% of the EE’s remuneration
during that year was deductible in respect of these policies.
(b) After the promulgation of the Taxation Laws Amendment Act
7 of 2010 (effective for years of assessment commencing on
or after 1 January 2011
This Amendment Act introduced section 11(w)(i) and (ii). These
sections stated that a premium could be deductible from income:
D28
Business Assurance
S11(w)(i)
In any case where the premiums paid by the employer had been
included in the taxable income of the employee or director, or
S11(w)(ii)
Where:
(i) the policy had been a long term insurance policy of which
the taxpayer (company) was the policy holder,
(ii) the taxpayer had been insured against any loss by
reason of the death, disablement or severe illness of an
employee or director the taxpayer
(iii) the policy was a pure risk policy with no cash or
surrender value
(iv) at the time of paying the premium, the company had
owned the policy
(v) no transaction, operation or scheme existed in terms of
which any amount recoverable under the policy or an
amount equivalent to or in lieu of such amount would
have been made over by the taxpayer to or in favour of
the employee (John), or a person connected to John,
John’s deceased estate, a dependent of John (whether
partially or wholly dependent)
(c) After promulgation of the Taxation Laws Amendment Act of
2011 but prior to 1 March 2012.
This Act was promulgated on 10 January 2012, which deleted the
amendments introduced in the 2010 Amendment Act as discussed
above.
This effectively reinstated the position to what it was prior to the
2010 Act, which was effective until the new amendments came into
operation as from 1 March 2012.
Therefore, between 10 January 2012 and 1 March 2012, for a
premium to be deductible from income, the requirements as
discussed in paragraph (a) had to be met.
Business Assurance
D29
(d) As from 1 March 2012 (to date of publication).
For the premiums to be deductible, the requirements are those as
earlier discussed in this publication under the respective headings of
sections 11(w)(i) and (ii).
D30
Business Assurance
Deferred compensation
1.
Definition
Deferred compensation is a benefit offered by employers to
selected employees in order to promote a settled and contented
staff and to induce the company’s employees to remain in the
company’s employ for as long as possible. It is constituted by an
agreement between the employer and employee, in terms of which
the employer undertakes to pay the employee a sum of money at
retirement or on the occurrence of some other specified event. The
vehicle to fund the benefit normally consists of an assurance policy
which the employer undertakes to effect on the life of the
employee.
2.
Income tax implications
2.1
2.2
Premiums
(a)
Employer:
May deduct the amount of the premiums
paid in respect of a policy on the life of
the employee provided that s11(w)(i)
requirements have been met.
(b)
Employee:
The premiums will be included in the
taxable income of the employee/director
in terms of paragraph 2(k) of the 7th
Schedule.
Proceeds
(a)
Employer:
At maturity or on surrender of the policy:
(i)
the proceeds of all policies taken
out on the life of an employee or
director will be included in the
gross income of the employer.
(ii)
once the amount is paid over to
the employee or director, the
amount will then not fall into the
gross income of the employer
under paragraph (m) as it fall
into the gross income of the
employee in terms of paragraph
Business Assurance
D31
(d)
of
gross
income
and
paragraph
(This
is
because
paragraph (m) does not apply
where paragraph (d) applies).
(b)
Employees: Any amount paid to the employee or his
or her estate or dependants in terms of
the service agreement will be included in
his or her gross income in terms of
paragraph (d)(ii) of the definition of
“gross income”).
If amount equal to the aggregate of the
amount of any premiums has been
included in the income of the person as a
taxable benefit since the date on which
the policy was entered into, section
10(1)(gG) exempts an amount that is
included in the gross income of the
employee or director.
2.3
Cession
Tax implications on cession of deferred compensation
policies between employers
Where an employer took out a deferred compensation policy
in respect of an employee who has now been employed with
a new employer, the previous employer can agree to cede
the policy to the new employer.
The new employer as the cessionary, will be the new owner
of the policy.
We will now look at the tax implications that could arise in
two situations.
In both examples, assume that that
obligations towards the employee have passed from the
cedant employer to that of the new (cessionary) employer.
Situation 1
The new employer pays the cedent-employer
consideration for the policy.

a cash
If this is the case, the consideration must be included
in the cedent-employer’s taxable income (without a
resulting deduction because the cedent-employer has
D32
Business Assurance
received compensation without retaining the obligation
towards the employee).

The new employer can claim a deduction for the
payment of the consideration on maturity of the
policy, if the requirements of s11(a) are met. Upon
maturity of the policy, the normal method of taxation
will be applicable as discussed under 2.2.

It must be kept in mind though, that SARS may have
a right of recoupment in terms of s8(4)(a) of the
Income Tax Act with regard to any premiums that the
cedent employer may have deducted in terms of the
policy. The reason for this is that in the past, the
employer would have had the ceded amount included
in its gross income and pay tax on that amount. With
the ceded amount no longer being included in the
cedent employer’s gross income, SARS would attempt
to recover that previous benefit received, as the
employer would have recouped those premiums paid
via the consideration received.
Situation 2
The policy is ceded for no consideration to a new employer.

This would give rise to an accrual in neither the hands
of the cedent-employer under paragraph (m) of “gross
income”, nor the employee under paragraph (d) as
there is no onward payment to the employee or
director at that stage.

Such employer may also not be able
s11(a) tax deduction upon maturity of
the policy proceeds would not form
employer’s gross income since there
onward payment to the employee
paragraph (d) would apply).

If the requirements of s11(w)(i) are met, the new
company may deduct any further premiums due under
the policy.

No tax implication arises for the employee
immediately upon cession between old and new
to claim the
the policy as
part of the
would be an
(and hence
Business Assurance
D33
employer (provided there is no accrual in favour of the
employee).
Tax implications on cession of deferred compensation
policies to employees
See the discussions under “Cession of a company-owned
policy” (summary of tax implications).
3.
Estate duty implications
In terms of section 3(3)(a) of the Estate Duty Act policies owned
by other persons on the life of a deceased are deemed to be
property in the estate of the deceased. The value to be included in
the estate of the deceased is so much of the amount due under
the policy as exceeds the premiums paid by such other person who
is entitled to the proceeds plus 6% compound interest. The duty
will be recoverable from the owner, i.e. the employer. It is the
practice of SARS to tax only the net proceeds of the policy in terms
of paragraph (m) of the definition of gross income after estate
duty has been deducted.
4.
Capital gains tax implications
See the discussion under “Cession of a company-owned policy”
(summary of tax implications).
In terms of paragraph 55(1)(e) deferred compensation policies will
not be subject to capital gains tax where an amount equal to the
aggregate of the amount of any premiums has been included in
the income of the person as a taxable benefit since the date on
which the policy was entered into.
D34
Business Assurance
Keyperson assurance
1.
Definition
Keyperson assurance refers to policies effected by an employer on
the life of an employee with the purpose of compensating the
business for the loss it will sustain should the employee die or
become disabled prematurely. The plan guarantees that cash will
be available to absorb any disruptions to the business, protect
existing credit facilities and provide the necessary funds for the
recruitment and training of a replacement.
It is important to note that a keyperson is an individual that has an
important impact on the future income and profits of the business.
It’s not just any employee, but someone who’s absence, whether
through death or disability, will severely impact the future
sustainability of the business.
2.
3.
(a)
Premiums: If the requirements of s.11(w)ii) are met, the
premiums will be tax deductible.
(b)
Proceeds: If s11(w)(ii) was complied with and there was no
election made to have section 11(w)(ii) apply to
premiums payable in respect of that policy the
maturity value will be exempt from tax in terms
of section 10(1)(gH)
Policies on the life of the deceased owned by a third party are
deemed to be property in the estate of the deceased for estate
duty purposes (s.3(3)(a) of the Estate Duty Act).
However, the proceeds of a keyperson policy will not be deemed to
be property in the deceased’s estate if the requirements of
s.3(3)(a)(ii) are met, namely:
(i)
the policy was not effected by or at the instance of the
deceased; and
(ii)
no premium was paid or borne by the deceased; and
(iii)
no amount due or recoverable under the policy has been or
will be paid into the estate of the deceased; and
Business Assurance
(iv)
D35
no amount has been or will be paid to or utilised for the
benefit of:
 any relative of the deceased, or
 any person who was wholly or partially dependent on the
deceased, or
 any company which was at any time a family company in
relation to the deceased.
A “family company”, as defined in the Estate Duty Act, means
any company other than a quoted company which at any relevant
time was controlled or capable of being controlled directly or
indirectly, by way of majority holding of shares or any other
interest or in any other manner by the deceased, or by the
deceased and one or more of his/her relatives.
A “relative” of a person, as defined in the Estate Duty Act, means
the spouse of that person or anybody related to him/her or his/her
spouse by blood within the third degree or any spouse of anybody
so related. Parents, brothers and sisters and their spouses, and
the children of brothers and sisters and their spouses thus qualify
as relatives.
If the policy does not qualify for this exemption, the policy
proceeds less premiums plus 6% compound interest will be
deemed an asset in the estate in terms of section 3(3)(a) of the
Estate Duty Act.
In terms of present departmental practice only the net proceeds of
the policy after the estate duty has been deducted, will be subject
to income tax.
4.
5.
Keyperson valuation
How to establish the value of a keyperson
Frequently, difficulty is encountered in establishing the keyperson’s
value to the business, and consequently, the amount of assurance
that should be carried. It is always difficult to place an exact value
on a human life, and the same applies to keyperson cover.
D36
Business Assurance
However, the emphasis for keyperson cover is what the financial
loss to the organisation will be on the death or disability of that
specific keyperson. Various methods can be used, some
approximate, others more accurate and depending on the
information available, one of the following should be used:
(a)
A multiple of the annual salary of the keyperson. This is a
relatively approximate method, and multiples of up to seven
times annual salary could be used. Normally 5 times should
suffice, but for very valuable keypersons, where it would
take a very long time to replace them, the higher multiple
could be used. It should be noted that due to the
approximate nature of the calculation, a more accurate
method is preferable for high cover amounts.
OR
(b)
The number of years it will take for a replacement to reach
the key employee’s present level of profitability multiplied by
the loss in profits due to the replacement of the keyperson.
This calculation would make reference to the net profits of
the business, and the keyperson’s impact on those profits.
OR
(c)
Itemising the
worksheet.)
cost
of
replacing
the
keyperson.
(See
 How much would it cost to replace the keyperson? These
include advertising costs, training costs, etc.
 How much is the keyperson worth to the business in net
profits? This calculation can become quite detailed and
extra information is provided in the next section.
In particular, mention is made of the proceeds generated from the
business’s capital. What this is referring to is that if a large portion
of the business’s profits are from capital investments, e.g.
investments in other businesses, this amount should be excluded
from the profits. This is because these profits are not generated by
employees of the business, and should potentially not be
attributable to the keyperson.
Business Assurance
6.
D37
Keyperson valuation guideline
Since the third method is more detailed, it is considered to be the
recommended method. In order to determine the rand value of the
keyperson, the following worksheet can be used:
1.
Replacement cost
Advertising for the replacement
R. . . . . . . . . .
Resettlement cost of replacement
R. . . . . . . . . .
Increase in salary package of replacement R. . . . . . . . . .
Other
2.
R. . . . . . . . . .
Keyperson’s contribution to net profit
Average profit over last five years
R. . . . . . . . . .
Less: reasonable proceeds
R. . . . . . . . . .
on invested capital
Annual profit attributable to key person
3.
R. . . . . . . . . (A)
Keyperson’s salary as percentage of key
personnel’s salary packages
. . . . . . . ..% (B)
Keyperson’s contribution to profit
attributable to key personnel:
AxB
R . . . . . . . = (C)
Years it will take to replace
keyperson’s contribution
........
Keyperson’s contribution
to profit
CxD
years (D)
R. . . . . . . . . . .
Total value of keyperson
1+2
=
R. . . . . . . . .
If provision is made by means of life and/or disability assurance for
the loss of the keyperson, the amount of life and/or disability cover
on the policy will be calculated as follows:
Life cover:
Total value of keyperson + income tax and/or estate duty
attracted by the policy.
D38
Business Assurance
Disability cover:
Total value of keyperson + income tax attracted by the policy.
7.
Calculation of cover required where policies are
owned by third parties
Any policy on the life of an individual constitutes deemed property
in his/her estate, unless it is specifically exempted in this regard,
in terms of sections 3(3)(a)(iA) or (ii) of the Estate Duty Act.
Should a policy not be exempted, there will be estate duty payable
on the proceeds. In addition, notwithstanding any exemption as
above, there could also be income tax implications. Income tax
implications could arise where the premiums on the policy were
tax deductible in terms of section 11(w). The policy proceeds will
be taxable in terms of paragraph (m) of the definition of “gross
income” whether it is tax deductible or not but may be subject to
an exemption.
The purpose of the calculations set out hereunder is to provide for
a situation where the amount of cover taken out may be reduced
by estate duty and/or income tax. It must be noted that::
(a)
the calculations herewith are not the only method employed
in this regard and that other methods are also used.
(b)
the calculations herewith do not take the deduction of
premiums plus 6% compound interest into account. This
deduction is allowed in respect of premiums or consideration
paid by a person other than the life assured who is also
entitled to the amount due under the policy.
(c)
it is assumed that the life assured has already utilised
his/her R3.5 million estate duty exemption and that the
policy is thus fully estate dutiable.
(d)
It is assumed that the employer tax rate is 28%.
Different scenarios will be examined in turn.
1.
Only income tax payable
Where a policy meets the requirements of s11(w) with the
result that the premiums were deductible, the proceeds will
be taxable.
Business Assurance
D39
If the cover required on the keyperson’s life is R500 000
after tax, then the amount of cover needed will be:
Initial cover required
1 − Income tax rate
Thus:
=
2.
= cover required
500 000
1 − 0.28
R694 444
Only estate duty payable
(i)
If the premiums were not deductible for income tax
purposes in terms of section 11(w), the proceeds of
the policy will not be taxable and it should, therefore,
be adjusted to take only estate duty into account.
1 − Estate Duty rate
= cover required
= cover required
Thus
500 000
1 − 0.20
= R625 000
(ii)
Where the policy is estate dutiable and the amount of
life cover is increased to cover the estate duty
payable, the life assured’s interest in the close
corporation or shareholding in a company may also be
increased. The situation may arise that double estate
duty may be imposed:

firstly, on the policy proceeds as deemed
property in the life assured’s estate.

secondly, on the increased value on the
member’s interest/ shareholding as an asset in
the estate.
Section 4(p) of the Estate Duty Act prevents double
taxation as described above by allowing a deduction
equal to the value of any deemed property that has
D40
Business Assurance
also been taken into account when
member’s interest or shareholding.
valuing
a
The following formula can be used in the case of a
keyperson policy or business contingency plan, where
the owner of the policy is a family company in relation
to the life assured:
lnitial cover required divided by
100 − (100 − % membership interest) x estate duty rate)
100
If we assume a membership interest of 60%:
Thus:
R500 000 divided by
=
3.
100 − (100 − 60) x 20%)
100
R543 478,26
Income tax and estate duty payable
If in scenario (ii) (above) the premiums were also deductible
in terms of section 11(w), income tax and estate duty will be
payable. In terms of present departmental practice, only the
net proceeds of the policy after the estate duty has been
deducted, will be subject to income tax. The cover is,
therefore, firstly adjusted for purposes of Estate Duty and
thereafter for Income Tax purposes.
Step 1
1 − Estate Duty rate
Thus:
500 000
1 − 0,2
= R625 000
Business Assurance
D41
Step 2
Adjusted cover
1 −0,28 (Income Tax rate)
Thus:
625 000
0,72
= R868 055
R868 055 represents total cover required for Income Tax
and Estate Duty purposes.
D42
Business Assurance
Preferred Compensation
1.
Definition
Preferred Compensation is an arrangement whereby the employer
pays an amount on a monthly basis to establish a fund that is
awarded to the employee after he or she has been in the service of
the employer for a specified period, such as 5 or 10 years.
2.
How the plan works
The employer increases the employee’s salary to place him in a
position to take out a policy on his/her own life. The employer
normally pays the premiums directly to the life office and the
parties agree that the employee will remain in the service of the
employer usually for a minimum period of 5 years.
The employee cedes the policy to the employer by way of a
security cession, as security for the fulfilment of his/her obligations
in terms of the agreement viz. to remain in the employ of his/her
employer for the specified period.
Upon expiry of the agreed period, the employer cancels the
security cession, thus restoring ownership in the policy to the
employee.
3.
3.1
For the employer
The salary increase (contributions) forms part of the
remuneration package of the employee and is therefore a
tax-deductible expense for the employer. (Expense incurred
in the production of income under Section 11(a) of the
Income Tax Act provided the amount is reasonable in
relation to the employee’s function and that the provisions of
the section are complied with.)
The employer does not receive the benefits, neither do they
accrue to the employer because these are paid directly to
the employee by the life assurer. Should the employee not
fulfil the service requirements laid down in the agreement,
the employer can claim the proceeds and use them to fund
similar benefits for another employee, should it wish to do
so.
Business Assurance
3.2
D43
For the employee
The salary increase (contributions) forms part of the
remuneration of the employee and is taxed in his/her hands
(paragraph (c) of the definition of gross income in the
Income Tax Act). The figure which is paid over by the
employer must be adjusted to take account of the income
tax burden.
Calculation of salary increase:
Premium
100 − marginal tax rate (employee)
Once the security cession has been cancelled, the employee
receives the proceeds from the policy tax-free.
Such
payment will therefore not be included in the gross income
of the employee.
4.
Estate duty consequences
The policy on the life of the employee is deemed to be
property in the estate of the employee in terms of section
3(3)(a) whether the employee dies before or after the
security cession is cancelled. None of the exclusions in
section 3 of the Estate Duty Act are applicable in these
circumstances.
5.
Important considerations
The use of preferred compensation is often opposed on the
grounds that an employee very often would rather receive
an increase in “take-home pay” than the promise of some
benefit in the future. For this reason it is unlikely that
preferred compensation can be sold on a salary sacrifice
basis. If it is to be funded exclusively by the employer, the
implementation of the scheme is likely to be more
successful.
6.
If the employee remains with the employer for the agreed
period, no CGT will be payable in respect of the proceeds of
the policy in the hands of the employee as original
D44
Business Assurance
policyholder upon disposal of the policy. (A security cession
does not give rise to a disposal)
If the employee breaches the agreement and the policy is
ceded to the employer, there will be CGT payable on any
gains made on the policy in the employer’s hands.
Should the employee first elect that employer as a
beneficiary to the policy, the gains will then be disregarded
in the employer’s hands in terms of paragraph 55(1)(a)(ii),
which states that a capital gain must be disregarded by a
person who is a “nominee” of the original beneficial owner of
the policy.
Business Assurance
D45
Buy-and-sell agreement
For the purposes of this section, where the word “member” is used, the
words “partner” and “shareholder” will also be appropriate, depending on
the type of entity involved. Likewise, the member’s interest may be
interchanged with “share” or “shares” as appropriate.
1.
Definition
A buy-and-sell agreement is an agreement between the members
of a business entity, obligating themselves to sell on their deaths
(or disability) their interest to the survivors and likewise obligating
the survivors to purchase the deceased member’s interest.
2.
The elements of a buy-and-sell agreement
A buy-and-sell agreement usually comprises the following:
1.
An undertaking by the co-owners that the survivors will
purchase the interest of the first-dying of the co-owners.
2.
An undertaking that the first-dying will sell, on death,
his/her interest in the business to the survivors.
3.
The purchase price or a method of determining the purchase
price of a co-owner’s interest in the business.
4.
Agreement as to the funding method of the buy-and-sell
agreement, usually through life policies and the correct way
of taking out the policies.
5.
Provision for the cession for value of policies held by the
executor of the first-dying’s estate on the lives of the
surviving co-owners.
6.
An agreement as to the procedure to be followed in the
event of all co-owners dying simultaneously or within 30
days of each other. Normally the estates of the owners of
the policies will receive the full proceeds of the policies.
7.
Provision can also be made for co-owners to purchase a
disabled co-owner’s interests in the business.
D46
3.
Business Assurance
How the plan works
The partners/members/shareholders enter into a contract in terms
of which they effect policies on each other’s lives, e.g. A and B
effect a policy on C’s life, B and C effect a policy on A’s life and A
and C effect a policy on B’s life.
The premium payer in the case of each policy under the plan
should be the partner/member/shareholder(s) who will purchase
the deceased’s share. The premiums for each policy should,
therefore, be paid by the co-owners other than the assured, and
such premium payments should be contributed by these other coowners in the same ratio in which the interest of the assurer will
be purchased and shared between them upon the assured’s death.
Example:
Bob, James and Dylan are shareholders in Upmarket (Pty) Ltd,
with a value of R2m. Bob owns 40%, James 35% and Dylan 25%
of the shares.
Policies taken out:
Policy Owners
James & Dylan
Bob & Dylan
Bob & James
Life Assured
Bob
James
Dylan
Life Cover
R800 000
R700 000
R500 000
Premium
R450 per month
R400 per month
R300 per month
Premiums payable by each shareholder:
Policy on Bob’s life:
35
James will pay:
60
25
Dylan will pay:
60
x R450
=
R262,50
x R450
=
R187,50
x R400
=
R246,15
x R400
=
R153,85
Policy on James life:
Bob will pay:
Dylan will pay:
40
65
25
65
Business Assurance
D47
Policy on Dylan’s life:
Bob will pay:
James will pay:
4.
40
75
35
75
x R300
=
R160,00
x R300
=
R140,00
There is no tax deduction for the premiums paid by each
partner/member/ shareholder.
In terms of the Close Corporation Act, a CC may assist financially
in the purchase of an interest in itself (s.40). It is, therefore,
possible that a buy-and-sell agreement can be entered into
between the members and the CC, in terms of which the CC will
buy a deceased member’s interest. The CC would then be the
proposer on the policy on the member’s life. Provided that the
requirements of s.11(w) are met, the premiums paid under such a
policy will be deductible. As previously mentioned, whether or not
the premiums are deductible or not, the proceeds of such a policy
will be included in the CC’s gross income in terms of paragraph
(m) of the gross income. It may however be subject to a possible
exemption.
The Companies Act makes it possible for companies to fund the
purchase of their own shares. The circumstances in which this may
be done are limited and stringent financial governance
requirements mean that this route will often not present the
solution to the problem faced by the company on the death or
permanent disability of a shareholder.
5.
Estate duty implications (s.3(3)(a)(iA))
In terms of the Estate Duty Act, policies on the life of the deceased
owned by a third party are deemed property in his/her estate.
However, an exception is made in respect of policies effected to
fund buy-and-sell agreements. Provided such a policy meets the
following requirements, it will not be deemed property in the
estate of the deceased:
(i)
the policy is taken out or acquired by a person who, on the
date of the death of the deceased, was a partner of the
deceased, or held a share or like interest in a company in
D48
Business Assurance
which the deceased, on that date, held a share or like
interest, and
(ii)
the policy was taken out or acquired with the purpose of
acquiring the deceased’s interest in the partnership, or with
the purpose of acquiring the whole or a part of the
deceased’s share or like interest in the company or close
corporation and any claim by the deceased against the
company or close corporation, and
(iii)
no premium on the policy was paid or borne by the
deceased.
This concession is not available if a CC or company is the owner of
the policy.
A buy-and-sell agreement can also be used in the sole proprietor
context. The sole proprietor can enter into an agreement with
another party (e.g. an employee). If a policy is used to fund this
agreement, it will not qualify for the s.3(3)(a)(iA)) exclusion. The
reason for this is that there is no adherence to requirement (i), as
mentioned above.
6.
Business Assurance
D49
Income tax implications of
restraint of trade payments
Restraint of trade agreements are frequently used by companies to
protect themselves against employees who may want to leave and set up
in competition. The agreement sometimes provides for a sum of money
to be paid to the employee as consideration for an undertaking by the
employee to restrain his/her income-earning activities. What follows is a
brief discussion of the tax implications for the company and the
employee of restraint payments funded by life assurance.
1.
Implications for the company (refer to Companyowned policies)
1.1
Premiums
See the discussions under “Company-owned policies” –
summary of tax consequences.
1.2
Proceeds
See the discussions under “Company-owned policies” –
summary of tax consequences.
1.3
Restraint payment (received or accrued before
23 February 2000)
This payment made in
agreement is a capital
company will not be
deduction based on the
(a)
consideration of a restraint of trade
payment (ITC 1338). Therefore, the
allowed to claim an income tax
amount of the payment (s.11(a)).
Death before retirement
The employee’s estate or dependants would not be
entitled to the restraint payment as such because the
company would not be bound to nor would it have any
interest in paying them.
The company may, however, pay the proceeds over in
the form of an ex gratia payment. Such a payment is
not deductible since it is not incurred in the production
of income and it is of a capital nature.
D50
Business Assurance
(b)
Disability or retirement
If the employee is still a potential threat despite
his/her disability or age, the restraint payment may
still be justified. If not, an ex gratia payment may be
substituted. In neither case will the payment be tax
deductible.
1.4
Restraint of payment (received or accrued on or
after 23 February 2000)
Restraint of trade payments received or accrued on or after
23 February 2000 by natural persons or “employment
companies” are tax deductible for the payer (employer). The
deduction of such payment must be made over the period of
the restraint or three years, whichever the longer. Such
payments will be included in the gross income of the
recipient.
2.
Implications for the employee
2.1
Premiums
Policies taken out to fund restraint payments are generally
owned by the company. The employee, therefore, does not
pay any premiums. However, due to the new paragraph 2(k)
of the 7th Schedule, the premiums will, have to be included
in his/her taxable income.
2.2
Restraint of trade (received or accrued on or
after 23 February 2000)
Restraint of trade payments are included in the gross income
of the recipient where such recipient is a natural person or
“employment company”.
Business Assurance
D51
Loan account cover
1.
Debit loan accounts
Loans are made by the company to shareholders, directors or
employees (e.g. instead of receiving dividends or increases in
salary).
Clearing debit loan accounts:
(i)
Bequeath the estate or portion of it to a beneficiary provided
he/she takes over the debit loan account.
(ii)
Bequeath shares to a testamentary trust provided the trust
takes over the debit loan account.
(iii)
Bequeath shares to a charitable institution provided it takes
over the debit loan account.
(iv)
Cover with life assurance to ensure liquidity in the estate to
settle the outstanding debt.
Capital gains tax implications:
There will be no capital gains tax implications on debit loan
accounts provided it is a bona fide loan specifically excluded as a
disposal as defined.
2.
Credit loan accounts
Loans are made by shareholders to the company. This makes it
easier to withdraw funds from the company. The loan account
ranks as a concurrent claim on liquidation.
(a)
Tax implications
Any interest payable on the loans is taxable in the hands of
the holder of the loan account and deductible as an expense
for the company. (NB: Interest payments will only be
deductible for the company if the loan was made for trade
purposes.)
(b)
Capital gains tax implication
There will be no capital gains tax implications on credit loan
accounts provided it is a bona fide loan specifically excluded
as a disposal as defined.
D52
Business Assurance
(c)
Clearing of credit loan accounts
(i)
The company can effect a policy on the shareholder’s
life. Note that the value of the life assurance will not
be exempt from estate duty in terms of s.3(3)(a) of
the Estate Duty Act.
(ii)
The shareholders can include the credit loan account
in their buy-and-sell agreements. The value of life
assurance used to fund the buy-and-sell agreements
would be exempt from estate duty in terms of
s.3(3)(a)(iA).
Business Assurance
D53
Loan account redemption plan
1.
Introduction
This plan is used to release funds to the shareholder/director/
member (hereinafter referred to as “shareholder”) who has lent
money to the company/close corporation (hereinafter referred to
as “company”). The funds are released in such a way that the
company’s capital requirements are not affected.
Working of the plan:

The company approaches a financial institution for a loan
equal to the amount owing to the shareholder. The minimum
loan period is five years and, during this period, only the
interest on the loan is serviced. There will be no capital
redemption during the term of the loan.

The company now repays the credit loan account to the
shareholder without affecting its capital structure.

The shareholder uses the repaid credit loan account to invest
in a five-year growth plan with an insurance institution. The
policy concerned is invested in the name of the shareholder
and not the company.

The policy is ceded by the shareholder to the financial
institution as security for the repayment of the loan by the
company, and the company pays only the interest on the
loan for the period thereof.

When the policy matures, an amount equal to the original
loan amount is lent to the company by the shareholder and
the company, in turn, repays the loan obligation to the
financial institution.

Once the shareholder’s original loan account is reinstated
with the company, he/she has the following options:

To withdraw the balance of the maturity value of the policy
(i.e. the difference between the total maturity value on the
policy and the repaid loan with the financial institution).

The balance can (if possible) be left with the insurance
institution and capital withdrawals made there from.
D54
Business Assurance
By implementing the plan, the funds loaned by the shareholder
can thus be released in a tax-efficient manner without disturbing
the company’s capital financing structure.
2.
The income tax deductibilit of interest payments is at the heart of
the plan. The success of the plan depends upon the company being
able to deduct the interest paid to the financial institution.
The company would deduct the expense (i.e. the payment of the
interest) in terms of sections 11(a) and 23(g) of the Income Tax
Act. For the expense to be deductible, it must be actually incurred
in the Republic in the production of income and it must not be of a
capital nature. The expense must be incurred for the purposes of
trade.
If it can be demonstrated that the original purpose of the loan was
to provide the company with working capital, any interest paid in
respect of the original loan would have been deductible. If this is
the case and the second loan was taken out to replace the first,
interest paid on the second loan should also be deductible.
3.
As the policy is on the life of the relevant shareholder, the
proceeds of the policy payable on his/her death will be deemed
property in his/her estate for estate duty purposes.
The shareholder effects the policy himself/herself and also pays
the relevant premium. As such, none of the relevant exclusions
contained in section s.3(3)(a)(ii) of the Estate Duty Act will apply.
4.
If the loan account redemption plan is structured correctly as set
out above, consisting of bona fide loan agreements, first hand
policies and security cessions, there will be no capital gains tax
implications.
Business Assurance
D55
Business contingency plan
1.
Introduction
A member/shareholder of a close corporation/company often has
to sign surety as co-principal debtor or provide personal security
for a loan taken out by the business. The member/shareholder can
thus incur personal liability:
1.
during his/her lifetime if the business cannot repay the loan;
or
2.
on death or permanent disablement, if the business is then
unable to repay the loan; or
3.
if no one can replace him/her as guarantor or no alternative
security can be given.
A solution for this problem can be achieved through the business
contingency plan.
2.
Working of the plan
The business insures the life of the member/shareholder who has
signed surety or provided personal security for the loan effected by
the business. The policy should preferably include disability cover
and the amount of life and disability cover should be equal to the
loan amount. The business pays the premiums and an agreement
is entered into between the business and the member/shareholder
in terms of which the business undertakes to apply the proceeds of
the policy to the repayment of the loan(s) giving rise to the
personal guarantees given by the member/shareholder.
3.
See the discussions under “Company-owned policies” – summary
of tax consequences.
Although there was a lot of speculation of a change of the tax
treatment of premiums paid to fund these types of policies, the
budget speech of 2012 proposed no amendments to the above,
other than to indicate that there is an intention to make it clear
that premiums for business contingency policies will not be
deductible. This is as a result of SARS’s view that these policies
fund a capital loss rather than a business operating loss.
D56
Business Assurance
Therefore, if employers take out a policy for this type of assurance,
with the intention of making the premiums deductible in terms of
the current requirements, those employers would need to take
SARS’ intention (as stated above) into consideration, as they may
find themselves in a position where they may not be allowed to
deduct the premiums of such policies, once SARS’ confirms their
intention, either by way of a further amendment to the Act or by
way of a directive.
4.
The proceeds of the policy will form part of deemed property in the
estate of the deceased unless the requirements of s.3(3)(a)(ii) of
the Estate Duty Act are met, namely:
5.
(i)
the policy was not effected by or at the instance of the
deceased; and
(ii)
no premium on the policy was borne by the deceased; and
(iii)
no amount due under the policy has been or will be paid to
the estate of the deceased; and
(iv)
no amount has been or will be paid to a relative of the
deceased or a person wholly or partly dependent on him for
maintenance, or to any family company.
Business Assurance
D57
The balance sheet: Business assurance leads
Introduction
The balance sheet contains the details of the assets and liabilities of an
undertaking (sole proprietorship, partnership, close corporation or
company); these are shown under appropriate headings and at values
taken from the ledger at a specific date, usually the end of the financial
year.
The function of the balance sheet is to show what a business owns, what
it owes and to give a true and fair view of the state of affairs of the
business at a particular date. For comparative purposes the balance
sheet shows two sets of figures - for the present and the previous
accounting periods - to show how the overall affairs of the business have
changed.
The balance sheet should always be read in conjunction with the notes
that are attached to the annual financial statements as they set out
further details and qualifications relevant to the assets and liabilities. The
notes are an integral part of the accounts and are intended to give an
analysis or to elaborate on certain items contained in the income
statement and balance sheet.
Assurance leads
A thorough analysis of the financial statements may provide valuable
information regarding a client’s business and personal affairs which, if
properly evaluated, may provide excellent assurance leads.
1.
Redeemable preference shares
Redeemable preference shares are used by investors to place
money in a company but only for a limited time. A redeemable
preference share is therefore more like a loan than a share
because it has to be repaid at a certain time.
Where a company has issued redeemable preference shares the
Companies Act requires that this be disclosed in the financial
statements on that date or earliest date on which such shares are
to be redeemed.
Redeemable preference shares may be redeemed out of
accumulated distributable profits or out of the proceeds of a fresh
issue of shares.
D58
Business Assurance
Distributable profits have invariably been invested in assets over
the years, with the result that ready cash may not be available to
redeem the shares.
Could the liquid resources not be provided by assurance maturing
on redemption date? The company could invest annually a fixed
sum outside the business by way of insurance premiums. A sinking
fund policy could suit this purpose.
2.
Long-term liabilities
Long-term liabilities usually comprise (a)
mortgage bonds
(b)
debentures (debentures are loans made to the company at a
fixed rate of interest and repayable at a fixed rate in the
future)
In terms of the Companies Act disclosure is required of the terms
governing these loans and in particular the date of repayment, if
paid in instalments, the periodic instalment involved must be
disclosed.
If repayment is fixed on a specific date, what provision is the
company making to discharge these obligations in cash?
A sinking fund policy could be considered in order to provide the
necessary liquid funds.
3.
Directors’ loan accounts (by the directors to the
company)
If the loans are long term, the terms of the loan account must be
disclosed in the financial statements by way of a note. If the loan
is substantial, the company would be placed in an embarrassing
financial position should it be necessary to repay the loan to the
estate of the deceased director.
The necessary funds could be made available through assurance
on the life of the director.
4.
Fixed assets
Retained earnings can be invested in investment policies to
provide the necessary funds to replace assets or to buy additional
fixed assets.
Business Assurance
5.
D59
Investments: loans (i.e. made to outsiders)
Are these loans secured by life assurance? If not, the company
should consider insuring such loan debtors (term assurance or
whole-life policy).
6.
Directors’ loans
directors)
(loans
by
the
company
to
Full disclosure of such loans is usually given in the notes to the
financial statements.
Would the director’s estate be able to liquidate the debt in the
event of his/her death? To avoid liquidity problems on death,
consider assurance to provide the necessary cash (term
assurance).
7.
Debtors
Are there perhaps any large debtors who maintain a substantial
monthly balance? Life assurance may provide the necessary
collateral security.
8.
Directors’ emoluments
Under the Companies Act a company is required to make full
disclosure of emoluments paid to directors, differentiating
between:

amounts paid in respect of services as directors (i.e.
directors’ fees)

amounts paid in respect of other services (i.e. salaries,
commission).
This gives one accurate figures of the income of directors and their
approximate marginal rates of tax can be determined. Consider
retirement annuity policies to neutralise the high rates of tax.
9.
Employees’ remuneration
Does the company have a pension scheme or provident fund?
Consider various deferred compensation schemes for highly paid
executives.
A highly paid director or employee often does not get much benefit
from a salary increase because of the concomitant increase in tax
D60
Business Assurance
payable. Such employee or director may therefore prefer to enter
into a deferred compensation scheme to avoid the negative effect
of taxation on his/her immediate cash flow in the event of a salary
increase.
10. Contingent liabilities
In terms of the Companies Act, full disclosure of the nature of
contingent liabilities in existence, as well as the estimate of such
liabilities, is required by way of notes to the balance sheet.
Guarantees given by the company and guarantees furnished on
behalf of directors must be disclosed.
Should the director pass away, will his/her estate be able to
honour his/her obligations or will the company be called upon to
honour its guarantee?
To avoid possible financial embarrassment the company should
consider insuring the life of the director involved.
11. Employee assurance - keyperson policies
Accountants pay special attention to the adequacy of the insurance
of fixed assets to ensure that the company is covered in the event
of natural disasters.
One of the most important business assets of any commercial
organisation is its management, those people who determine
policy and strategy and are responsible for the organisation’s
success.
The loss of a key manager could cause the organisation irreparable
financial harm and it is equally important to assure this valuable
asset as one would insure fixed assets.
Business Assurance
D61
Valuing business interests
1.
Introduction
Placing the correct value on a business is a difficult and involved
exercise. Various methods and assumptions can be used, as well
as numerous adjustments to the underlying cash flows and
balance sheet items.
This might lead to different valuations given by different valuators
and underwriters, potentially leading to confusion and
disagreements. This section aims to reduce, and ultimately to
remove, these disagreements by discussing the basic principles
underlying the valuation of a business, as well as going into some
detail on the different valuation methods and assumptions.
Please note that these are guidelines and great care is required
when valuing a business. They need to be interpreted in line with
the specifics of the business being valued. In no way can these
principles be applied without serious consideration of the specific
situation being analysed.
2.
Assumptions used in Business Valuations
The assumptions used when valuing a business are of critical
importance and can significantly affect the final number.
Particularly important is the fair rate of return used in the business
valuation.
The fair rate of return is the annual return you would expect to
receive if you invested in the business being valued. The more
stable and more established the business, with a good solid track
record, the lower return you would expect to compensate you for
the risk of investing in that business. For a risky, less well
established business, a higher fair rate of return would be required
to compensate you for the increased risk. A reasonable range
would be between 12% and 20%, but even these can vary
depending on individual business circumstance.
It is thus important to assess the “riskiness” and “track record” of
the business being valued, and to adjust the assumptions
accordingly.
D62
3.
Business Assurance
Valuation Methods
The methods used to value a business entity could vary
depending on the purpose of the valuation. The following four
valuation methods are explained from a Life Insurance Business
Cover perspective.
For example buy and sell valuations are different from contingent
liability. When assessing buy and sell cover, we need to establish
the respective entity’s worth from either an assets and liabilities
or an income generating ability point of view. This then differs
with the issue of contingent liability cover, as some of the
business entities under valuation will probably run with a negative
asset value due to the outstanding loans and other liabilities. It is
therefore essential to establish whether the business entity can
still service the loans, meet its other obligations and generate
profits.
Some underwriting challenges include inflated values and deciding
on whether the assumptions are optimistic or pessimistic? The
basic assumption is that the value will change overtime and an
upward trend is always welcomed as appose to a downward trend.
There is always a wide gap between projections and reality.
3.1
Intrinsic Value Method
This method is particularly applicable to investment and
property businesses, because the values of these businesses
are mainly in the net assets.
It values the business as the difference between the Assets
and Liabilities, also leading to it being called the Net Asset
Value method.
Steps:
(a)
Value all the assets at market value.
(b)
Value all the liabilities.
(c)
Deduct the liabilities from the market value of the
assets.
Step (c) gives the Intrinsic Value of the business. To
calculate the value of a particular individual’s share in the
business, multiply the Intrinsic Value by the percentage of
the individual’s interest.
Business Assurance
D63
Example:
Assets
R8 700 000
Fixed Assets
R6 200 000
Current Assets
R2 500 000
Liabilities
R3 700 000
Long-term liabilities
R2 500 000
Current liabilities
R1 200 000
Intrinsic Value (or Net Asset Value)
R5 000 000
If there are three partners, namely A, B and C, with
ownership percentages of 35%, 40% and 25% respectively,
their individual interest in the business would be:
A: 35% x R5 000 000 = R1 750 000
B: 40% x R5 000 000 = R2 000 000
C: 25% x R5 000 000 = R1 250 000
Advantages of using the Intrinsic Value Method:

This method can be used if the business entity’s value is
demonstrated mainly in its assets.

The calculations are easy as the figures are taken directly
from the balance sheet.
Disadvantages of using the Intrinsic Value Method:

This method does not take into account any future growth in
the business or any other items that do not appear in the
financial statements.

On some occasions the book value is far below the real
market value.

There are no guidelines for establishing the market value for
assets unless you involve a property valuation expert.

It is hardly used in the first 5 years of the life of a business
entity as a result of the small net asset value due to the
loan accounts and other liabilities.
D64
4.
Business Assurance
Earnings Yield Method
This method is applicable where the asset base is not directly
related to the earning potential of the business, for example a
business that provides professional services or a trading business.
The actual value is derived from the net after tax income earned
from the services delivered.
Steps:
(a)
Establish future net
current net earnings after
income statement. Multiply
increase factor to get the
annum after tax.
earnings per annum after tax. The
tax can be taken straight from the
this figure by an appropriate annual
next year’s future net earnings per
(b)
Establish a fair rate of return.
(c)
Capitalise the annual future net earnings at the fair rate of
return.
Example:
Current annual net earnings after tax:
R1 500 000
Expected annual growth:
10%
Expected future net earnings after tax:
R1 500 000 + 10% x
R1 500 000
= R1 650 000
Fair rate of return:
(Assuming a well established business)
15%
Value of the business:
R1 650 000 / 15%
= R11 000 000
Notes:
This is a forward looking method, and values the future net income
streams of the business. It is a good method, because it is based
on the present value of future earnings.
It is important to consider the net earnings in detail. Once off
amounts, such as exceptional profits, or major expense outlays,
can impact the net earnings in a particular year, and should
sometimes be excluded. But this is a complicated area and care
Business Assurance
D65
must be taken to only adjust the earnings where really deemed
appropriate.
The earnings used should be net of all expenses and tax.
Advantages of using the Earnings Yield Method:

It provides one with an idea of the possible future earnings
of the business entity assuming optimal or steady economic
growth.

This method is most applicable where the asset base is not
directly related to the earning potential of the company, e.g.
services companies.

It is widely used in the insurance industry.
Disadvantages of using the Earnings Yield Method:
5.

Care must be taken when considering the appropriate fair
rate of return.

This method ignores the capital employed in the business.

It treats the profits as ceaseless.
Dividend Yield Method
This method is applicable when valuing minority shares in a larger
established business that provides a steady stream of dividend
income.
Steps:
(a)
Establish the future dividend declaration. This can be
calculated from the current dividend declaration. Multiply the
current dividend declaration by an appropriate
annual
increase factor to get next year’s dividend declaration.
(b)
Establish a fair rate of return.
(c)
Capitalise the annual future dividend declaration.
(d)
Multiply this capitalised value by the number of shares held.
D66
Business Assurance
Example:
Annual dividend per share:
R45
Expected annual growth:
10%
Expected future dividend declaration:
R45 + 10% x R45
= R49,50
Fair rate of return:
15%
(Assuming a well established business)
Capitalised value of each dividend:
R49,50 / 15%
= R330
If you hold 1 000 shares, your value is:
R330 x 1 000
= R330 000.
Advantages of using the Dividend Yield Method:

Most suitable when valuing shares related to a small
percentage shareholding in a business entity.
Disadvantages of using the Dividend Yield Method:
6.

Seldom used in the insurance industry;

Ignores the assets value.
Super Profits Method
The super profits method is essentially a combination of the
intrinsic value method and the earnings yield method. It thus
takes the asset value as well as the future expected earnings of
the business into account in order to arrive at a value of the
business. It is an appropriate method to use where the value of
the business is contained in its assets as well as in its future
earning potential.
The super profits method takes into account the present value of
the future expected earnings, constituting a fair rate of return of
the business. These “super” earnings or profits are then capitalised
over a predetermined period, during which the business is
reasonably expected to maintain this high level of return on
investment. A five year period is commonly used for the purpose
Business Assurance
D67
of this time value of money calculation. Once the present value of
the super profits during the e.g. five year period has been
calculated, the asset value of the business is added to arrive at the
total business value.
Steps:
(a)
Establish the net assets employed in the business after
deducting liabilities (i.e. the intrinsic or net asset value).
(b)
Determine the annual expected income after tax. These
allow for the super profits expected.
(c)
Determine fair rate of return and the number of years over
which super profits are expected (5 years).
(d)
Calculate what is considered
employed x fair rate of return).
(e)
Calculate the super profits = (Projected income – Calculated
fair income).
(f)
Calculate the discounted value of super profits over a
number of years (from assumptions).
(g)
Calculate the final value for the business = value of assets
(Step a) + discounted value of super profits (Step f).
as
fair
income
(assets
D68
Business Assurance
Example:
Total capital employed
R5 000 000
Total net assets
R4 000 000
Expected annual income per year
from this capital
(Expected annual income estimated for
next 5 years)
R850 000
Fair rate of return (low risk
investment)
15%
Fair expected income from
capital employed
15% x R5 000 000
R750 000
Super profits per year
R850 000 – R750 000
R100 000
Discounted value of super profits
at 15% over
5 years to present value:
= R100 000 x 3.35
R335 000
Total value of business
R4 000 000 + R335 000
R4 335 000
Advantages of using the Super Profits Method:

This method is the most suited for the valuing of a majority
holding in a business entity.

It takes both asset value as well as expected income into
account, offering a fair approach to the value of the
business.
Business Assurance
D69
Disadvantages of using the Super Profits Method:

It is a complicated method and care needs to be taken when
it is used.

The results can be easily influenced by changing the
assumption.

It can be used to refine the business valuation but often
either the intrinsic or earnings yield methods would be
better method.
D70
Business Assurance
Financial ratios
Introduction
Financial ratios are similar to a thermometer which can be used to “take
the temperature of a business”. Like a thermometer they give only a
limited but useful diagnosis. Financial ratios can be compared to that of
another business in the same industry or historical ratios in order to
determine a trend.
1.
Liquidity ratios
Liquidity deals with the ability of the business to meet its shortterm debts. Short-term debts are those debts which must be
repaid within a year. Since debts can only be liquidated out of
available cash resources, it follows that liquidity involves two
factors, namely:

the capacity of the business to generate cash, and

the availability of this cash to pay short-term debts.
In searching for liquidity, we look at both current assets and
current liabilities, and the relationship between these categories.
The logic behind this is that cash is generated from the current
assets and short-term debts constitute current liabilities.
Therefore, the relationship between current assets and current
liabilities will reveal the ease or difficulty with which current debts
can be paid.
There are two methods for measuring liquidity, namely:

the current ratio, and

the acid test ratio.
1.1 The current ratio
The formula for determining the current ratio is:
Current assets
Current liabilitie s
Business Assurance
D71
This ratio measures how many times current liabilities are
covered by current assets. Although many people in the
accounting profession regard a current ratio of 2:1 as being
ideal, no such absolute criteria can apply to all businesses. A
business with a large turnover operating on a cash basis will
require a lower current ratio than a company which grants
extensive credit and sells slow-moving stock.
For example:
Suppose a business has R2,000,000 in current assets and
R1,000,000 in current liabilities. Then the current ratio is
R2,000,000/R1,000,000 = 2:1.
This means for every Rand in current liabilities there is R2 in
current assets.
1.2
The acid test ratio
The formula to determine the acid test ratio is:
Cash plus debtors and other current assets (excluding Stock)
Current liabilitie s
This ratio measures the ability of the business to meet its
current liabilities in the worst possible conditions, i.e. if all
current liabilities have to be paid at short notice. Note that
stock is not taken into account in this calculation since it
may be difficult to convert to cash.
Business entities with ratios of less than 1 cannot pay their
current liabilities and they should be looked at with extreme
caution.
Example:
After perusing ABC (Pty) Ltd’s financial statements for the
relevant financial year, the following figures were extracted:
Cash
R 100 000
Debtors
R 350 000
Current assets (excluding stock)
R 900 000
Stock
R1 200 000
Current liabilities
R 800 000
D72
Business Assurance
Therefore ABC (Pty) Ltd’s acid test ratio is:
100 000 + 350 000 + 900 000
800 000
= 1.7:1
This indicates that the business would be able to meet its current
liabilities with relative ease.
2.
Solvency ratios
2.1
Shareholders’ equity to capital employed
This ratio represents the proportion of assets or funds
provided by the owners.
Shareholders' equity
Capital employed
2.2
e.g.
600 000
1 000 000
= 60%
Liabilities to capital employed
This ratio illustrates the proportion of funds provided by
outsiders, i.e. the extent of gearing.
Long − term liabilitie s
Capital employed
3.
e.g.
400 000
1 000 000
= 40%
Profitability ratios
3.1
Earnings per share (EPS)
This ratio can only be calculated if the shares are listed on
the stock exchange. It indicates the actual return on the
market price.
Net income after tax − preference dividends
Weighted average ofnumber of ordinary shares in issue
= cents per share
Business Assurance
3.2
D73
Price/earnings ratio (P/E)
This ratio measures how many years’ earnings will cover the
price of the share, e.g. a share with a price of R8 and EPS of
R1 has a P/E ratio of R8 which means that it will take an
investor 8 years of earnings to recover the purchase price of
share. It indicates whether the share is relatively expensive
or relatively cheap.
Market price per share
Earnings per share
The value of the P/E is to quickly describe what happened to
a business entity during the past year and how it's
performing financially.
A business entity with a low (P/E) could mean that the
business has encountered some problems recently. One
should try to determine whether those problems will likely
be temporary or permanent.
Some businesses on the other hand tend to have high (P/E)
ratios due to the nature of the business e.g. software
companies.
3.3
Dividend yield
This ratio measures the dividend return based on the market
price of the share.
Dividend in cents per ordinary
Marked price per share
3.4
x
100
1
=%
Gross/net profit margin
3.4.1 Gross profit margin
This ratio indicates the markup on goods. If the
markup is quite low, it means large stock levels must
be kept and it is necessary to achieve a higher level of
sales.
Gross profit margin =
Gross profit
Sales
D74
Business Assurance
3.4.2 Net profit margin
The profit margin ratio indicates the after-tax return
(net income) on each Rand of sales.
Net profit margin
=
Net profit
Sales
Business Assurance
D75
Notes
D76
Business Assurance
Estate Planning
Estate
Planning
Estate Planning
Estate Planning
E1
Estate Planning
Introduction
Estate planning is the arrangement of an estate in terms of which the
planner’s objectives in dealing with the assets and liabilities are
achieved. These objectives should make provision for the management
of the planner’s estate during his/her life and thereafter.
E2
Estate Planning
Methods to save Estate Duty
There are a number of ways in which estate duty can be saved, most of
which are aimed at limiting the growth in the planner’s estate.
The facts of each individual case will determine whether a specific
method will be suitable or not. The practical distribution of the planner’s
estate after his/her death must be the primary objective and the saving
of estate duty should be just one of the factors to be kept in mind during
the planning process. Some of the methods in which estate duty can be
saved are mentioned hereunder.
Ways to limit growth in the estate

Sale of growth assets;

Donations - by making use of the provisions of section
56(2)(b) of the Income Tax Act;

“Executory Donations”;

By transfer of growth assets to an inter vivos trust by sale or
donation;

By the creation of a company and thereafter selling the
growth assets to the company;

By swopping growth assets for assets of equal value which
increase in value at a slower rate;

Making use of limited rights;

The sale of bare dominium in a particular asset to a trust;

Reduction of the loan account as an asset in the estate;

Estate massing.
Note:
When advising a client on any of the above, the full implication of any
recommendation has to be considered.
Estate Planning
E3
Capital Gains Tax and Estate Planning
This is a short summary of the impact of capital gains tax on estate
planning and must be read with Section A on Income Tax.
Disposals by the deceased
A deemed disposal of assets (excluding those assets exempt from
capital gains tax) takes place from the deceased to his estate at
the market value as at the time of his death. The difference
between the market value and the base cost of the asset during
the lifetime of the deceased could result in a capital gain or loss.
The base cost of the assets in the estate will be equal to the
market value of the assets, for purposes of any disposal by the
deceased estate.
An annual exclusion of R300 000 is applicable to gains or losses by
the deceased, instead of R30 000 per annum during the lifetime of
the deceased.
These principles are not applicable in respect of the following
assets:

Assets accruing to the surviving spouse will be transferred at
the base cost of the deceased to the spouse. No capital
gains tax (hereinafter referred to as CGT) will therefore be
payable in respect of any assets accruing to a surviving
spouse. (See new definition of spouse as per amendment to
the Income Tax Act 58 of 1962.)

No CGT is payable in respect of any assets bequeathed to a
public benefit organisation.

No CGT is payable in respect of the proceeds of long-term
insurance policies in the hands of the policyholder. CGT
could be payable in respect of second-hand policies.

No CGT is payable in respect of lump-sum benefits payable
from pension funds, provident funds and retirement
annuities, taxed in relation to the 2nd Schedule.

No CGT is payable in respect of an accrual claim transferred
to a surviving spouse.
E4
Estate Planning
Note:
‘Spouse’ in relation to any person, means the partner of such
person (a)
in a marriage or customary or civil union recognised in terms
of the laws of the Republic;
(b)
in a union recognised as a marriage in accordance with the
tenets of any religion; or
(c)
in a same-sex or heterosexual union which
Commissioner is satisfied is intended to be permanent:
the
Provided that a marriage or union contemplated in paragraph (b)
or (c) shall, in the absence of proof to the contrary, be deemed to
be a marriage or union without community of property.
According to Section 13(2)(b) of the Civil Union Act (No. 17 of
2006) reference to husband, wife or spouse in any other law,
including the common law, includes a civil union partner (with the
exception of the Marriage Act or the Customary Marriage Act).
Disposals by the estate
When assets are distributed by the estate to the heirs, legatees or
trustees of a trust it is regarded as a disposal, the proceeds being
equal to the base cost (the market value at date of death) of the
estate and resulting in no CGT being payable. The base cost of the
assets in the hands of the heirs, legatees and trustees are equal to
the market value of the assets as at date of death.
Should the deceased estate sell any assets there could be a gain or
loss equal to the difference of the proceeds and the base cost. The
deceased estate has an annual exclusion of R30 000.
Such a disposal would apply if assets are disposed of by the
executor of the deceased estate. The disposal in this instance
must be treated in the same manner as the deceased would have
been treated had he/she been alive. Thus the same exclusions
apply.
Estate Planning
E5
Taxation of trusts
Provisions similar to those of section 7(2) to 7(8) of the Income
Tax Act are contained in the Eighth Schedule. A donor may be
taxed on a gain arising in a trust, should these provisions apply.
There is a general rule applicable to trusts. The vesting of an asset
or a gain in a beneficiary is a disposal for purposes of CGT. Any
gain can be taxed in the hands of the beneficiary instead of in the
trust. The gain is calculated by deducting the base cost of the
asset from the market value at the time vesting takes place. This
rule will only be applicable if the beneficiary is a South African
resident. If the beneficiary is not a resident the gain will be taxed
in the trust.
E6
Estate Planning
Donations Tax: Exemptions
In terms of the Income Tax Act, donations tax is payable in respect of
the value of all property donated on or after 16 March 1988. Certain
exemptions are permitted. Primarily, the first R100 000 of the value of
property donated by a natural person in a year is exempt from donations
tax. Other exemptions include:
Section
56(1)(a)
56(1)(b)
56(1)(d)
56(1)(e)
56(1)(g)
56(1)(h)
56(1)(k)
56(1)(l)
56(1)(m)
56(1)(n)
56(2)(c)
Donations in terms of ante-or postnuptial contracts
Donations to a spouse.
*New definition of spouse as per amendment to the Income Tax Act 58 of 1962.
Donations where the donee does not benefit until the donor’s death.
Donations cancelled within six months.
Donations of property outside the Republic.
Donations by or to government or local bodies and certain institutions and funds.
Voluntary awards which are subject to income tax in donee’s hands.
Property disposed of in terms of a trust.
Property consisting of a right (other than usufructuary fiduciary) to the use or
occupation of property used for farming purposes if the donee is a child of the
donor.
Donations made by public companies.
Maintenance payments.
* ‘Spouse’ in relation to any person, means the partner of such person (a)
in a marriage or customary or civil union recognised in terms of
the laws of the Republic;
(b)
in a union recognised as a marriage in accordance with the tenets
of any religion; or
(c)
in a same-sex or heterosexual union which the Commissioner is
satisfied is intended to be permanent:
Provided that a marriage or union contemplated in paragraph (b) or (c)
shall, in the absence of proof to the contrary, be deemed to be a
marriage or union without community of property.
Note: According to Section 13(2)(b) of the Civil Union Act (No. 17 of
2006) reference to husband, wife or spouse in any other law, including
the common law, includes a civil union partner (with the exception of the
Marriage Act or the Customary Marriage Act).
Estate Planning
E7
Estate Pegging Worksheet
Comparison of costs and benefits
1. THE COST OF A PEGGING
(a) Drawing up of trust
R
(b) Costs of forming a company/CC
R
(c) Trustee’s acceptance of cap
R
(d) Transfer costs
R
(i) Donations
Donations tax
R
Capital gains tax
R
Transfer duty
R
Conveyancing fees
R
Legal costs
R
Total
R
OR
(ii) Sale
Transfer duty/VAT
R
Capital gains tax
R
Conveyancing fees
R
Legal costs
R
Total
R
(e) Submission of 2 compulsory Provisional Tax Forms
R
TOTAL COSTS
R
2. PROJECTED INCREASE IN VALUE OF ASSETS TO BE PEGGED
Value at present
R
Expected yearly increase in value . . . . . % p.a. for . . . . .
R
Years (Future Value)
Less: Value at present
R
Total expected increase in value after . . . . . years
R
3. ADDITIONAL ESTATE DUTY ATTRACTED BY INCREASE IN VALUE
Increase in value R. . . . (C) x 20% (rate of estate duty)
Additional Estate Duty
R
4. COMPULSORY OF COSTS AND BENEFITS
Expected estate duty saving over . . . . . years discounted at
R
the inflation rate of . . . . . %
Less: Cost of pegging operation (B)
R(
)
NET SAVING
R
(A)
(B)
(C)
E8
Estate Planning
Costs involved in transferring assets
1. DONATIONS
Donations tax is payable at the rate of 20% on the value of property donated on or after 1
October 2000. The first R100 000 of property donated per taxpayer per annum is exempt
from the payment of donations tax. The R100 000 annual exemption from donations tax is
available to both spouses (s.56(2)(b)). Where the donation is made from assets forming part
of the joint estate for in community of property marriages, such donation shall be deemed to
have been made equally by each spouse, but where the property did not form part of the joint
estate, such donation will be deemed to have been made solely by the spouse making the
donation (s.57A). Depending on the type of asset that is donated, capital gains tax could be
payable.
METHOD OF
TAX/DUTY
AMOUNT
TRANSFER AND TYPE
OF ASSET
(a) Movables
Donations tax
20%
(b) Immovables
Donations tax plus
20%
transfer duty
A donation is regarded as a disposal for
purposes of capital gains tax (CGT).
The proceeds will be equal to the
market value of the asset and CGT as
well as donations tax may be payable.
No CGT will be payable in respect of a
donation to a spouse. (See definition of
spouse under the Donation Exemptions
section.)
(Refer to transfer duty below under
Sale)
0.25% of taxable amount on listed and
(c) Shares
Marketable securities tax
unlisted securities.
20%
Donations tax
2. SALE
(a) Movables
VAT
14%
Rates applicable from 23 February
(B) Immovables
Transfer duty/VAT (no
2011:
transfer duty will be
payable if VAT is
Companies/ Close Corporation and
payable on the purchase
Trusts and Natural Persons:
price). VAT is payable at
• on first R600 000 – 0%
a rate of 14%.
• Between R600 000 and R1 000 000
– 3% on value above R600 000.
• Between R1 000 00 and R1 500
000 – R12 000 + 5% of the value
above R1 000 000.
• Above R1 500 000 – R37 000 + 8%
of the value above R1 500 000
Estate Planning
E9
Costs involved in the setting up and
administration of trusts
1.
2.
3.
4.
5.
6.
7.
SERVICE
Drawing up of trust deed (legal fees)
Trustee’s acceptance of capital fees
Commission on collection of income
Capital administration fee
General administration costs (e.g.
postage and petties)
Costs involved in the compulsory
submission of two provisional tax
returns
Final distribution of capital on value
COSTS
Average
R3 500 – R5 000
1,5% of capital plus VAT (on 1,5%)
7,5% of gross income
1 – 1,5% of the value per annum
Average R25 – R50 per transaction
Average R600 per tax return
2% of capital plus VAT
(The charges are merely an indication of the costs)
E10
Estate Planning
The taxation of trust income
This section deals with the taxation of trust income. The following
sections which affect the taxation of trust income are included in the
Income Tax Act, Nr. 58 of 1962 (as amended):
1.
The definition of “person” in section 1 includes a trust.
2.
As a result of an amendment to section 6(1), trusts are no longer
entitled to the primary rebate.
3.
In terms of section 25B of the Act:
4.

any income received by or accrued to or in favour of any
person,

in his/her capacity as the trustee of a trust,

shall, subject to the provisions of section 7,

to the extent that it has been derived for the immediate or
future benefit,

of an ascertained beneficiary with a vested right,

be deemed to be income accrued to the beneficiary,

otherwise be deemed to be the income of the trust fund.
In cases where the beneficiary has acquired a vested right to the
trust income as a result of the trustee exercising his/her
discretion, such income is deemed to accrue to the beneficiary.
Where the income accrues to the beneficiary in terms of these
provisions, any deductions or allowances relating to this income
are permitted to be claimed by the beneficiary. Similarly, where
the income accrues to the trust, it will be entitled to such
deductions and allowances.
Deductions and allowances in the hands of beneficiaries are limited
to the income deemed to have accrued to the beneficiary.
Any deductions and allowances which are not allowed to flow
through to the beneficiaries can be deducted against the taxable
income of the trust in the same tax year. Such deductions and
allowances are limited to the taxable income in the trust before
taking into consideration the deductions and allowances. If the
trust is not subject to tax in the Republic, the deductions and
allowances can be deducted in the following year of assessment
Estate Planning
E11
from income which the beneficiary of the trust receives in that
year.
The deductions and allowances which exceed the taxable income of
the trust can be deducted in the following year of assessment from
income which the beneficiary of the trust receives in that year.
5.
If during a year of assessment a resident acquires a vested right to
capital of an offshore trust:

and the capital arose from income received by or accrued to
the trust or from any receipts or accruals of such trust which
would have constituted income if such trust had been a
resident, in any previous year of assessment during which
the resident had a contingent right to income, and

the income or receipts and accruals has not been taxed in
the Republic, such capital amount shall be included in the
income of the resident.
Tax rates
Income vesting in the trust as taxpayer is taxed at a rate of 40%
as from 1 March 2002 with the exception of a special trust.
Definition of a special trust:


A trust created solely for the benefit of a person who suffers
from
-
any “mental illness” as defined in section 1 of the Mental
Health Act of 1973; or
-
a serious physical disability, where such disability or
illness incapacitates the beneficiary from earning
sufficient income to maintain himself/herself; or
A testamentary trust established solely for the benefit of any
minor beneficiaries who are relatives of the deceased person
and who are alive on the date of death of the deceased
person, will be classified as a special trust until the youngest
of the beneficiaries turns 21.
Trusts falling into these categories will be taxed at the same rates
applicable to natural persons as contained in the Income Tax
section.
E12
Estate Planning
PERSON TAXED
TAXATION OF TRUST INCOME
SECTION/CASE
1. SETTLOR/DONAR; Parent
BENEFICIARY: Minor child (own child)
(a) Parent
Income received by or accrued to minor
s.7(3)
that is attributable to parent’s gratuitous
disposition.
(b) Minor child (as
Income received by or accrued to the
CIR v Widan
a trust
minor where the beneficiary has a vested
CIR v Berold
beneficiary)
right to the income retained in the trust.
Ovenstone v SIR
2. SETTLOR: Parent BENEFICIARY: Major child1
s.1”gross income”
(a) Beneficiary
(i) Income actually received
s.7(1)
(ii) Income due and payable i.e.
ITC 1328
accrued but not received.
s.25B(1)
s.7(5)
(b) Parent
Income not received by or accrued to
ITC 1328
beneficiary as a result of settlor’s
Est. Dempers v SIR
stipulation or condition.
Sir V Sidley
(c) Trustee / Donor
Income withheld i.t.o. trustee’s discretion
s.1 “gross income”
if settler is dead)
and which does not accrue to beneficiary.
s.25B(1)
3. SETTLOR:
Any person
BENEFICIARY: Minor child (note own child)
(a) Beneficiary
(i) Income actually received.
s.1 gross income”
(ii) Income accrued but not received.
s.7(1)
ITC 1328
s.25B(1) & (2)
(b) Settlor / Donor
Income not received by or accrued to
S.7(5)
beneficiary in terms of settlor’s stipulation
ITC 1328
or condition.
Est. Dempers
SIR v Sidley
s.1 “gross income”
(c) Trustee
Income withheld in terms of trustee’s
s.25B(1)
discretion and which does not accrue to
(if settler / donor
beneficiary.
dead)
Note:
As from 1 July 2007 the age of majority has been changed to 18 years.
Estate Planning
PERSON TAXED
4. SETTLOR/
BENEFICIARY:
Parents of
beneficiary
5. SETTLOR/
BENEFICIARY:
Donor Spouse
6. SETTLOR/
BENEFICIARY:
Settlor
7. SETTLOR/
BENEFICIARY:
Settlor/Donor
8. SETTLOR/
BENEFICIARY:
Resident
E13
TAXATION OF TRUST INCOME
SECTION/CASE
Any person
Another person’s minor child with reciprocal
Benefits for settler or his family
Income received by or accrued to minor
s.7(4)
child.
Donor spouse
Other spouse (living together)
s.7(2)
Income received by or accrued to donee
spouse can be taxed in the other spouse’s
hands if provisions of s.7(2) are met.
Any person who confers a right to income but retains the
power to revoke or confer the right upon another
Any person
Income received by or accrued in terms of
s.7(6)
conferred right so long as the power to
revoke is retained.
Any person who donates/settles a right to receive income
in such a manner that he remains the owner or retains an
interest therein, or is entitled to regain ownership at a
specified or specifiable time
Any person
Any income (e.g. rent, dividends, interest)
s.7(7)
Received by the beneficiary.
Any resident
Non-resident
s.7(8)
Income received by or accrued to a nonresident as is attributable to a donation,
settlement or other disposition made by
the resident.
E14
Estate Planning
Interest-free loans
1.
Income tax considerations
(a)
Minor children (section 7(3))
The interest-free loan is treated as a disposition within the
meaning of s7(3) and any income or benefit the minor
receives which is attributable to the fact that the loan is
interest free, is taxable in the parent’s hands (CIR v Berold
and Joss v SIR).
Where an interest rate is charged, but it is lower than
market rates, the interest income that is attributable to the
loan may be apportioned between the parent and minor
child in accordance with the gratuitous and non-gratuitous
elements of the disposition. If no apportionment takes place,
all the interest income will be taxed in the parent’s hands
(Ovenstone v SIR).
(b)
Trust beneficiaries (section 7(5))
Where a settlor makes an interest-free loan to a trust and
the trust deed contains a stipulation that the trust income is
to be withheld from the trust beneficiaries until a stipulated
event occurs, the income attributable to the interest-free
loan will, together with the rest of the trust income, be
taxed in the settlor’s hands (in terms of s7(5)). When the
stipulated event occurs, the income may no longer be taxed
in the settlor’s hands in terms of s7(5). Section 80A may,
however, be applied.
(c)
Other cases (section 80A)
Where income attributable to an interest-free loan cannot be
taxed in the parent’s/settlor’s hands in terms of sections
7(3) or 7(5), the Commissioner may apply Section 80A.
This can be done only if the requirements as set out in
Section 80A are present.
If the Commissioner can successfully apply s80A, the income
attributable to the interest-free loan will be taxed in the
hands of the person making the loan.
Estate Planning
2.
E15
Donations tax considerations
In terms of common law a loan carries no interest unless there is
an express agreement to that effect (Balliol Investment Co. v
Jacobs). Section 55(1) defines a donation for donations tax
purposes as “a gratuitous disposal of property including a
gratuitous waiver or renunciation of rights”. It is debatable
whether making an interest-free loan constitutes a gratuitous
disposal of property, and therefore the failure to charge interest
thereon could be said to amount to a waiver or renunciation of a
right that does not exist. According to the author Silke, the present
general practice of Inland Revenue is not to regard interest-free
loans as donations.
3.
CGT consequences
In terms of paragraph 12(5) of the Eighth Schedule, SARS will
regard the bequest of an outstanding loan account to an inter
vivos trust or to anyone who owes the deceased money, as the
writing off of a debt (ABC Trust v The CIR Case no 11410(TPD)).
The debtor will be responsible for paying CGT on the difference
between the outstanding debt and the base cost of the loan (base
cost of a loan is zero).
In TC 12399, Northern Cape Tax Court the Court found that the
bequest of such a loan account as part of the residue of estate will
not attract capital gains tax where it is not the intention of the
testator/testatrix to specifically bequeath such loan account to the
debtor. It must however be noted that SARS does not agree with
this judgment and because it is a decision by the special tax court
it is not binding. SARS may decide to take a similar matter to
court, should this issue arise again in future.
E16
Estate Planning
Anti-tax avoidance measures
1.
Section 7
This section was designed to prevent tax avoidance, by means of
trusts inter alia - see section on the taxation of trust income, and
to prevent tax avoidance by means of income splitting (s.7(2)).
2.
Sections 54 - 64 (Donations tax)
Donations tax is levied on certain donations. If property is
disposed of for an inadequate consideration it is deemed to have
been disposed of under a donation (s.58).
3.
Sections 80A
Section 80A to L replaced section 103(1) on 2 November 2006,
and applies to any arrangements or any steps therein (or parts
thereof) entered into on or after that date. At the same time,
section 103(1) and (3) were deleted.
Section 80A determines that an avoidance arrangement is an
impermissible avoidance arrangement if its sole or main purpose
was to obtain a tax benefit and—
(a)
in the context of business—
(i)
it was entered into or carried out by means or in a
manner which would not normally be employed for
bona fide business purposes, other than obtaining a
tax benefit; or
(ii)
it lacks commercial substance, in whole or in part,
taking into account the provisions of section 80C;
(b)
in a context other than business, it was entered into or
carried out by means or in a manner which would not
normally be employed for a bona fide purpose, other than
obtaining a tax benefit; or
(c)
in any context—
(i)
it has created rights or obligations that would not
normally be created between persons dealing at arm’s
length; or
Estate Planning
E17
(ii)
it would result directly or indirectly in the misuse or
abuse of the provisions of this Act (including the
provisions of this part.
Section 80B provides that the Commissioner may determine the
tax consequences of any impermissible avoidance arrangement for
any party by—
(a)
disregarding, combining, or re-characterising any steps in or
parts of the impermissible avoidance arrangement;
(b)
disregarding any accommodating or tax-indifferent party or
treating any accommodating or tax-indifferent party and any
other party as one and the same person;
(c)
deeming persons who are connected persons in relation to
each other to be one and the same person for purposes of
determining the tax treatment of any amount;
(d)
reallocating any gross income, receipt or accrual of a capital
nature, expenditure or rebate amongst the parties;
(e)
re-characterising any gross income, receipt or accrual of a
capital nature or expenditure; or
(f)
treating the impermissible avoidance arrangement as if it
had not been entered into or carried out, or in such other
manner as in the circumstances of the case the
Commissioner deems appropriate for the prevention or
diminution of the relevant tax benefit.
The section further provides that the Commissioner must make
compensating adjustments that he or she is satisfied are necessary
and appropriate to ensure the consistent treatment of all parties to
the impermissible avoidance arrangement.
4.
Section 103(5) (Cession of interest)
Where under any transaction, operation or scheme any taxpayer
has ceded his right to receive any amount in exchange for any
amount of dividends, and in consequence of such cession the
taxpayer’s liability for normal tax, as determined before applying
the provisions of this subsection, has been reduced or
extinguished, the Commissioner shall determine the liability for
normal tax of the taxpayer and any other party to the transaction,
operation or scheme as if such cession had not been effected.
E18
Estate Planning
This section shall be deemed to have come into operation on 22
December 1988 and shall apply (i)
to any transaction, operation or scheme concluded on or
after that date; and
(ii)
to any transaction, operation or scheme concluded before
that date, if the taxpayer is at liberty to terminate the
operation of such transaction, operation or scheme without
incurring liability for damages, compensation or similar
relief.
Estate Planning
E19
Tax implications of retaining
control in estate planning
1.
Trusts
(a)
Income Tax Act - Section 7(6)
If a settlor, in the trust deed, retains the power to revoke or
transfer the right to receive income from the trust, then any
income received by the person on whom the right is
conferred will be taxed in the settlor’s hands. Section 7(6)
will be applicable for so long as the power is retained.
(b)
Income Tax Act - Section 7(7)
While the settlor remains the owner of or retains an interest
in property transferred to a trustee or beneficiary, or if the
settlor is entitled to regain the interest or ownership, all the
income from the property that is received by or accrues to
the beneficiary will be taxable in the settlor’s hands. The
settlor may recover any tax payable from the person who is
entitled to receive the income.
(c)
Estate Duty Act - Section 3(3)(d)
Any property which the deceased was immediately prior to
his death competent to dispose of for his own or his estate’s
benefit shall be deemed to be his property for estate duty
purposes.
A person is deemed to be competent to dispose of any
property if he has the power to appropriate or freely dispose
of the property, or if he is empowered to revoke or vary the
trust deed provisions - section 3(5)(b)(ii).
2.
Companies: Unquoted shares
The valuation of shares of private companies for estate duty
purposes
Section 5(1)(f)(bis) of the Estate Duty Act provides the method of
valuing shares in a private company. In terms of an amendment to
the Estate Duty Act introduced in 1993, the term “company”
includes close corporation and the term “shares” includes any
member’s interests or debentures. The purpose of this section is to
prevent the creation of artificial values and provides as follows:
E20
Estate Planning
(i)
No regard shall be had to any provision in the memorandum
and articles of association, founding statement, association
agreement or rules of the company, as the case may be,
restricting the transferability of the shares therein, but it
shall be assumed that such shares were freely transferable;
(ii)
No regard shall be had to any provision in the memorandum
and articles of association, founding statement, association
agreement or rules of the company, as the case may be,
whereby or where-under the value of the shares of the
deceased or any other member is to be determined;
(iii)
If upon a winding-up of the company the deceased would
have been entitled to share in the assets of the company to
a greater extent pro rata to shareholding or membership
than other shareholders or members, no lesser value shall
be placed on the shares held by the deceased than the
amount to which he would have been so entitled if the
company had been in the course of winding-up and the said
amount had been determined as at the date of his death;
(iv)
No regard shall be had to any provision or arrangement
resulting in any variation in the rights attaching to any
shares through or on account of the death of the deceased;
(v)
There shall be taken into account any power of control
exercisable by the deceased and the company where under
he was entitled or empowered to vary or cancel any rights
attaching to any class of shares therein, including by way of
redemption of preference shares, if, by the exercise of such
power, he could have conferred upon himself any benefit or
advantage in respect of the assets or profits of the company.
Estate Planning
E21
Limited interests
1.
Tax implications
1.1
Fideicommissum
(a)
Income tax
The fiduciary is taxed on any income from the
fideicommissary property. When the fideicommissary
becomes owner he will similarly be taxed.
(b)
Estate duty
A fiduciary interest held immediately prior to death is
“property” (s3(2)(a)). The value of the usufruct is,
however determined in terms of s5(1)(b) read in
conjunction with s5(2). (See section on valuing limited
interests.)
1.2
Usufructs
(a)
Income tax
The usufructuary is taxed on the income from the
usufructuary property. When the bare dominium
holder acquires full ownership he will similarly be
taxed.
(b)
Estate duty
A usufructuary interest held immediately prior to
death is “property” (s3(2)(a)). The value is
determined in terms of s5(1)(b) read in conjunction
with s5(2).
The value of the usufruct is, however, deductible in
terms of s4(m) provided:

the usufruct concerned was created by a predeceased
spouse; and

the property over which the usufruct was created was
an asset in the estate of the predeceased spouse; and

no deduction in respect of the usufruct was allowed or
allowable as a deduction in terms of s4(q) in
determining the net value of the estate of the
predeceased spouse.
E22
Estate Planning
1.3
Annuities
(a)
Income tax
Recipient: An annuity (other than a voluntary
purchase annuity) is fully taxable even if paid out of
capital (s.1 “gross income” (a)).
Payer: If paid in terms of a personal obligation, the
annuity is not deductible. The income is thus taxed
twice, first in the hands of the annuity payer and then
again in the hands of the annuitant.
If the annuity is charged upon property it is payable to
and taxable in the hands of the annuitant, and
deductible against the income of the property, i.e. it is
taxed only once.
(b)
Estate duty
An annuity charged against property will form part of
the annuitant’s estate (s3(2)(a)). If the annuity is a
personal obligation and it accrues to another person
on the annuitant’s death it will be “property”
(s3(2)(b)).
A personal obligation annuity which ceases on the
annuitant’s death is free of estate duty.
Where an annuity is charged against property, the
value of the annuity is deductible in terms of s.4(m)
provided:

the annuity was created by a predeceased
spouse, and

the property over which the annuity was created
was an asset in the estate of the predeceased
spouse, and

no deduction in respect of the annuity was
allowed or allowable as a deduction in terms of
s4(q) in determining the net value of the estate
of the predeceased spouse.
Estate Planning
2.
E23
Valuing limited interests for estate duty
purposes: Deaths before and after 1 April 1977
Sections 5(1)(b) and (f) and 5(2) of the Estate Duty Act 45 of
1955 set out how fiduciary, usufructuary or other like interests in
property (hereinafter referred to as limited interests) are to be
valued for estate duty purposes. The value is determined by
capitalising the annual value of the interest either over the life
expectancy of the beneficiary, or, if the right of enjoyment is over
a lesser period than the beneficiary’s lifetime, over such lesser
period.
(a)
Annual value
The annual value of the limited interest must be determined
in accordance with the provisions of section 5(2). The annual
value is an amount equal to 12% (6%, if the person died
before 1.4.1977) of the fair market value of the full
ownership of the property subject to the limited interest.
The Commissioner may accept a lower yield if he is satisfied
that it is reasonable and it is shown that the property cannot
reasonably be expected to yield an annual return of 12%.
Example: Calculate the annual value of a property which has
a fair market value of R350 000.
Before 1.4.1977
:
On or after 1.4.1977 :
(b)
R350 000
x
6% = R21 000
R350 000
x
12% = R42 000
Capitalising the annual value
(i)
Before 1 April 1977
For persons who died between 13 April 1956 and 1
April 1977, the amount to be included as property is
determined by capitalising at 6% the annual value of
the property over which the right is enjoyed. The
tables to be used with regard to the estates of persons
who died before 1 April 1977 are to be found below.
Example: Calculate the present value of a limited
interest of R21 000 per annum for life of X, a female,
who becomes entitled to the limited interest at the
age of 47 years 2 months, and Y, a male, who
becomes entitled to the limited interest at the age of
69 years 6 months.
E24
Estate Planning
Age when acquired
Age next birthday
Present value of R1 p.a. for life
Present value of R21 000 p.a. for life
(ii)
X
47 years 2 months
48
13,26
R278 460
Y
69 years 6 months
70
7,22
R151 620
On or after 1 April 1977
In respect of persons who died on or after 1 April
1977 the annual value of the property must be
capitalised at 12%. (The tables to be used for this
purpose are to be found below.)
Example:
On the same facts as (i) above. Assume that the
annual value is R21 000.
X
Age next birthday
Present value of R1 p.a. for life
Present value of R21 000 p.a. for life
3.
48
8,00026
R168 005
Y
70
5,45165
R114 484
Valuation of limited interests: Examples
3.1
Fiduciary right
Facts:
P held a fiduciary right over property worth R70 000
immediately prior to death.
Q (a female), the fideicommissary, is 39 years old.
Calculation:
Annual value of property: 12% of R70 000
P.V. of R1 p.a. for Q’s life (a.n.b. 40)
P.V. of R8 400 p.a. for life: 8,183 86 x R8 400
Value in P’s estate
=
=
=
=
R 8 400
8,183 86
R68 744
R68 744
Estate Planning
3.2
E25
Value of usufruct for 4(q) deduction
Facts:
A leaves property worth R500 000 to C, subject to a life long
usufruct in favour of his spouse, B (a female), aged 56, next
birthday.
Calculation:
Annual value of property: 12% x R500 000
P.V. of R1 p.a. for B’s life
4(q) deduction in A’s estate
3.3
=
=
=
R60 000
7,63363
R458 018
Usufructuary right (ceasing)
Facts:
X (a female) held a usufructuary interest immediately prior
to her death. The usufruct ceases and Y (a male), the bare
dominium holder, acquires full ownership. The value of the
property when bare dominium was acquired was R35 000
and when full ownership was acquired R70 000. X was 46
years old when acquiring the usufructuary interest. Y was 39
years old when X died.
Calculation:
P.V. of R1 p.a. for Y’s life (a.n.b. 40)
=
=
=
R8 400
8,040 30
R67 538
Remember:
For estate duty purposes, the capitalised value may not
exceed the difference between the present market value of
the property and the value of the bare dominium when it
was first acquired (assume after 1.4.1977). This
necessitates the following calculation:
Value of bare dominium when originally acquired:
P.V. of R1 p.a. for X’s life (a.n.b. 47)
P.V. of R4 200 p.a. for life: 8,03119 x R4 200
Value of bare dominium when acquired:
R35 000 - R33 731
Present market value of property
=
=
=
R 4 200
8,03119
R33 731
=
=
R 1 269
R70 000
E26
Estate Planning
Difference between present fair market value of the property
and dominium when first acquired:
R70 000 - R1 269
=
R68 731
For Estate duty purposes the lesser of R67 538 or R68 731
may be used, therefore, the value of the usufruct ceasing is
R67 538.
3.4
Usufructuary right (passing to another)
B held a usufructuary right over property worth R70 000
immediately prior to death. The usufruct passes to C (a
female) aged 39.
P.V. of R1 p.a. for C’s life (a.n.b. 40)
Value of B’s estate:
3.5
=
=
=
=
R 8 400
8,183 86
R68 744
R68 744
Annuity (passing to another)
Facts:
P (a male) received an annuity of R2 100 from the income of
property held in trust. On his death, his wife, Q, aged 71,
continues to receive the annuity.
Calculation:
Value of annuity
P.V. of R1 p.a. for Q’s life (a.n.b. 72)
5,882 78 x R2 100
P.V. of R2 100
Value in P’s estate
3.6
=
=
=
=
=
R 2 100
5,882 78
R12 353
R12 353
R12 353
Annuity (ceasing)
Facts:
P received an annuity of R1 200 from the income of property
held by a company. On his death, the annuity ceases. See
s.5(1)(3).
Calculation:
Value of annuity
=
R1 200
Estate Planning
P.V. of R1 p.a. for 50 years
P.V. of R1 200 for 50 years: 8,3045 x R1 200
Value in P’s estate:
E27
=
=
=
8,3045
R9 965
R9 965
Note:
If the property belonged to a natural person, the value of
the annuity must be capitalised at 12% over the owner’s life
expectancy s.5(1)(c)(ii).
3.7
Bare dominium (property subject to usufruct)
Facts:
X inherited property subject to a usufruct. On X’s death the
property’s market value is R30 000, and the usufructuary, Y,
(a male) is 57 years old.
Calculation:
Annual value of property: 12% of R30 000
P.V. of R1 p.a. for Y’s life (a.n.b. 58)
Value in X’s estate: R30 000 - R25 028
3.7
=
=
=
=
R
3 600
6,952 25
R25 028
R 4 972
Bare dominium (property charged with annuity)
Facts:
P owns property charged with an annuity of R1 500. On P’s
death the property’s market value is R25 000, and the
annuitant (a female) is 67 years old. She is entitled to
receive the annuity for a further 12 years. Her life
expectancy is 13,2 years.
Calculation:
Value of annuity
P.V. of R1 p.a. for 12 years
P.V. of R1 500 for 12 years: 6,1944 x R1 500
Value in P’s estate: R25 000 - R9 292
=
=
=
=
R
1 500
6,1944
R
9 292
R15 708
E28
Estate Planning
Tables for valuation of limited interests
Table A: 6%: Death before 1 April 1977
Expectation of life and present value of R1 p.a. for life capitalised at 6%
over expectation of life of males and females of various ages
A.N.B
0
1
2
3
4
5
Life expectancy
Males
Females
63,78
68,31
65,51
69,63
64,90
68,97
64,08
68,16
63,21
67,31
62,32
66,40
P.V. of R1 p.a. for life
Males
Female
16,26
16,35
16,30
16,38
16,29
16,37
16,27
16,35
16,25
16,34
16,22
16,32
A.N.B
0
1
2
3
4
5
6
7
8
9
10
61,41
60,50
59,58
58,65
57,71
65,48
64,56
63,62
62,68
61,73
16,20
16,18
16,15
16,12
16,09
16,30
16,28
16,25
16,24
16,21
6
7
8
9
10
11
12
13
14
15
56,76
55,81
54,86
53,92
52,97
60,78
59,82
58,87
57,91
56,97
16,06
16,02
15,98
15,95
15,91
16,18
16,15
16,12
16,10
16,06
11
12
13
14
15
16
17
18
19
20
52,04
51,10
50,18
49,26
48,35
56,02
55,08
54,14
53,21
52,27
15,86
15,81
15,77
15,72
15,66
16,03
15,99
15,96
15,92
15,87
16
17
18
19
20
21
22
23
24
25
47,45
46,55
45,65
44,74
43,84
51,33
50,40
49,47
48,55
47,63
15,62
15,56
15,51
15,44
15,36
15,83
15,79
15,73
15,68
15,63
21
22
23
24
25
26
27
28
29
30
42,93
42,02
41,11
40,20
39,29
46,71
45,80
44,89
43,97
43,06
15,31
15,22
15,14
15,07
14,97
15,57
15,51
15,46
15,38
15,31
26
27
28
29
30
31
32
33
34
35
38,38
37,48
36,75
35,68
34,79
42,15
42,23
40,32
39,42
38,52
14,90
14,79
14,68
14,59
14,47
15,24
15,16
15,07
15,00
14,90
31
32
33
34
35
36
37
38
39
40
33,89
33,01
32,13
31,25
30,38
37,62
36,72
35,83
34,95
34,07
14,37
14,23
14,12
13,97
13,85
14,79
14,71
14,59
14,50
14,37
36
37
38
39
40
Estate Planning
E29
Table A: 6%: Death before 1 April 1977 (cont.)
A.N.B
41
42
43
44
45
Life expectancy
Males
Females
29,52
33,20
28,66
32,33
27,82
31,47
26,98
30,61
26,15
29,76
Males
Female
13,68
14,26
13,54
14,12
13,36
14,01
13,21
13,85
13,05
13,72
46
47
48
49
50
25,34
24,54
23,75
22,97
22,21
28,92
28,09
27,27
26,46
25,66
12,84
12,67
12,49
12,30
12,11
13,59
13,41
13,26
13,11
12,95
46
47
48
49
50
51
52
53
54
55
21,46
20,73
20,01
19,30
18,61
24,86
24,07
23,29
22,52
21,76
11,90
11,69
11,47
11,24
10,99
12,73
12,55
12,37
12,17
11,97
51
52
53
54
55
56
57
58
59
60
17,93
17,26
16,60
15,96
15,34
21,00
20,25
19,50
18,77
18,04
10,83
10,56
10,29
10,11
9,81
11,76
11,54
11,31
11,08
10,83
56
57
58
59
60
61
62
63
64
65
14,72
14,12
13,54
12,97
12,41
17,32
16.60
15,91
15,22
14,55
9,61
9,29
9,07
8,85
8,62
10,56
10,29
10,11
9,81
9,50
61
62
63
64
65
66
67
68
69
70
11,86
11,33
10,81
10,29
9,79
13,89
13,24
12,61
11,99
11,39
8,26
8,01
7,76
7,49
7,22
9,29
8,96
8,62
8,38
8,14
66
67
68
69
70
71
72
73
74
75
9,29
8,81
8,35
7,90
7,47
10,80
10,24
9,69
9,17
8,68
6,94
6,65
6,36
6,21
5,90
7,76
7,49
7,22
6,94
6,65
71
72
73
74
75
76
77
78
79
80
7,05
6,65
6,25
5,87
5,51
8,20
7,74
7,29
6,86
6,43
5,58
5,42
5,08
4,74
4,56
6,36
6,05
5,74
5,42
5,25
76
77
78
79
80
81
82
83
84
85
5,15
4,82
4,50
4,21
3,94
6,02
5,63
5,25
4,90
4,57
4,39
4,03
3,84
3,65
3,39
4,92
4,74
4,39
4,21
3,84
81
82
83
84
85
A.N.B
41
42
43
44
45
E30
Estate Planning
Table A: 6%: Death before 1 April 1977 (cont.)
A.N.B
Life expectancy
Males
Females
4,25
3,68
3,95
3,44
3,67
3,21
3,41
2,99
3,16
2,78
86
87
88
89
90
Males
Female
3,65
3,23
3,39
3,99
3,23
2,83
2,99
2,67
2,83
2,51
A.N.B
86
87
88
89
90
91
92
93
94
95
2,59
2,41
2,24
2,09
1,94
2,93
2,71
2,51
2,31
2,14
2,34
2,17
2,00
1,92
1,74
2,59
2,42
2,25
2,09
1,92
91
92
93
94
95
96
97
98
99
100
1,80
1,68
1,56
1,45
1,35
1,97
1,81
1,67
1,54
1,42
1,66
1,57
1,48
1,39
1,30
1,83
1,66
1,57
1,39
1,30
96
97
98
99
100
Table B: 6%: Death before 1 April 1977
Present value of R1 per annum capitalised at 6% over fixed periods
Year
Year
1
2
3
4
5
Factor
R
0,94
1,83
2,67
3,47
4,21
Year
16
17
18
19
20
Factor
R
10,11
10,48
10,83
11,16
11,47
6
7
8
9
10
11
12
13
14
15
Year
31
32
33
34
35
Factor
R
13,93
14,08
14,23
14,37
14,50
46
47
48
49
50
Factor
R
15,52
15,59
15,65
15,71
15,76
4,92
5,58
6,21
6,80
7,36
21
22
23
24
25
11,76
12,04
12,30
12,55
12,78
36
37
38
39
40
14,62
14,74
14,85
14,95
15,05
51
52
53
54
55
15,81
15,86
15,91
15,95
15,99
7,89
8,38
8,85
9,29
9,71
26
27
28
29
30
13,00
13,21
13,41
13,59
13,76
41
42
43
44
45
15,14
15,22
15,31
15,38
15,46
56
99
16,03
16,61
Note: Fractions of a year are to be disregarded when using this table.
Estate Planning
E31
Table A: 12%: Death on or after 1 April 1977
A.N.B
Life expectancy
Males
Females
64,74
72,36
65,37
72,74
64,50
71,87
63,57
70,93
62,63
69,97
61,69
69,02
Males
Female
8,327 91
8,331 05
8,328 28
8,331 14
8,327 76
8,330 91
8,327 14
8,330 64
8,326 44
8,330 33
8,325 67
8,329 99
6
7
8
9
10
60,74
59,78
58,81
57,83
56,85
68,06
67,09
66,11
65,14
64,15
8,324
8,323
8,322
8,321
8,320
80
81
71
46
07
8,329
8,329
8,328
8,328
8,327
61
18
69
15
53
6
7
8
9
10
11
12
13
14
15
55,86
54,87
53,90
52,93
51,98
63,16
62,18
61,19
60,21
59,23
8,318
8,316
8,314
8,312
8,310
49
73
80
65
29
8,326
8,326
8,325
8,324
8,323
84
08
22
27
20
11
12
13
14
15
16
17
18
19
20
51,04
50,12
49,21
48,31
47,42
58,26
57,29
56,33
55,37
54,41
8,307
8,304
8,301
8,298
8,294
70
89
80
41
71
8,322
8,320
8,319
8,317
8,315
03
71
26
64
84
16
17
18
19
20
21
22
23
24
25
46,53
45,65
44,77
43,88
43,00
53,45
52.50
51,54
50,58
49,63
8,290
8,286
8,281
8,275
8,269
61
13
17
64
59
8,313
8,311
8,309
8,306
8,303
83
61
12
33
26
21
22
23
24
25
26
27
28
29
30
42,10
41,20
40,30
39,39
38,48
48,67
47,71
46,76
45,81
44,86
8,262
8,255
8,246
8,237
8,226
74
16
77
37
94
8,299
8,295
8,291
8,286
8,281
81
95
71
97
70
26
27
28
29
30
31
32
33
34
35
37,57
36,66
35,75
34,84
33,94
43,91
42,96
42,02
41,07
40,13
8,215
8,202
8,188
8,172
8,155
38
57
36
62
36
8,275
8,269
8,262
8,254
8,245
83
30
10
00
09
31
32
33
34
35
36
37
38
39
40
33,05
32,16
31,28
30,41
29,54
39,19
38,26
37,32
36,40
35,48
8,136
8,115
8,092
8,067
8,040
47
58
74
81
30
8,235
8,224
8,211
8,198
8,183
17
26
99
66
86
36
37
38
39
40
0
1
2
3
4
5
A.N.B
0
1
2
3
4
5
E32
Estate Planning
Table A: 12%: Death on or after 1 April 1977 (cont.)
A.N.B
41
42
43
44
45
Life expectancy
Males
Females
28,69
34,57
27,85
33,67
27,02
32,77
26,20
31,89
25,38
31,01
Males
Female
8,167 62
8,010 67
8,149 83
7,978 44
8,130 12
7,943 44
8,108 81
7,905 47
8,085 27
7,863 80
A.N.B
46
47
48
49
50
24,58
23,79
23,00
22,23
21,47
30,14
29,27
28,41
27,55
26,71
7,819
7,771
7,718
7,662
7,602
24
09
43
36
01
8,059
8,031
8,000
7,966
7,929
56
19
26
17
50
46
47
48
49
50
51
52
53
54
55
20,72
19,98
19,26
18,56
17,86
25,88
25,06
24,25
23,44
22,65
7,537
7,467
7,393
7,316
7,232
13
48
87
31
34
7,889
7,846
7,799
7,748
7,693
67
46
65
34
55
51
52
53
54
55
56
57
58
59
60
17,18
16,52
15,86
15,23
14,61
21,86
21,08
20,31
19,54
18,78
7,144
7,051
6,952
6,850
6,742
14
78
25
04
06
7,633
7,568
7,499
7,423
7,341
63
96
27
21
35
56
57
58
59
60
61
62
63
64
65
14,01
13,42
12,86
12,31
11,77
18,04
17,30
16,58
15,88
15,18
6,630
6,512
6,393
6,268
6,137
10
32
01
22
89
7,254
7,160
7,060
6,955
6,841
57
20
46
37
61
61
62
63
64
65
66
67
68
69
70
11,26
10,76
10,28
9,81
9,37
14,51
13,85
13,20
12,57
11,96
6,007
5,871
5,734
5,591
5,451
26
65
03
82
65
6,723
6,598
6,466
6,328
6,184
93
93
35
18
66
66
67
68
69
70
71
72
73
74
75
8,94
8,54
8,15
7,77
7,41
11,37
10,80
10,24
9,70
9,18
5,307
5,167
5,024
4,878
4,734
75
44
37
76
90
6,036
5,882
5,722
5,557
5,388
07
78
22
43
93
71
72
73
74
75
76
77
78
79
80
7,07
6,73
6,41
6,10
5,82
8,68
8,21
7,75
7,31
6,89
4,593 54
4,446 63
4,303 09
4,158 98
4,024 4
5,217
5,046
4,870
4,693
4,516
27
79
92
89
47
76
77
78
79
80
41
42
43
44
45
Estate Planning
E33
Table A: 12%: Death on or after 1 April 1977 (cont.)
A.N.B
Life expectancy
Males
Females
6,50
5,55
6,13
5,31
5,78
5,09
5,45
4,89
5,14
4,72
81
82
83
84
85
4,85
4,58
4,33
4,11
3,92
4,57
4,45
4,36
4,32
4,30
86
87
88
89
90
Males
Female
4,343 99
3,890 51
4,173 15
3,768 02
4,004 82
3,652 76
3,839 88
3,545 46
3,679 21
3,452 32
3,368
3,300
3,249
3,225
3,214
64
66
07
97
38
3,523
3,374
3,231
3,102
2,989
71
26
75
96
12
A.N.B
81
82
83
84
85
86
87
88
89
90
Table B: 12%: Death on or after 1 April 1977
Present value of R1 p.a. capitalised at 12% over fixed periods
Year
1
2
3
4
5
Factor
R
0,892 9
1,690 0
2,401 8
3,037 4
3,604 8
6
7
8
9
10
11
12
13
14
15
Year
16
17
18
19
20
Factor
R
6,974 0
7,119 6
7,249 7
7,365 8
7,469 4
4,111 4
4,563 8
4,967 6
5,328 2
5,650 2
21
22
23
24
25
5,937 7
6,194 4
6,423 6
6,628 2
6,810 9
26
27
28
29
30
Year
31
32
33
34
35
Factor
R
8,085 0
8,111 6
8,135 4
8,156 6
8,175 5
Year
46
47
48
49
50
Factor
R
8,288 0
8,292 8
8,297 2
8,301 0
8,304 5
7,562 0
7,644 6
7,718 4
7,784 3
7,843 1
36
37
38
39
40
8,192 4
8,207 5
8,221 0
8,233 0
8,243 8
51
52
53
54
55
8,307 6
8,310 4
8,312 8
8,315 0
8,317 0
7,895 7
7,942 6
7,984 4
8,021 8
8,055 2
41
42
43
44
45
8,253 4
8,261 9
8,269 6
8,276 4
8,282 5
56
57
58
100
8,318 7
8,320 3
8,321 7
8,333 2
Note: Fractions of a year are to be disregarded when using this table.
E34
Estate Planning
Estate duty: Rebate of duty
on successive deaths
If any part of the duty is charged in respect of the value of any property
on which duty had previously been payable, on the death of another
person at any time within ten years of the death of the deceased, the
amount of the duty attributable to the value of that property is further
reduced in accordance with the following scale:
0 - 2 years:
If the deceased dies within two years of the
100%
death of the first-dying person.
2 - 4 years
If the deceased dies more than two years, but
not
80%
more than four years, after the death of
the first-dying person.
4 - 6 years:
If the deceased dies more than four years, but
60%
not more than six years, after the death of the
first-dying person.
6 - 8 years
If the deceased dies more than six years, but
40%
not more than eight years, after the death of
the first-dying person.
8 - 10 years:
If the deceased dies more than eight years, but
20%
not more than ten years, after the death of the
first-dying person.
This rebate may not, however, exceed the amount of duty attributable to
that property by reason of its inclusion in the dutiable estate of the firstdying.
The rebate will not be applicable if a section 4(q) deduction was allowed
in the first-dying spouse’s estate.
Estate Planning
E35
How to calculate the estate duty that may be
apportioned to policies owned by third
parties/where there is a third-party beneficiary
The proceeds of all policies on the deceased’s life (except those
recoverable under ante nuptial contracts, buy-and-sell and key person
policies) are deemed to be property in the deceased’s estate.
Although the estate derives no benefit, its liability for estate duty is
increased by the value of the policies. Redress is, however, to be found
in the Estate Duty Act. In terms of section 11(b) the person liable for the
(extra) estate duty is the person entitled to recover the amount due
under the policy. The executor is also empowered by section 13(1) to
recover such duty from the person liable therefore.
The statutory method of calculating the apportionable duty is set out in
section 13(2) of the Estate Duty Act. The following two-step method is a
simplified but accurate way of establishing how much estate duty may be
claimed from a third party who is entitled to recover the proceeds of a
policy effected on the deceased’s life.
Note:
The deemed value of policies owned by third parties will be the value of
the proceeds of the policies less the premiums paid by such third party
plus 6% compound interest.
Step 1
Value of life assurance
Net value of estate
X duty payable
Step 2
Deemed value of policies owned by third parties
X amount derived
in Step 1
The net value of life assurance is determined by adding the
proceeds of all policies on the life of the deceased deemed to be
property in his/her estate (excluding policies with spouse as
beneficiary).
E36
Estate Planning
The following example illustrates how the apportionable amount is
calculated.
Add
Assurance on own life
Policy owned by third party
(less premiums paid + 6% interest)
R 523 858
R 653 856
The net value of estate
R5 669 636
Estate duty payable
(R5 669 636 - 3,5m x 20%)
R
R 129 998
433 927
Step 1
Net value of estate
R653 856
=
R5 669 636
X duty payable
x R433 927
=
R50 043 (Step 1 amount)
Step 2
=
Deemed value of policies owned by third parties
Step 1 amount
=
R129 998
R653 856
x R50 043
=
R9 949
The estate duty apportioned to the policy owned by the third party is,
therefore, R9 949. The third party is liable for this duty and the executor
may recover the apportioned amount unless directed otherwise in the
will of the deceased or the contract in terms of which the policy was
effected.
Estate Planning
E37
ANC marriage
Estate Duty Worksheet
Note: In all the spreadsheets the estate duty abatement is R3,5m. Note
that in the event of the first dying spouse not utilising any or all of the
R3,5m abatement, the surviving spouse will be entitled to the unused
deduction.
PROPERTY AND DEEMED PROPERTY
1.
2.
3.
4.
5.
6.
GROSS ESTATE
LESS: Deductions
1. Deductible Expenses
- Master’s fees
- Funeral expenses
- Executor’s fees
2. Liabilities
- Income Tax (including CGT)
- Bank overdraft
- Mortgage Bond
- Hire purchase
3. Other
4. Accrual claim (if married in terms of accrual
system)
5. Bequests to surviving spouse (Section 4(q))
NET ESTATE
LESS: ABATEMENT (Section 4A)
DUTIABLE ESTATE
Estate duty @ 20%
ESTATE DUTY PAYABLE
R
R
R
R
R
R
R
(R
R
(R3 500 000)
R
x 20%
R
)
E38
Estate Planning
ANC marriage and residue is bequeathed to the surviving
spouse
PROPERTY AND DEEMED PROPERTY
1.
2.
3.
4.
5.
6.
7.
GROSS ESTATE
LESS: Deductions
1. Deductible Expenses
- Master’s fees
- Funeral expenses
- Executor’s fees
2. Liabilities
- Income Tax (including CGT)
- Bank overdraft
- Mortgage Bond
- Hire purchase
3. Other
4. Accrual claim (if married in terms of accrual system)
5. Direct bequests to surviving spouse (Section 4(q))
- Policies paying directly to spouse
- Other (i.e. Usufruct)
R
R
R
R
R
R
R
R
(R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
)
Estate Planning
NET ESTATE OF CLIENT BEFORE DEDUCTING
BEQUEST OF RESIDUE TO SURVIVING SPOUSE
CALCULATION OF RESIDUE WHICH ACCRUES TO SURVIVING SPOUSE
(A) CARRIED FORWARD
R
(A)
LESS: Bequests in terms of the will and policies payable to third R
(B)
parties, other than the surviving spouse (excluding the bequest of
the residue to the surviving spouse).
1. Bare Domimium (if usufruct bequeathed to
R
spouse)
2.
R
3.
R
4.
R
5.
R
RESIDUE BEQUEATHED TO SURVIVING SPOUSE (A-B)
NET ESTATE
LESS: ABATEMENT (Section 4A)
DUTIABLE ESTATE
Estate duty @ 20%
ESTATE DUTY PAYABLE
E39
R
(A)
(R
R
(R3 500 000)
R
x 20%
R
Note: In a Special Income Tax Court decision (ITC 1681) the court found
that the step-by-step approach amounted to a calculation of duty
on duty and that it was unjustified. This decision was upheld on
appeal (CIR v The Executor of the Estate of the Late Waldo Earl
Frith, 2000).
)
E40
Estate Planning
Community marriage
PROPERTY IN THE JOINT ESTATE
1.
R
2.
R
3.
R
4.
R
5.
R
6.
Policies:
R
Spouse’s policies (taken out after 1/1/99) - surrender values
R
Client’s policies payable to the estate (no beneficiary nomination)
R
Investment / sinking fund policies
R
Surrender values of policies on life of 3rd party
R
GROSS ESTATE
LESS: Spouse’s half share (Gross estate divided by two)
CLIENT’S HALF SHARE OF THE JOINT ESTATE
PLUS: Property + deemed property excluded from joint estate
1. Life policies: 3rd party = beneficiaries
R
2. Life policies: spouse = beneficiary
R
3. Ceded policies on life of client
R
4. Life cover (client life assured / spouse is the owner)
R
5. Life cover (client life assured / 3rd party is the owner)
R
6. Assets inherited
R
7. Usufruct
R
8. Other
R
R
R
TOTAL
LESS: Deductions
- Master’s fees
R
- Administration costs
R
- Executor’s fees
R
- Bank overdraft
R
- Mortgage Bond
R
- Income tax
R
- Liabilities (including CGT)
R
TOTAL R
TOTAL DIVIDED BY TWO
R
CLIENT’S HALF OF DEDUCTION
R
R
(R
R
R
R
(R
)
)
Estate Planning
E41
Community marriage
Estate Duty Worksheet (cont.)
LESS: Deductions against the client’s estate
(R
- Fees on excluded assets (100%)
R
- Funeral costs and death expenses (100%)
R
LESS: Bequests to spouse (see note 4q)
)
R
1.
R
2.
R
3.
R
4.
R
5.
R
NET ESTATE R
Less: Abatement (section 4A)
(R3 500 000)
DUTIABLE ESTATE R
Estate duty @ 20%
X 20%
ESTATE DUTY PAYABLE R
Note: The above method is followed by the University of the Free State
for the Post Graduate Diploma in Financial Planning and the
Advanced Post Graduate Diploma in Financial Planning.
E42
Estate Planning
Community marriage and residue is
bequeathed to surviving spouse
PROPERTY IN THE JOINT ESTATE
1.
2.
3.
4.
5.
6. Policies:
Spouse’s policies (taken out after 1/1/99) – surrender
values
Client’s policies payable to the estate (no beneficiary nomination)
Investment / sinking fund policies
Surrender values of policies on life of 3rd party
R
R
R
R
R
R
R
R
R
R
GROSS ESTATE
LESS: Spouse’s half share (Gross estate divided by two)
CLIENT’S HALF SHARE OF THE JOINT ESTATE
PLUS: Property + deemed property excluded from joint estate
1. Life policies: 3rd party = beneficiaries
2. Life policies: spouse = beneficiary
3. Ceded policies on life of client
4. Life cover (client life assured / spouse is the owner)
5. Life cover (client life assured / 3rd party is the owner)
6. Assets inherited
7. Usufruct
8. Other
LESS: Deductions
- Master’s fees
- Administration costs
- Executor’s fees
- Bank overdraft
- Mortgage Bond
- Income tax
- Liabilities (including CGT)
TOTAL
TOTAL DIVIDED BY TWO
CLIENT’S HALF OF DEDUCTION
R
R
R
R
R
R
R
R
R
R
TOTAL
R
(R
R
R
R
(R
R
R
R
R
R
R
R
R
R
R
)
)
Estate Planning
E43
Community marriage and residue is bequeathed
to surviving spouse
Estate Duty Worksheet (cont.)
LESS: Deductions against the client’s estate
- Fees on excluded assets (100%)
- Funeral costs and death expenses (100%)
LESS: Bequests to spouse (see note 4q)
1.
2.
3.
4.
5.
(R
R
R
R
R
R
R
R
R
Note:
In terms of section 1 of the Estate Duty Act 45 of 1955
‘Spouse’ in relation to any person, means the partner of such person (a)
in a marriage or customary or civil union recognised in terms of
the laws of the Republic;
(b)
in a union recognised as a marriage in accordance with the tenets
of any religion; or
(c)
in a same-sex or heterosexual union which the Commissioner is
satisfied is intended to be permanent:
Provided that a marriage or union contemplated in paragraph (b) or (c)
shall, in the absence of proof to the contrary, be deemed to be a
marriage or union without community of property.
Note:
According to Section 13(2)(b) of the Civil Union Act (No. 17 of 2006)
reference to husband, wife or spouse in any other law, including the
common law, includes a civil union partner (with the exception of the
Marriage Act or the Customary Marriage Act).
)
E44
Estate Planning
Calculation of residue which accrues to the surviving
spouse
(B) CARRIED FORWARD
LESS: Bequests in terms of the will and policies payable to third
parties, other than the surviving spouse (excluding the bequest of
the residue to the surviving spouse).
1. Bare dominium (if usufruct bequeathed to
R
spouse)
2.
R
3.
R
4.
R
5.
R
Residue bequeathed to surviving spouse (B-C)
NET ESTATE
Less: Abatement (section 4A)
DUTIABLE ESTATE
Estate duty @ 20%
ESTATE DUTY PAYABLE
R
(R
(B)
(C )
R
(R3 500 000)
R
X 20%
R
Note:
The above method is followed by the University of the Free State in the
Post Graduate Diploma in Financial Planning and the Advanced Post
Graduate Diploma in Financial Planning.
Estate Planning
E45
Estate planning
Liquidity analysis
LIQUID ASSETS
1. Cash and investments
2. Life assurance payable to estate
3. Bequest prices payable by heirs to the estate
4. Proceeds from Buy-and-Sell agreement:
5. Other
TOTAL
LESS: Cash needed to provide for:
1. Liabilities
2. Executor’s fees
3. Master’s fees
4. Funeral expenses
5. Income Tax (including CGT)
6. Estate duty
7. Cash bequests
7.1
7.2
8. Other:
8.1
8.2
TOTAL
R
R
R
R
R
R
(R
(R
(R
(R
(R
(R
)
)
)
(R
(R
)
)
(R
(R
)
)
)
)
)
(R
SURPLUS/SHORTFALL
)
E46
Estate Planning
Capital Needs Analysis Worksheet
CAPITAL NEEDS ANALYSIS ON DEATH
1. Income objective on death (p.a.)
2. Less income already provided for (p.a.)
Widow’s pension
Orphans’ pension
Other
Other
TOTAL
INCOME SURPLUS/SHORTFALL
3. Capital required to eliminate the shortfall
Interest rate
Inflation/escalation rate
Term
Capital preserved/consumed
Factor*
Shortfall (
) x factor (
)
= Capital required
4. Plus other liabilities at death
Interim income required
Other capital needs (if any)
GROSS CAPITAL REQUIRED
Less capital to dependants available to invest
NET CAPITAL REQUIRED
=
%
%
years
R
+R
+R
=R
-R
=R
See Table A and B in Section C.
Estate Planning
E47
Trust Worksheet
Income Tax Saving
1.
Income tax payable if there is no trust
and if a trust is used
Survivor’s income
If no
Own and
trust
from trust
Gross income
Less exemptions
Income
Less deductions
Taxable income
Ta per table
Less rebates
Tax payable
2.
R
R
Children’s income from trust
1
2
3
R
R
R
Comparison: Saving in income tax
Tax payable on survivor’s income (if trust is not used)
Tax payable if a trust is used:
by survivor
R
by child 1
R
by child 2
R
by child 3
R
INCOME TAX SAVING
R
(R
R
)
E48
Estate Planning
Calculation of accrual
in terms of the accrual system
Value of assets at commencement of marriage: (as shown in the ANC)
Client:
R.......................
Spouse: R......................
Client
Current value of each spouse’s assets
Less:
Liabilities of each spouse’s estate
Less:
Assets excluded from respective estates
R
(
)
(
)
(
)
(
)
(
)
(
)
CURRENT VALUE OF RESPECTIVE ESTATES
R
LESS: Original assets revalued @ CPI (CPI = . . . . . . .%)
(
ACCRUAL
R
GREATEST ACCRUAL
Spouse
R
R
)
(
)
R
R
LESS: Smallest accrual
(R
= “DIVISIBLE ACCRUAL”
)
R
PORTION THAT SPOUSE WITH SMALLEST ACCRUAL
RECEIVES FROM OTHER SPOUSE
÷2
R
Estate Planning
E49
Life assurance and estate planning
Important
In these tables the client is the deceased. All the information in this table
reflects the client’s situation.
Owner
Life
Assured
Beneficiary
Executor’s
Fee
Client
Client
None
Yes
Client
Client
Spouse
No
Client
Client
Third party
No
Third party
Client
Spouse
Client
None/another No
party
beneficiary for
ownership
None
No
Client
Third party
None
Client
Third party
No
Spouse
beneficiary for
ownership
Client
Third party
Another party No
beneficiary for
ownership
Note:
Yes - cash
value
Estate
Duty
Accrual
Yes - section
3(3)(a)
Yes, but
section 4(q)
deductible
Yes - section
3(3)(a)
Yes - death
value *
No
Yes - section
3(3)(a)
No
Yes, but
section 4(q)
deductible
No (to be
included for
spouse)
No
Yes - cash
Yes section 3(2) - value
cash value
No
Yes, but
section 4(q)
deductible
- cash value
Yes - cash
No
value
The section 4(h) deduction will only apply if a bequest is
made to a charitable institution via the client’s will. It
will not apply if a charity is nominated as the beneficiary
on a policy.
* See discussion under Note 1 below.
E50
Estate Planning
Notes
1.
When parties are married out of community of property and the
accrual system is applicable, the assumption is that all policies
with nominated beneficiaries will be excluded for purposes of
calculating the accrual. Take note that different opinions exist as to
how these policies should be dealt with.
The court case Daniels No v De Wet and Another 2944 / 06
delivered in June 2008 may have an influence on the calculation of
accrual where life policies pay out. The court case held that death
benefits from a life policy only arise after the death of the life
assured.
2.
When a person other than the life assured is entitled to the
proceeds of the policy, the value of the policy included for estate
duty purposes may be reduced by a consideration of premiums
plus six per cent compound interest paid to the date of death of
the life assured by such other person.
3.
If the client is married in community of property and he/she is the
owner of a policy and a third party is the life assured, only the
client’s half share of the cash value will be included in the estate
for estate duty purposes.
Estate Planning
E51
Retirement fund lump sums
Retirement annuities, pension funds, provident funds
Member
Client
Client
Client
Beneficiary
None
Spouse
Third party
Executor’s
fees
No
No
No
Estate
Duty
No
No
No
Accrual on
Death
No
No
No
The Estate Duty exclusion is effective in respect of the estate of a person
who dies on or after 1 January 2009.
When working with the table above, “Retirement fund lump sums”,
section 37C of the Pension Funds Act must be taken into account.
Sec 37C of the Pension Funds Act prescribes the manner in which a
retirement fund must pay the benefits in the case of the death of a
member of a fund:
1.
If the member is survived by dependants:
a) Within a period of 12 months of the death of the member, the
benefits must be paid to some or all of such dependants in
proportions as may be deemed equitable by the board of the
fund.
2.
If the said board does not become aware or cannot trace any such
dependant within the 12 month period and the member has
nominated a nominee (who is not a dependant) in writing:
a) The benefit must be paid to such nominee (beneficiary), but
b) If the debts of the estate of the deceased member is more than
the assets I the estate, an amount equal to such shortfall must
be paid into the estate, and the balance, if any, to the nominee.
3.
If the member is survived by both a dependant and a nominee:
a) The benefit must be paid to such dependant and nominee in such
proportions as the board deems equitable (this provisions is
applicable to nominations made on or after 30 June 1989).
E52
4.
Estate Planning
If the fund does not become aware or cannot trace any dependant of
the member within 12 month period and the member has not
nominated any nominee:
a) the benefit must be paid to the estate of the member.
Estate Planning
E53
Intestate succession
A person dies intestate when he or she dies without leaving a valid will
and a person dies partially intestate in the event that a portion of the will
is invalid or cannot be carried out. A brief summary of the law of
intestate succession is set out hereunder.
1.
The surviving spouse
The new definition of “spouse” as per amendments to the Income
Tax Act 58 of 1962 and the Estate Duty Act 45 of 1955 does not
apply.
Note that definition of spouse includes spouses married in or out of
community of property; marriages concluded according to Muslim
rites, Hindu rites, common law marriages, partners in a civil union
and same-sex persons in a union which the commissioner is
satisfied is intended to be permanent.
Note: Legislation was not changed, but according to recent case
law the following also form part of the definition of spouse:
Muslim rites
(Daniels v Campbell monogamous marriages)
(Hassam v Jacobs – polygamous
marriages)
Hindu marriages
(Govender v Ragavayah monogamous marriages)
Common law marriages
(Bhe v Magistrate, Khayelitsha)
Same-sex partners
(Gory v Kolver)
1.1
No descendants
If the deceased dies leaving no descendants but only a
surviving spouse, the surviving spouse will inherit the entire
intestate estate.
1.2
Descendants
If the deceased dies leaving descendants and a surviving
spouse, the surviving spouse inherits the greater of:
E54
Estate Planning
(a)
a child’s share; or
(A child’s share is calculated by dividing the monetary
value of the estate by a number equal to the number
of children of the deceased who have survived him, or
have died leaving descendants surviving him, plus
one.)
(b)
2.
such portion of the intestate estate as does not
exceed in value the amount fixed from time to time by
the Minister of Justice by notice in the Government
Gazette. Descendants inherit the residue (if any) of
the estate (see below under paragraph 2). The current
amount fixed by the Minister is R125 000.
Descendants
Descendants mean children and further issue “ad infinitum” of the
deceased, i.e. grandchildren, great-grandchildren, etc.
Succession “per stirpes” and by representation means that the
intestate estate is divided into so many equal portions as there are
children who survive the deceased and children who have
predeceased him leaving descendants surviving him. Each
surviving child takes one share while the share attributed to a
deceased child is divided equally among his children. If one of the
latter has died leaving descendants, such descendants take the
predeceased child’s share “per stirpes” and by representation.
2.1
No spouse or descendants, but parents alive
Where both parents are alive, each takes half the intestate
estate. Where only one parent survives the deceased and
there are descendants of the deceased parent, the surviving
parent will take half of the estate and the other half
devolves upon the descendants of the deceased parent.
Where there is only one surviving parent and no other
descendants of the predeceased parent, the surviving parent
will inherit the entire estate.
2.2
Only brother/sister/descendants of brother or
sister alive (no parents alive)
Where there are descendants of the deceased’s mother
and/or father alive, half of the estate will devolve upon the
Estate Planning
E55
descendants of the mother and half upon the descendants of
the father. Where there are only descendants of one parent,
such descendants inherit the entire intestate estate.
2.3
No close relatives
Where the deceased is not survived by a spouse,
descendant, parent, brother or sister or descendants of such
brother or sister, the intestate estate devolves in equal
shares upon such other blood relations of the deceased who
are related to him in the closest degree.
2.4
No relations and no spouse
In such a situation, after 30 years, the estate will be
forfeited to the state.
2.5
Illegitimate and adopted children
Illegitimate children are not prohibited from inheriting on
intestacy from another blood relation.
An adopted child is deemed to be a descendant of his
adoptive parent or parents. He is deemed not to be a
descendant of his natural parents except where the natural
parent is also the adoptive parent of that child or was, at the
time of the adoption, married to the adoptive parent of that
child.
E56
Estate Planning
The Wills Act,
No. 7 of 1953
The signing of wills
Because it is a legal document, a will must conform to certain legal
requirements. These relate to the signing and witnessing of the will.
The Wills Act of 1953 lays down certain requirements which must be
complied with in the execution of a will. This Act has been amended with
the effect that certain formalities have been relaxed. The amendment to
the Act came into effect on 1 October 1992 and applies to all wills in
respect of which the testator has died after that date. Where the testator
has died before 1 October 1992, however, the more stringent
requirements will still apply.
1.
Wills in respect of which the testator has died
before 1 October 1992
For a will executed after 1 January 1954, in respect of which the
testator has died prior to 1 October 1992, the more stringent
requirements laid down by the Wills Act will apply.
1.1
How must a will be signed?
The will must:
1.2
(a)
be signed by the testator
witnesses on every page;
and
two
competent
(b)
although it is not a formal requirement, be dated on
the last page; and
(c)
be signed on all the pages by the testator and two
witnesses while they are all present at the same time.
Who may witness a will?
(a)
For a will to be valid, the witnesses must be at least
fourteen (14) years of age and able to give evidence
in court.
(b)
Beneficiaries under the will, or their spouses, must not
sign, as witnesses to the signing of a will, will not be
allowed to benefit under said will.
Estate Planning
E57
(c)
A person nominated as an executor, trustee, guardian
or their spouses must not sign as a witness to the will
as this will render the nomination null and void.
1.3
Codicils and amendments
A codicil can be described as an appendix to a will. One is
normally drawn up where minor changes are required to a
will which do not warrant a complete redraft of the will.
Because a codicil is also a testamentary document it must
comply with the same requirements as a will for validity.
Any deletion, addition, alteration or interlineation made to a
will or codicil must be carefully and clearly marked or written
and authenticated by the full signatures of the testator(s)
and the witnesses in the margin opposite. It is not permitted
simply to initial such changes or additions.
If a section of the will is deleted, the testator(s) and the
witnesses must sign against the deletion and, if any
substituted wording has been inserted, they must also
authenticate the new insertion.
Only the original document needs to be signed. It is
unnecessary to either sign or initial the copy of the will
although it is usual to record the date on it. If both original
and copy are signed, it may be difficult to ascertain which
document accurately expresses the testator’s last wishes.
2.
Wills in respect of which the testator has died
after 1 October 1992
(A will executed after 1 January 1954 and in respect of which the
testator died after 1 October 1992.) The amendments to the Wills
Act will be applicable and the requirements for a valid will are as
follows:
2.1
How must a will be signed?
(a)
The will must be signed at the end thereof by the
testator(s) and by two competent witnesses. If the will
consists of more than one page, each page other than
the page on which it ends must also be signed by the
testator(s). The witnesses no longer have to sign
these additional pages. In this regard it is interesting
to note that “signature” is defined as including the
making of initials.
E58
Estate Planning
(b)
The signing of the will by the testator (all pages) and
the witnesses (last page) must take place while they
are all present at the same time.
(c)
Although it is not a formal requirement, the will should
be dated on the last page.
Note: It should be noted that in terms of the Wills Act, the
court is empowered to accept wills that do not comply
with the above requirements, provided that it is
satisfied that the document before the court is
intended to be the testator’s last will.
2.2
Who may witness a will?
(a)
For a will to be valid, the witnesses must be at least
14 years old and must be competent to give evidence
in a court.
(b)
Any person who signs a will as witness and the spouse
of such person will be disqualified from receiving any
benefit under that will. If, however, a court is satisfied
that such person or his/her spouse did not unduly
influence the testator in the execution of his/her will,
or where the will concerned was witnessed and signed
by at least two other competent witnesses who will
not receive any benefit under the will, or where the
witness or he/she spouse would be entitled to inherit
from the testator in terms of intestate succession if
the testator died intestate, the person or his/her
spouse will be allowed to receive the benefit under the
will. In the latter case, the value of the benefit the
person or his/her spouse receives may not exceed the
value of the portion that said person or his/her spouse
would receive intestate.
(c)
It must be noted that the nomination of a person as
executor, trustee or guardian will be regarded as a
benefit to be received by such person from that will.
In other words, if a person who witnesses a will is
nominated as executor, trustee or guardian under that
will, such person will be disqualified from taking up
such appointment except in the circumstances set out
in (b) above.
Estate Planning
2.3
E59
Codicils and amendments
All the formalities required in the execution of a will apply
for the execution of a codicil.
Any amendment to a will or a codicil must be carefully and
clearly marked or written and authenticated by the signature
of the testator(s). The full signature of the testator must be
made in the presence of two competent witnesses who must
also sign next to the amendment. An amendment includes a
deletion, addition, alteration or interlineation.
Note that it is no longer necessary for both the deletion and
substitution of a section of the will to be authenticated
separately by the signatures of the testator and the
witnesses - the deletion and substitution need only be
authenticated once with the requisite signatures.
Only the original document needs to be signed. However, if
the original is in the possession of someone else, it is a good
idea to date a copy so that the testator knows on what date
the will was drafted.
E60
Estate Planning
Notes
General
General
General
General
F1
Report writing
The following is a suggested structure designed to give the report a
logical progression.
1.
Introduction/Background
Start the report with a brief statement of the background facts
that have a bearing on the client’s specific situation or problem(s).
Include a limited number of facts relevant to the report. Relevant
background facts include the names, ages, and occupations of the
immediate family members; what they intend or hope to do in the
future, e.g. study further, travel or retire at the coast; sources of
income, pensions; whether or not the client has any life assurance,
a trust, a will, or dependants, etc.
A good introduction shows a clear understanding of the client’s
environment. This is essential before any analysis of his problems
can be made. The problems to be solved should flow logically from
the way in which the background information is framed.
2.
Areas of concern
Here the critical areas that require action are described. These are
the problems facing the client which must be solved. There may be
one or more central problem(s), each containing subsidiary
problems. Some problems may not be as obvious as others and it
may be necessary to highlight the more obscure areas of concern
and their consequences.
For example, attempts to solve estate duty problems may lead to
income tax problems, or vice versa.
Lengthy calculations or tables showing that the client has a
problem should not be included in the text of the report. Such
calculations should rather be done in appendices attached to the
report and referred to at relevant places in the text.
3.
Objectives
After defining the problem areas the intention behind the solutions
must be outlined. After clearly identifying the objectives, they
must be stated briefly. This will provide guidelines to assess what
courses of action are appropriate.
F2
General
Care should be taken to distinguish between objectives and
courses of action. An objective answers the question: “What do I
want to accomplish?”; and a course of action answers the
question: “How am I going to achieve ...?”
4.
Possible courses of action and their appraisal
and evaluation
Once the objectives have been established, possible ways of
achieving each objective, either partially or completely, must be
outlined and evaluated.
Example: To provide his “widow” with an income from his estate, a
testator can:
(a)
leave everything to her
-
this will increase her
estate duty liability.
(b)
give her a usufruct
-
this is inflexible as the
capital may not be used.
(c)
create a trust
-
this is flexible and
involves no increase
in her estate duty
liability.
Each course of action must be evaluated in terms of the stated
objectives. There may be no “best” alternative, but rather a
compromise of several elements.
Under examination conditions, use should be made of a second
answer book for “Notes to the report” to show the examiner how
answers were arrived at without cluttering up the main body of the
report.
5.
Conclusion/Recommendations
In the conclusion a course of action is recommended, the reasons
for the course of action are given and the consequences of each
action are stated. When answering an exam question the examiner
will be looking for a sound reasoning ability and a decision on a
course of action most likely to bring about the improved situation
outlined in the objectives.
A client will also require a recommended course of action matching
the required needs.
General
F3
Exchange control guidelines
1.
Capital Transactions
(a)
The investment allowance for private individuals
Currently this stands at R4 000 000 per annum per individual
resident over the age of 18. This is subject to the applicant
obtaining tax clearance from SARS.
(b)
Additional amounts
In addition the Financial Surveillance Department will consider
applications by private individuals to invest in fixed property, e.g.
holiday homes and farms in SADC member countries.
Furthermore, applications by private individuals for investment
purposes, including offshore properties outside of SADC, will also
be considered. No limit has been set. Applications will be made
through authorized dealers, and must be accompanied by
appropriate motivations. A certificate of good standing from SARS
will be required.
(c)
The single discretionary allowance
From 2012 the amounts intended for investment may also be
exported under the single discretionary allowance, up to R1 000
000 per annum. No tax clearance is required.
2.
Portfolio Investments by South African
Institutional Investors
As an interim step towards prudential regulation, retirement funds,
long-term insurers, collective investment scheme management
companies and investment managers are allowed to transfer funds
from South Africa for investment abroad. The limit on foreign
portfolio investment by institutional investors is applied to an
institution’s total retail assets. The foreign exposure of retail assets
may not exceed 25% in the case of retirement funds and
underwritten policy business of long-term insurers. Collective
investment
scheme
management
companies,
investment
managers registered as institutional investors for exchange control
purposes and the investment-linked business of long-term insurers
are restricted to 35% of total retail assets under management.
Institutional investors are allowed to invest an additional five per
cent of their total retail assets by acquiring foreign currency
denominated portfolio assets in Africa through foreign currency
F4
General
transfers from South Africa or by acquiring approved inward listed
investments.
3.
Emigration
(a)
Facilities for which emigrants qualify
Emigrants qualify for a cash allowance (equal to a travel
allowance), a foreign capital allowance and are allowed to export
certain items.
Cash allowance (equal to a travel allowance)
Single person: Foreign exchange may be made available up to R1
000 000 per adult, less any amounts which may have already been
used in respect of the single discretionary allowance in that yearsee below;
Family unit: Foreign exchange may be made available up to R1
000 000 per adult, less any amounts which may have already been
used in respect of the single discretionary allowance in that year,
plus R200 000 per child under 18 years of age.
Foreign capital allowance (Settling-in allowance)
Single persons: Up to R4 million per calendar year.
Family unit: Up to R8 million per calendar year.
Household and personal effects, and motor vehicles, caravans,
trailers, motorcycles, stamps and coins.
These may be exported up to a value of R2 000 000.
Where these amounts are not taken immediately, they can be
taken later from funds or assets retained in South Africa.
(b)
Blocked Rands
Amounts and assets exceeding these limits must be placed in the
control of an authorised dealer in foreign exchange and are subject
to limitations on the nature of the asset permitted. Cash and
proceeds from the sale of blocked assets must be placed in a
blocked account. Cash from these sources may now be utilised
locally for any purposes.
Emigrants may now apply to the Financial Surveillance Department
(SARB) for release of blocked assets.
General
(c)
F5
Remitting income after departure
Current income may be transferred through normal banking
channels to the emigrant at his new place of residence. “Income”
includes interest, dividends, director’s fees, monthly pension
payments and income from testamentary trusts, subject to certain
formalities.
Income and other amounts that may not be remitted include
income from inter vivos trusts, and donations or gifts received, or
capital transfers from inter vivos trusts, received within 3 years
before departure.
4.
The Single Discretionary Allowance
A single discretionary allowance has replaced the previous
allowances in respect of gifts, loans, maintenance and donations to
missionaries and travel. The limit for this has been set at R1 000
000 per year per person over the age of 18, which may be
apportioned between the following:

Monetary gifts and loans

Donations to missionaries

Maintenance transfers

Alimony and child support payments on production of
a court order

Wedding expenses and other special events

Foreign capital allowance – This discretionary
allowance is in addition to the existing R4 million
individual foreign capital allowance. See Capital
Transactions, above

Travel allowance – subject to norms and factors to be
considered by the authorized dealer, including
duration and purpose of travel, Travel must
commence within 60 days and unspent travel
allowance must be repatriated and resold within 30
days

Study allowance. An allowance is available in respect
of full-time students attending foreign schools,
universities or similar institutions. All tuition fees,
F6
General
without limit, may be paid directly by an authorised
dealer.
A separate travel allowance remains in place in respect of children
under the age of 18. Currently this is R200 000 per calendar year.
Credit and/or debit cards may be utilised up to the limit of the
amount authorised.
5.
Credit and/or Debit Cards
Cardholders are allowed permissible foreign currency payments for
small transactions e.g. internet purchases. This is subject to a limit
of R20 000 per transaction. “Permissible” transactions are those
which may be effected by an authorised dealer.
6.
Estates and transfers to beneficiaries
(a)
Inheritances
Bequests and distributions from the estate of a deceased South
African resident may be transferred to a non-resident beneficiary
without limit, on production of the Liquidation and Distribution
accounts. Note that conditions may apply and that where the
beneficiary has been a previous resident in South Africa, they need
to formally emigrate before they can be regarded as a nonresident for the purposes of this concession. South African assets
in the estate of a deceased non-resident may be freely transferred.
(b)
Legacy transfers
Cash bequests and the cash proceeds of legacies and distributions
due to beneficiaries permanently resident outside the Common
Monetary Area, including emigrants, may be remitted abroad, on
production of the Liquidation and Distribution Account bearing a
Master of the High Court Reference Number.
In cases where the total assets of the resident estate is less than
R125 000, cash bequests and the cash proceeds of legacies due to
nonresident legatees, including emigrants, may be remitted
abroad, provided that the Last Will and Testament and Letter of
Executorship/Authority have been produced.
Where the beneficiary is an emigrant, it would be incumbent upon
Authorised Dealers to ensure that the emigrant has formally
emigrated before effecting any transfers. Where it cannot be
General
F7
established that the beneficiary has formally emigrated, the matter
must be referred to the Financial Surveillance Department.
(c) Capital distributions from local testamentary
trusts
Capital distributions from local testamentary trusts due to nonresidents, including emigrants, may be remitted abroad, provided
that the Trustees Resolution confirming the capital distribution and
the Last Will and Testament confirming that the beneficiary is
entitled to such capital distribution, have been viewed.
(d)
Death Benefits
Proceeds from registered South African pension and provident
schemes as well as insurance policies (annuity, endowment and
life) due to non-residents, including emigrants, who are nominated
beneficiaries upon the demise of the policy holder, may be
transferred abroad on presentation of:

Death Certificate, as well as

Documentary evidence from the institution concerned
reflecting the full names of the beneficiary and the
amount due to the beneficiary.
F8
General
Section 54 of the Long-term Insurance Act
(read with the regulations to the Act)
Note:
This legislation applies to all long-term policies whether entered
into before or after the commencement of this Act, excluding:
(a)
a reinsurance policy;
(b)
a fund policy; or
(c)
a fund member policy, for as long as no right under the
policy is transferred by the fund to a life insured under the
policy, or is transferred to any person except another fund
for the direct or indirect benefit of a life insured under the
policy.
Definitions
“Fund policy” means a contract in terms of which a person, in
return for a premium, undertakes to provide policy benefits for the
purpose of funding, in whole or in part, the liability of a fund to
provide benefits to its members in terms of its rules, other than
such a contract relating exclusively to a particular member of the
fund or to the surviving spouse, children, dependants or nominees
of a particular member of the fund; and includes a reinsurance
policy in respect of such a contract.
“Fund” means:
(a)
a friendly society as defined in section 1 of the Friendly
Societies Act;
(b)
a pension fund organization as defined in section 1 of the
Pension Funds Act;
(c)
a medical scheme as defined in section 1 of the Medical
Schemes Act;
(d)
a permanent fund, established bona fide for the purpose of
providing benefits to members in the event of sickness,
accident or unemployment, or of providing benefits to
surviving spouses, children, dependants or nominees of
deceased members, or mainly for those purposes; and
General
(e)
F9
any other person, arrangement or business prescribed by
the Registrar.
“Fund member policy” as defined in the regulations means a
long-term policy other than a fund policy:
(a)
of which a fund is the sole policyholder;
(b)
under which a specified member of the fund (or the
surviving spouse, child, dependant or nominee of the
member) is the life insured;
(c)
which is entered into by the fund for the exclusive purpose
of funding the fund’s liability to that member (or the
surviving spouse, children, dependants or nominees of the
member) in terms of the rules of the fund; and
(d)
if the fund holding the policy is a fund contemplated in
paragraph (c) of the definition of “benefit fund” in section 1
of the Income Tax Act, only insofar as provision is made
therein for unemployment benefits.
“Free surrender value” means the value of the consideration
which the insurer would provide if the policy is surrendered on the
day preceding the date of commencement of an extended
restriction period.
“Restriction period” means a period of five years which begins
on the date, if it is 1 January 1994 or later (i)
when the first premium period begins; or
(ii)
during a premium period after the first, on the first day of
the month in which an excess premium is received by the
insurer.
“Extended restriction period” means a restriction period (a)
which has not expired; and
(b)
which includes every earlier restriction period any part of
which runs concurrently with it; and
(c)
the commencement date of which, from time to time, is the
commencement date of the earliest restriction period
which runs concurrently with it.
F10
General
“Policy benefit” means one or more sums of money, services or
other benefits, including an annuity, but excluding a loan in
respect of a policy or consideration upon the surrender of a policy.
“Premium period” means one of a succession of periods, each of
twelve months duration, the first of which commences on, and
ends twelve months after the first day of the month which the first
premium, or any part thereof, is received by the insurer, or, if it is
a later date, the first day of the month in which the undertaking of
the insurer to provide policy benefits under the policy becomes
operative.
“Restricted amount” means an amount equal to the aggregate
of the free surrender value plus the total value of premiums in
an extended restriction period plus 5% compound interest per
annum less the aggregate of all payments already made by the
insurer in respect of the policy whether as a policy benefit or on
the surrender of any part of the policy in the extended
restriction period plus 5% compound interest per annum.
Provisions relating to policies (excluding annuities)
Policy term
Minimum five-year term (including deferred
compensation and keyperson assurance, but
excluding pension, provident, retirement annuity
and benefit funds (to the extent that the latter
provides unemployment benefits)).
Premiums
Single or recurring.
Recurring-premium policies may have any
premium payment term but payment intervals
may not be greater than twelve months.
Premium increases
Maximum of 20% of the higher of the total value
of the premiums paid in any one of the
immediately preceding two premium periods.
(Provided that, if a premium is increased during
the second premium period, the percentage
increase shall be determined in relation to the
first premium period only.)
Premium decreases No limit
Surrenders and
loans
Only one surrender and one loan are allowed
during an extended restriction period.
General
F11
The restricted period will not apply in the
Surrender and
loan values
(a)
the death, curatorship or sequestration of
the estate of the policyholder who is a
natural
person;
or
(b)
the winding up, liquidation, curatorship or
judicial management, upon an order of
court, of a policyholder who is a juristic
person;
or
(c)
the actual surrender value does not
exceed the restricted amount by more
than R2 500. (In this case, the whole
surrender value can be taken. It only
applies to full and not to partial
surrenders.)
The value on surrender or loan against the policy
may not be more than the restricted amount
as defined.
Provisions relating specifically to annuities
Policy term
Minimum five-year term.
Policy benefits
The payments by the insurer to the insured must
be made at intervals not exceeding twelve
months.
At least one of the payments that is to be made
by the insurer to the insured must be made after
the commencement of the period of 31 days
preceding
the
expiry
of
the
extended
restriction period concerned, unless the
insured has died prior to the expiry of the
extended
restriction
period.
The payments by the insurer to the insured in
any twelve-month period may not differ by more
than 20% from the total amount of payments in
F12
General
the immediately preceding period of
months, except in the case of an annuity
(a)
twelve
which constitutes a linked benefit, where
the difference in the period concerned
results solely from the determination of
the value of the relevant assets; or
(A “linked benefit” means a policy
benefit, the value of which is not
guaranteed by the long-term insurer and
is determined solely by reference to the
value of particular assets specified in the
policy and which are held by or on behalf
of the long-term insurer specifically for
the purpose of the policy.)
(b)
payable in terms of a policy under which
there are two or more policyholders or
life assured and the difference results
solely from a reduction in the annuity
payable as a result of the death of one of
the owners of the policy or life assured (a
joint and survivorship annuity); or
(c)
where the difference results solely from a
reduction in the annuity payable during
the period concerned consequent upon
the surrender of a part of the policy.
Loans
No loans may be effected against annuities.
Surrenders
Only one surrender or part surrender is allowed
against an annuity during an extended
restriction period.
Restricted
commuted
values
Within any extended restriction period the
restricted commuted value will be limited in the
case of either a full or partial commutation to a
return of the annuity consideration plus 5%
compound interest less the accumulated value of
the payments already made under the annuity
contract plus 5% compound interest.
General
F13
Exception to
If the actual commuted value exceeds the
restricted commuted restricted commuted value by not more than
value
R2 500, the actual commuted value may be paid.
If the actual commuted value exceeds the
restricted commuted value by more than R2 500,
only the restricted commuted value may be paid.
Alternatively, the annuity may be partsurrendered for an amount equal to the restricted
commuted
value
only.
(See section A for income tax consequences of
commutation.)
F14
General
Basic interest calculations
on a financial calculator
Before starting any calculation the following important points should be
borne in mind:
1.
If you are dealing with periodic payments, determine whether the
payment will be made at the beginning or the end of each period
and set the calculator accordingly.
2
Ensure that the interest rate you will use corresponds with the
compounding period. Example: the investment is made for a
period of three years at a 12% rate of interest, compounded
quarterly. As it is compounded quarterly, there are 12 (3 x 4)
compounding periods and the interest rate to be used in your
calculation will be 3% (12 ÷ 4).
3.
Determine whether different cash flow signs must be used. Should,
for example, the investor invest R100 per month and after a period
of five years, the accrued amount is R8 857, the monthly payment
(PMT) must be entered as a negative amount (-100) as it
represents the cash outflow, while the accrued amount (FV) must
be entered as a positive amount as it represents a cash inflow.
Note: Premiums on policies are calculated in begin (BGN) mode and
mortgage bond calculations are calculated in end (END) mode.
Examples:
1.
The client invests R250 per month for ten years at the beginning of
each month at 15% per annum (nominal). What will he receive?
HP 12C
HP 10BII
f Clear Fin
 Clear All
2ndF CA
g BEG
 BEG
2ndF BGN
250 CHS PMT
12  P/YR
250 +/- PMT
10 g n
250 +/- PMT
10 2ndF nn
15 g i
15 I/YR
FV = 69664,32
10  x P/YR
SHARP
15 2ndF ii
COMP FV = 69664,32
FV = 69664,32
General
2.
F15
A lump sum of R200 000 is invested for a term of 12 years @
18%, compounded annually. How much will he receive?
HP 12C
HP 10BII
SHARP
f Clear Fin
 Clear All
2ndF CA
200000 PV
1  P/YR
200000 +/- PV
12 n
200000 +/- PV
18 i
18 i
12 N
12 n
FV = 1457518,53
18 I/YR
COMP fv = 1457518.53
FV = 1457518,53
3.
As in 2 above, except that the interest rate of 18% is compounded
quarterly.
HP 12C
HP 10BII
SHARP
f Clear Fin
 Clear All
2ndF CA
200000 CHS PV
4  P/YR
200000 +/- PV
12 Enter 4 x n
200000 +/- PV
18 ÷ 4 = 4,5 i
18 Enter 4 ÷ i
12  x P/YR
2 x 4 = 48 n
FV = 1654291,12
18 I/YR
COMP FV = 1654291,12
FV = 1654291,12
4.
The client wants to save R150 per month (at the end of each
month) so that he has R60 000 after 14 years. What is the annual
rate of return he should receive in order to achieve his objective?
HP 12C
HP 10BII
SHARP
f Clear Fin
 Clear All
2ndF CA
150 CHS PMT
 End
150 +/- PMT
14 g n
12  P/YR
60000 FV
60000 FV
150 +/- PMT
14 2ndF nn
i = 0,93
60000 FV
COMP i = 0,93
14  x P/YR
x 12 = 11,11
x 12 = 11,11
I/YR = 11,11
NB:
With the HP 12C and the Sharp the answer of 0,93 should be
multiplied by 12 as it is the interest rate per month. With the HP
10BII the calculator is already set on 12 periods per annum:
consequently it is not necessary to multiply by 12.
F16
5.
General
How long will it take an investor to accumulate R90 000 if he has
R5 000 to invest at the end of each six months and can earn an
interest rate of 18% per annum?
HP 12C
HP 10BII
SHARP
f Clear Fin
 Clear All
2ndF CA
g END
2  P/YR
90000 FV
90000 FV
90000 FV
5000 +/- PMT
5000 CHS PMT
5000 +/- PMT
18 ÷ 2 = 9 i
18 Enter 2 ÷ i
18 I/YR
COMP n = 11,18
n = 12
N = 11,18
÷ 2 = 5,59 years
÷ 2 = 6 years
÷ 2 = 5,59 years
NB:
Note that the answer obtained here must be divided by two as
there are 12 half-yearly compounding periods. The HP 12C rounds
off the answer automatically to the next highest number, hence
the answer of 12 and not 11,18.
6.
Your client will receive R3 000 000 when he retires in 25 years’
time. How much is that amount worth today if one assumes an
inflation rate of 15% over the next 25 years?
HP 12C
HP 10BII
SHARP
f Clear Fin
 Clear All
2ndF CA
3000000
1  P/YR
3000000 FV
25 n
3000000 FV
25 n
15 i
15 I/YR
15 i
PV = -91132,91
25 N
COMP PV = -91132,91
PV = -91132,91
7.
You win a competition which offers the following alternatives as
prizes:

either a lump sum of R150 000 immediately
or

R2 350 per month payable at the beginning of each month
for 10 years.
Which alternative is more profitable if an inflation rate of 15% is
taken into account?
General
F17
The present value of the periodic payments should, therefore, be
determined before exercising a choice.
HP 12C
HP 10BII
SHARP
f Clear Fin
 Clear All
2ndF CA
g BEG
 BEG
2ndF BGN
2350 CHS PMT
12  P/YR
2350 +/- PMT
15 g i
2350 +/- PMT
10 2ndF nn
15 I/YR
10 g n
10  x P/YR
15 2ndF ii
PV = 147480,44
PV = 147480,44
COMP PV = 147480,44
Although the second alternative will generate a total of R282 000,
this will not be the better choice as the present value of the
periodic payments is less than R150 000. The first one will thus be
more profitable.
Valuation of market value of long-term gilts (e.g.
Eskom stock)
E.g.
Coupon rate of a long-term stock = 12% p.a. payable annually in
arrears
Nominal value of stock = R100 000
Term to maturity = 6 years
Market-related interest rates = 18%
HP 12C
HP 10BII
SHARP
f CLX
 Clear All
2ndF CA
g END
 End
2ndF END
100 000 ENTER 12%
1  P/YR
100 000 x 12% =
PMT
100 000 x 12% = PMT
100 000 FV
+/- PMT
6N
100 000 +/- FV
6N
18 i
6N
18 i
18 I/YR
COMP PV = - 79 014,38
PV = -79 014,38
100 000 FV
PV = 79 014,38
NB:
Under normal circumstances income on long-term stock is paid
six-monthly and the calculation should, therefore, be adapted to
reflect this should this be the case.
F18
General
Nominal and effective rate of interest
Bank pays a nominal rate of interest of 12% p.a. which is
compounded quarterly. What is the effective rate of interest?
HP 12C
HP 10BII
SHARP
f CLX
 Clear All
2ndF CA
g END
4  P/YR
4 2ndF EFF
12 ENTER
12  NOM%
12 =
4n÷i
 EFF % = 12,55
12,55
CHS PMT FV = 12,55
Simple vs compound interest
R10 000 p.a. invested for four years at the beginning of each year.
Compare the difference in interest earned between 15% p.a.
simple interest and 15% interest compounded annually in arrears.
Simple Interest
10 000 x 15% x
Compound Interest
HP 12C
 HP 10BII
SHARP
f CLX
 Clear All
2ndF CA
(1 + 2 + 3 + 4) = g BEG
 BEG
2ndF BGN
15 000 interest
1 P/YR
10 000 +/- PMT
10 000 CHS PMT
15 i
10 000 +/- PMT 15 i
4n
15 I/YR
4n
FV = 57 423,81
4N
COMP FV
- 40 000
FV = 57 423,81 = 57 423,81
= 17 423,81
- 40 000
- 40 000
interest
= 17 423,81
= 17 423,81
interest
Difference
interest
= 17 423,81 - 15 000
= 2 423,81
General
F19
Simple vs compound interest
R100 000 invested for four years. Calculate the difference in interest
earned between 15% p.a. simple interest and 15% interest compounded
annually in arrears.
Simple Interest
Compound Interest
HP 12C
HP 10BII
SHARP
100 000 x 15% x 4 f CLX
 Clear All
2ndF CA
= 60 000 interest 100 000 CHS PV
1  P/YR
100 000 +/- PV
4n
15 i
100 000 +/- PV
4n
15 I/YR
15 i
FV = 174 900,63 4 N
- 100 000
COMP FV
FV = 174 900,63
= 174 900,63
= 74 900,63
- 100 000
100 000
interest
= 74 900,63
= 74 900,63
interest
interest
-
Difference = 74 900,63 - 60 000
= 14 900,63
Debt repayments
Your client has a mortgage bond of R100 000 repayable over 25
years at a fixed interest rate of 17% p.a. What is his repayment at
the end of each month?
HP 12C
HP 10BII
SHARP
f CLX
 Clear All
2ndF CA
g END
 END
2ndF END
100 000 PV
12  P/YR
100 000 PV
25 g N
100 000 PV
25 2ndF n n
17 g i
25  x P/YR
17 2ndF ii
PMT = - 1 437,80
17 I/YR
COMP PMT
PMT = - 1 437,80
= - 1 437,80
F20
General
Resultant Rate
Your client wants to invest R5000 per annum for the next 5 years
at 9%; she wants to increase her premium at 6% every year. How
much will she receive at the end of the 5-year term, if she invests
the R5000 at the beginning of every year?
It is not possible to input both the growth rate of 9% and the
escalation rate of 6% using a financial calculator. To calculate the
future value it is, therefore, necessary to use the resultant rate.
The formula is as follows:
[{
1+i
1+e
} - 1] x 100
In the formula
i = the growth rate
e = the escalation rate
[{
1.09
1.06
} - 1 ] x 100 = 2,830189
This rate must now be used to calculate the Present Value of the
escalating investment.
Once the Present Value has been calculated, the Future Value of
the investment can now be established by using the actual
growth/interest rate of 9%
HP 10Bll
Step 1
Step 2
Shift Clear All
Shift Clear All
1 P/YR
1 Shift P/YR
5 000 +/- PMT
23 661,21 PV
2.830189 I/YR
9 I/YR
5N
5N
PV = 23 661,21
FV = 36 405,70
General
F21
Table A - Life Expectancy Tables
used to calculate VPA’s
Age Now
Male annuitants
Female annuitants
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
53,254
52,317
51,380
50,443
49,506
48,568
47,631
46,692
45,753
44,814
43,875
42,936
41,998
41,060
40,123
39,187
38,253
37,321
36,391
35,464
34,640
33,620
32,704
31,792
30,885
29,984
29,089
28,200
27,318
25,443
25,576
24,716
23,866
23,024
22,192
21,369
20,557
19,755
18,965
18,186
17,421
16,668
15,930
15,206
14,498
13,806
13,131
12,473
11,832
11,211
57,467
56,535
55,602
54,668
53,733
52,799
51,864
50,928
49,992
49,056
48,120
47,184
46,248
45,311
44,376
43,441
42,508
41,565
40,644
39,714
38,787
37,861
36,938
36,018
35,100
34,187
33,276
32,370
31,468
30,570
29,677
28,789
27,906
27,028
26,156
25,290
24,431
23,579
22,734
21,897
21,069
20,250
19,442
18,645
17,860
17,086
16,326
15,580
14,849
14,133
F22
General
Table A - Life Expectancy Tables (continued)
Age Now
Male annuitants
Female annuitants
70
71
72
73
74
75
76
77
78
79
80
10,608
10,024
9,460
8,916
8,393
7,890
7,409
6,948
6,508
6,090
5,692
13,433
12,750
12,085
11,438
10,810
10,202
9,614
9,047
8,501
7,976
7,473
This table was checked by Old Mutual Product Solutions. The editors
acknowledge Soshan Soobramoney from Old Mutual for his contribution.
General
F23
Table B - Compound Interest Table
One rand per month paid in advance
The sum to which one rand per month, paid at the beginning of each
month, will increase, at compound interest at undermentioned rates per
annum.
Year
1
2
3
4
5
3%
12,19680
24,76457
37,71461
51,05854
64,80833
4%
12,26320
25,02603
38,30883
52,13280
66,51997
5%
12,33002
25,29086
38,91481
53,23578
68,28944
6%
12,39724
25,55912
39,53279
54,36832
70,11888
7%
12,46488
25,83084
40,16303
55,53129
72,01053
Year
1
2
3
4
5
6
7
8
9
10
78,97634
93,57528
108,61826
124,11878
140,09077
81,49331
97,07667
113,29493
130,17395
147,74064
84,11328
100,74669
118,23110
136,61004
155,92929
86,84090
104,59430
123,44268
143,45360
164,69874
89,68105
108,62897
128,94665
150,73309
174,09447
6
7
8
9
10
11
12
13
14
15
156,54857
173,50694
190,98112
208,98679
227,54012
166,02302
185,05026
204,85270
225,46192
246,91079
176,23694
197,58358
220,02235
243,60913
268,40265
187,25424
211,20091
236,62456
263,61629
292,27281
199,14465
226,00571
254,80855
285,69356
318,81124
11
12
13
14
15
16
17
18
19
20
246,65777
266,35690
286,65520
307,57089
329,12275
269,23352
292,46571
316,64442
341,80821
367,99721
294,46465
321,86004
350,65703
380,92733
412,74631
322,69679
354,99727
389,28996
425,69775
464,35110
354,32301
392,40192
433,23357
477,01693
523,96540
16
17
18
19
20
21
22
23
24
25
351,33014
374,21298
397,79182
422,08784
447,12284
395,25319
423,61962
453,14174
483,86663
515,84331
446,19321
481,35132
518,30818
557,15583
597,99100
505,38850
548,95700
595,21270
644,32136
696,45893
574,30778
628,28941
686,17337
748,24178
814,79711
21
22
23
24
25
26
27
28
29
30
472,91931
499,50040
526,88998
555,11265
584,19373
549,12277
583,75808
619,80449
657,31949
696,36290
640,91537
686,03583
733,46475
783,32021
835,72638
751,81224
810,57961
872,97163
939,21185
1009,53762
886,16374
962,68946
1044,74723
1132,73697
1227,08749
26
27
28
29
30
31
32
33
34
35
614,15934
645,03638
676,85258
709,63649
743,41757
736,99701
779,28661
823,29915
869,10483
916,77671
890,81374
948,71948
1009,58779
1073,57024
1140,82614
1084,20093
1163,46931
1247,62679
1336,97492
1431,83385
1328,25862
1436,74342
1553,07059
1677,80707
1811,56075
31
32
33
34
35
36
37
38
39
40
778,22612
814,09341
851,05164
889,13399
928,37465
966,39081
1018,02627
1071,76543
1127,69401
1185,90121
1211,52299
1285,83682
1363,95269
1446,06512
1532,37857
1532,54347
1639,46464
1752,98047
1873,49771
2001,44819
1954,98350
2108,77429
2273,68263
2450,51221
2640,12481
36
37
38
39
40
41
42
43
44
45
968,80885
1010,47290
1053,40420
1097,64129
1143,22390
1246,47986
1309,52658
1375,14192
1443,43052
1514,50131
1623,10799
1718,47929
1818,72992
1924,10966
2034,88078
2137,29037
2281,51101
2434,62685
2597,18655
2769,77257
2843,44462
3061,46223
3295,24046
3545,91853
3814,71815
41
42
43
44
45
F24
General
annum.
Year
1
2
3
4
5
8%
12,53293
26,10608
40,80579
56,72558
73,96670
9%
12,60139
26,38488
41,46136
57,95212
75,98982
10%
12,67028
26,66731
42,13000
59,21185
78,08238
11%
12,73959
26,95339
42,81200
60,50575
80,24700
Year
1
2
3
4
5
6
7
8
9
10
92,63883
112,86073
134,76104
158,47907
184,16568
95,71958
117,30013
140,90508
166,72435
194,96566
98,92891
121,95834
147,39925
175,50416
206,55202
102,27268
126,84714
154,26534
184,85634
218,98729
6
7
8
9
10
11
12
13
14
15
211,98426
242,11178
274,73986
310,07606
348,34514
225,85615
259,64441
296,60224
337,02696
381,24381
240,85100
278,74153
320,59969
366,84094
417,92427
257,06783
299,55502
346,95877
399,84802
458,85756
11
12
13
14
15
16
17
18
19
20
389,79054
434,67589
483,28670
535,93219
592,94722
429,60850
482,51014
540,37431
603,66654
672,89602
474,35668
536,69830
605,56791
681,64906
765,69691
524,69562
598,15238
680,10946
771,55053
873,57305
16
17
18
19
20
21
22
23
24
25
654,69447
721,56671
793,98932
872,42297
957,36657
748,61970
831,44679
922,04363
1021,13907
1129,53035
858,54566
961,11689
1074,42867
1199,60568
1337,89035
987,40150
1114,40205
1256,09895
1414,19285
1590,58119
21
22
23
24
25
26
27
28
29
30
1049,36045
1148,98977
1256,88828
1373,74232
1500,29518
1248,08948
1377,77028
1519,61603
1674,76789
1844,47406
1490,65523
1659.41659
1845,84948
2051,80432
2279,32532
1787,39009
2006,95422
2251,93622
2525,26725
2830,22783
26
27
28
29
30
31
32
33
34
35
1637,35186
1785,78419
1946,53632
2120,63080
2309,17503
2030,09984
2233,13860
2455,22380
2698,14212
2963,84786
2530,67075
2808,33533
3115,07502
3453,93436
3828,27670
3170,47810
3550,10172
3973,65496
4446,22128
4973,47242
31
32
33
34
35
36
37
38
39
40
2513,36835
2734,50961
2974,00548
3233,37940
3514,28122
3254,47842
3572,37256
3920,08714
4300,41975
4716,43017
4241,81758
4698,66159
5203,34314
5760,87144
6376,78024
5561,73645
6218,07371
6950,36156
7767,38890
8678,96169
36
37
38
39
40
41
42
43
44
45
3818,49775
4147,96411
4504,77601
4891,20312
5309,70349
5171,46525
5669,18576
6213,59588
6809,07542
7460,41506
7057,18275
7808,83228
8639,18934
9556,49564
10569,85589
9696,02063
10830,77245
12096,83642
13509,40785
15085,44039
41
42
43
44
45
General
F25
annum.
Year
1
2
3
4
5
12%
12,80933
27,24320
43,50765
61,83483
82,48637
13%
12,87949
27,53677
44,21723
63,20014
84,80331
14%
12,95009
27,83417
44,94107
64,60274
87,20073
15%
13,02112
28,13544
45,67945
66,04374
89,68169
Year
1
2
3
4
5
6
7
8
9
10
105,75703
131,97900
161,52657
194,82151
232,33908
109,38841
137,36705
169,20766
205,44331
246,68065
113,17356
143,02521
177,33498
216,76863
262,09138
117,11954
148,96815
185,93657
228,84783
278,65727
6
7
8
9
10
11
12
13
14
15
274,61481
322,25217
375,93114
436,41795
504,57600
293.61009
347,01731
407,79646
476,96511
555,68128
314,18273
374,05350
442,86550
521,95402
612,85378
336,47380
403,58460
481,48377
571,90557
676,86309
11
12
13
14
15
16
17
18
19
20
581,37819
667,92083
765,43924
875,32542
999,14792
645,26284
747,20956
863,22824
995,26127
1145,51914
717,32869
837,40610
875,41612
1134,03683
1316,34628
798,69301
940,10764
1104,25530
1294,79045
1515,95497
16
17
18
19
20
21
22
23
24
25
1138,67421
1295,89593
1473,05730
1672,68716
1897,63509
1316,51749
1511,11916
1732,58218
1984,61428
2271,43501
1525,88219
1766,71062
2043,50485
2361,63610
2727,27772
1772,67270
2070,65896
2416,54786
2818,03996
3284,07374
21
22
23
24
25
26
27
28
29
30
2151,11205
2436,73623
2758,58470
3121,25162
3529,91377
2597,84632
2969,31298
3392,05411
3873,14725
4420,64687
3147,52499
3630,53285
4185,67408
4823,72122
5557,05563
3825,02454
4452,93563
5181,78627
6027,80294
7009,82061
26
27
28
29
30
31
32
33
34
35
3990,40452
4509,29702
5093,99808
5752,85387
6495,26907
5043,71922
5752,79880
6559,74797
7478,08575
8523,18398
6399,90768
7368,63297
8482,02965
9761,70326
11232,48592
8149,70205
9472,82459
11008,64506
12791,36560
14860,64492
31
32
33
34
35
36
37
38
39
40
7331,84109
8274,51138
9336,73587
10533,67700
11882,42024
9712,53971
11066,06516
12606,41108
14359,39616
16354,33874
12922,91825
14865,80317
17098,84247
19665,36839
22615,18450
17262,58184
20050,64097
23286,89321
27043,38761
31403,75546
36
37
38
39
40
41
42
43
44
45
13402,21787
15114,76388
17044,50359
19218,98260
21669,23998
18624,64820
21208,33410
24148,65258
27494,83051
31302,88969
26005,53213
29902,20115
34380,80664
39528,25616
45444,43623
36465,07214
42340,01834
49159,38868
57075,00362
66263,08942
41
42
43
44
45
F26
General
annum.
Year
1
2
3
4
5
16%
13,09258
28,44063
46,43270
67,52428
92,24932
17%
13,16448
28,74981
47,20114
69,04553
94,90691
18%
13,23683
29,06302
47,98511
70,60870
97,65787
Year
1
2
3
4
5
6
7
8
9
10
121,23377
155,21139
195,04236
241,73504
296,47151
125,52400
161,77130
204,68419
255,48841
315,63510
129,99886
168,66523
214,89604
270,17044
336,25751
6
7
8
9
10
11
12
13
14
15
360,63747
435,85786
524,03544
627,40402
748,57999
386,84227
471,14384
570,94778
689,10484
828,99001
415,27242
509,74409
622,69612
757,74363
919,20888
11
12
13
14
15
16
17
18
19
20
890,6304
1057,15335
1252,36258
1481,20066
1749,46086
994,59889
1190,66189
1422,77925
1697,58106
2022,91666
1112,26967
1343,07470
1619,04135
1948,99209
2343,48719
16
17
18
19
20
21
22
23
24
25
2063,93446
2432,58268
2864,73822
3371,34154
3965,21782
2408,07879
2864,06904
3403,91214
4043,02791
4799,67178
2815,15269
3379,08455
4053,33172
4859,47388
5823,31211
21
22
23
24
25
26
27
28
29
30
4661,40164
5477,51760
6434,22651
7555,74842
8870,47582
5695,45620
6755,96797
8011,49908
9497,91198
11257,66391
6975,69460
8353,50406
10000,83808
11970,42056
14325,28917
26
27
28
29
30
31
32
33
34
35
10411,69235
12218,41548
14336,38425
16819,21719
19729,76974
13341,01966
15807,498731
18727,51796
22184,51808
26277,23194
17140,81288
20507,10418
24531,90323
29344,02611
35097,48767
31
32
33
34
35
36
37
38
39
40
23141,72550
27141,46161
31830,23545
37326,74810
43770,14937
31122,56202
36858,90822
43650,12103
51690,18171
61208,74304
41976,43086
50201,02034
60034,48898
71791,56277
85848,53383
36
37
38
39
40
41
42
43
44
45
51323,56052
60178,20385
70558,24364
82726,46118
96990,90726
72477,68907
85818,90106
101613,45157
120312,48928
142450,12535
102655,30387
122749,78354
146775,10857
175500,22875
209844,49344
41
42
43
44
45
General
F27
annum.
Year
1
2
3
4
5
19%
13,30962
29,38033
48,78493
72,21503
100,50573
20%
13,38286
29,70179
49,60096
73,86582
103,45418
21%
13,45654
30,02746
50,43354
75,56238
106,50703
22%
13,53068
30,35739
51,28303
77,30609
109,66827
Year
1
2
3
4
5
6
7
8
9
10
134,66537
175,91145
225,71408
285,84831
358,45744
139,53396
183,52932
237,17688
302,59422
382,36355
144,61349
191,53928
249,32554
320,48582
408,11538
149,91377
199,96293
262,20390
339,60655
435,86423
6
7
8
9
10
11
12
13
14
15
446,12941
551,98903
697,80932
834,14606
1020,50011
479,63357
598,24375
742,87595
919,23917
1134,29490
516,02587
648,91108
812,55116
1014,06399
1262,21481
555,56994
704,43556
889,56434
1119,78985
1406,09751
11
12
13
14
15
16
17
18
19
20
1245,51350
1517,20614
1845,26169
2241,37268
2719,65730
1396,53195
1716,30147
2106,22556
2581,69553
3161,47939
1567,79748
1944,10400
2407,50264
2978,14994
3680,86747
1762,14873
2204,93281
2755,57759
3440,35754
4291,94754
16
17
18
19
20
21
22
23
24
25
3297,16255
3994,47183
4836,43861
5853,07225
7080,60755
3868,46261
4730,55168
5781,77540
7063,62823
8626,70815
4546,22146
5611,85238
6924,11219
8540,08052
10530,04745
5350,98196
6667,99354
8305,82463
10342,62577
12875,58469
21
22
23
24
25
26
27
28
29
30
8562,79627
10352,46653
12513,40566
15122,63377
18273,14886
10532,71387
12856,88025
15690,94801
19146,78497
23360,80176
12980,57096
15998,24195
19714,32065
24290,44606
29925,66608
16025,56375
19942,86692
24814,41173
30872,64820
38406,65034
26
27
28
29
30
31
32
33
34
35
22077,24145
26670,49684
32216,62765
38913,30884
46999,22322
28499,32626
34765,21941
42405,78147
51722,61473
63083,47815
36865,09917
45410,58900
55933,84116
68892,58758
84850,49740
47775,90961
59427,48838
73917,35187
91936,89654
114345,94058
31
32
33
34
35
36
37
38
39
40
56762,56860
68551,32973
82785,68113
99972,96293
120725,76350
76936,81371
93826,44760
114428,17476
139546,07902
170174,62755
104501,69493
128701,95216
158500,86891
195197,65797
240387,52675
142213,75109
176870,06488
219968,53810
273565,65192
340218,83926
36
37
38
39
40
41
42
43
44
45
145783,75325
176040,04799
212573,04128
256684,84049
309947,67647
207522,80656
253064,84310
308598,38643
376315,51628
458889,21652
296036,10780
364563,95834
448951,84765
552870,41226
680839,81826
423108,51494
526189,83196
654381,40505
813800,00667
1012052,43411
41
42
43
44
45
F28
General
Table C - Compound Interest Table
One rand per annum paid in advance
The sum to which one rand per annum, paid at the beginning of each
year, will increase, at compound interest at undermentioned rates per
annum.
Year
1
2
3
4
5
3%
1,030
2,091
3,184
4,309
5,468
4%
1,040
2,122
3,246
4,416
5,633
5%
1,050
2,153
3,310
4,526
5,802
6%
1,060
2,184
3,375
4,637
5,975
7%
1,070
2,215
3,440
4,751
6,153
8%
1,080
2,246
3,506
4,867
6,336
Year
1
2
3
4
5
6
7
8
9
10
6,662
7,892
9,159
10,464
11,808
6,898
8,214
9,583
11,006
12,486
7,142
8,549
10,027
11,578
13,207
7,394
8,897
10,491
12,181
13,972
7,654
9,260
10,978
12,816
14,784
7,923
9,637
11,488
13,487
15,645
6
7
8
9
10
11
12
13
14
15
13,192
14,618
16,086
17,599
19,157
14,026
15,627
17,292
19,024
20,825
14,917
16,713
18,599
20,579
22,657
15,870
17,882
20,015
22,276
24,673
16,888
19,141
21,550
24,129
26,888
17,977
20,495
23,215
26,152
29,324
11
12
13
14
15
16
17
18
19
20
20.762
22,414
24,117
25,870
27,676
22,698
24,645
26,671
28,778
30,969
24,840
27,132
29,539
32,066
34,719
27,213
29,906
32,760
35,786
38,993
29,840
32,999
36,379
39,995
43,865
32,750
36,450
40,446
44,762
49,423
16
17
18
19
20
21
22
23
24
25
29,537
31,453
33,426
35,459
37,553
33,248
35,618
38,083
40,646
43,312
37,505
40,430
43,502
46,727
50,113
42,392
45,996
49,816
53,865
58,156
48,006
52,436
57,177
62,249
67,676
54,457
59,893
65,765
72,106
78,954
21
22
23
24
25
26
27
28
29
30
39,710
41,931
44,219
46,575
49,003
46,084
48,968
51,966
55,085
58,328
53,669
57,403
61,323
65,439
69,761
62,706
67,528
72,640
78,058
83,802
73,484
79,698
86,347
93,461
101,073
86,351
94,339
102,966
112,283
122,346
26
27
28
29
30
31
32
33
34
35
51,503
54,078
56,730
59,462
62,276
61,701
65,210
68,858
72,652
76,598
74,299
79,064
84,067
89,320
94,836
89,890
96,343
103,184
110,435
118,121
109,218
117,933
127,259
137,237
147,913
133,214
144,951
157,627
171,317
186,102
31
32
33
34
35
36
37
38
39
40
65,174
68,159
71,234
74,401
77,663
80,702
84,970
89,409
94,026
98,827
100,628
106,710
113,095
119,800
126,840
126,268
134,904
144,058
153,762
164,048
159,337
171,561
184,740
198,635
213,610
202,070
219,316
237,941
258,057
279,781
36
37
38
39
40
41
42
43
44
45
81,023
84,484
88,048
91,720
95,501
103,820
109,012
114,413
120,029
125,871
134,232
141,993
150,143
158,700
167,685
174,951
186,508
198,758
211,744
225,508
229,632
246,777
265,121
284,749
305,752
303,244
328,583
355,950
385,506
417,416
41
42
43
44
45
General
F29
annum.
Year
1
2
3
4
5
9%
1,090
2,278
3,573
4,985
6,523
10%
1,100
2,310
3,641
5,105
6,716
11%
1,110
2,343
3,710
5,228
6,913
12%
1,120
2,374
3,779
5,353
7,115
13%
1,130
2,407
3,850
5,480
7,323
14%
1,140
2,440
3,921
5,610
7,536
Year
1
2
3
4
5
6
7
8
9
10
8,200
10,028
12,021
14,193
16,560
8,487
10,436
12,579
14,937
17,531
8,783
10,859
13,164
15,722
18,561
9,089
11,300
13,776
16,549
19,655
9,405
11,757
14,416
17,420
20,814
9,730
12,233
15,085
18,337
22,045
6
7
8
9
10
11
12
13
14
15
19,141
21,953
25,019
28,361
32,003
20,384
23,523
26,975
30,772
34,950
21,713
25,212
29,095
33,405
38,190
23,133
27,029
31,393
36,280
41,753
24,650
28,985
33,883
39,417
45,672
26,271
31,089
36,581
42,842
49,980
11
12
13
14
15
16
17
18
19
20
35,974
40,301
45.018
50,160
55,765
39,545
44,599
50,159
56,275
63,002
43,501
49,396
55,939
63,203
71,265
47,884
54,750
62,440
71,052
80,699
52,739
60,725
69,749
79,947
91,470
58,118
67,394
77,969
90,025
103,768
16
17
18
19
20
21
22
23
24
25
61,873
68,532
75,790
83,701
92,324
70,403
78,543
87,497
97,347
108,182
80,214
90,148
101,174
113,413
126,999
91,503
103,603
117,155
132,334
149,334
104,491
119,205
135,831
154,620
175,850
119,436
137,297
157,659
180,871
207,333
21
22
23
24
25
26
27
28
29
30
101,723
111,968
123,135
135,308
148,575
120,100
133,210
147,631
163,494
180,943
142,079
158,817
177,397
198,021
220,913
168,374
189,699
213,583
240,333
270,293
199,841
226,950
257,583
292,199
331,315
237,499
271,889
311,094
355,787
406,737
26
27
28
29
30
31
32
33
34
35
163,037
178,800
195,982
214,711
235,125
200,138
221,252
244,477
270,024
298,127
246,324
274,529
305,837
340,590
379,164
303,848
341,429
383,521
430,664
483,463
375,516
425,463
481,903
545,681
617,749
464,820
531,035
606,520
692,573
790,673
31
32
33
34
35
36
37
38
39
40
257,376
281,630
308,066
336,882
368,292
329,039
363,043
400,448
441,592
486,852
421,982
469,511
522,267
580,826
645,827
542,599
608,831
683,010
766,091
859,142
699,187
791,211
895,198
1012,704
1145,486
902,507
1029,998
1175,338
1341,025
1529,909
36
37
38
39
40
41
42
43
44
45
402,528
439,846
480,522
524,859
573,186
536,637
591,401
651,641
717,905
790,795
717,978
798,065
886,963
985,639
1095,169
963,359
1080,083
1210,813
1357,230
1521,218
1295,529
1465,078
1656,668
1873,165
2117,806
1745,236
1990,709
2270,548
2589,565
2953,244
41
42
43
44
45
F30
General
annum.
Year
1
2
3
4
5
15%
1,150
2,473
3,993
5,742
7,754
16%
1,160
2,506
4,067
5,877
7,977
17%
1,170
2,539
4,141
6,014
8,207
18%
1,180
2,572
4,215
6,154
8,442
19%
1,190
2,606
4,291
6,297
8,683
20%
1,200
2,640
4,368
6,442
8,930
Year
1
2
3
4
5
6
7
8
9
10
10,067
12,727
15,786
19,304
23,349
10,414
13,240
16,519
20,321
24,733
10,772
13,773
17,285
21,393
26,200
11,142
14,327
18,086
22,521
27,755
11,523
14,902
18,923
23,709
29,404
11,916
15,499
19,799
24,959
31,150
6
7
8
9
10
11
12
13
14
15
28,002
33,352
39,505
46,580
54,717
29,850
35,786
42,672
50,660
59,925
31,824
38,404
46,103
55,110
65,649
33,931
41,219
49,818
59,965
71,939
36,180
44,244
53,841
65,261
78,850
38,581
47,497
58,196
71,035
86,442
11
12
13
14
15
16
17
18
19
20
64,075
74,836
87,212
101,444
117,810
70,673
83,141
97,603
114,380
133,841
77,979
92,406
109,285
129,033
152,139
86,068
102,740
122,414
145,628
173,021
95,022
114,266
137,166
164,418
196,847
104,931
127,117
153,740
185,688
224,026
16
17
18
19
20
21
22
23
24
25
136,632
158,276
183,168
211,793
244,712
156,415
182,601
212,978
248,214
289,088
179,172
210,801
247,808
291,105
341,763
205,345
243,487
288,494
341,603
404,272
235,438
281,362
336,011
401,042
478,431
270,031
325,237
391,484
470,981
566,377
21
22
23
24
25
26
27
28
29
30
282,569
326,104
376,170
433,745
499,957
336,502
391,503
455,303
529,312
615,162
401,032
470,378
551,512
646,439
757,504
478,221
565,481
668,447
789,948
933,319
570,522
680,112
810,523
965,712
1150,387
680,853
818,223
983,068
1180,882
1418,258
26
27
28
29
30
31
32
33
34
35
576,100
663,666
764,365
880,170
1013,346
714,747
830,267
964,270
1119,713
1300,027
887,449
1039,486
1217,368
1425,491
1668,995
1102,496
1302,125
1537,688
1815,652
2143,649
1370,151
1631,670
1942,877
2313,214
2753,914
1703,109
2044,931
2455,118
2947,341
3538,009
31
32
33
34
35
36
37
38
39
40
1166,498
1342,622
1545,165
1778,090
2045,954
1509,191
1751,822
2033,273
2359,757
2738,478
1953,894
2287,225
2677,224
3133,522
3667,391
2530,686
2987,389
3526,299
4162,213
4912,591
3278,348
3902,424
4645,075
5528,829
6580,496
4246,811
5097,374
6118,048
7342,858
8812,629
36
37
38
39
40
41
42
43
44
45
2353,997
2708,246
3115,633
3584,128
4122,898
3177,795
3687,402
4278,546
4964,274
5759,718
4292,017
5022,830
5877,881
6878,291
8048,770
5798,038
6842,865
8075,760
9530,577
11247,261
7831,981
9321,247
11093,474
13202,424
15712,075
10576,355
12692,826
15232,592
18280,310
21937,572
41
42
43
44
45
General
F31
Table D - Compound Interest Table - One rand principal
The sum to which one rand principal will increase, at compound interest
at undermentioned rates per annum.
Year
1
2
3
4
5
3%
1,030
1,061
1,093
1,126
1,159
4%
1,040
1,082
1,125
1.170
1,217
5%
1,050
1,102
1,158
1,215
1,276
6%
1,060
1,124
1,191
1,262
1,338
Year
1
2
3
4
5
6
7
8
9
10
1,194
1,230
1,267
1,305
1,344
1,265
1,316
1,368
1,423
1,480
1,340
1,407
1,477
1,551
1,629
1,418
1,504
1,594
1,689
1,791
6
7
8
9
10
11
12
13
14
15
1,384
1,426
1,469
1,513
1,558
1,539
1,601
1,665
1,732
1,801
1,710
1,796
1,886
1,980
2,079
1,898
2,012
2,133
2,261
2,396
11
12
13
14
15
16
17
18
19
20
1,605
1,653
1,702
1,754
1,806
1,873
1,948
2,026
2,107
2,191
2,183
2,292
2,407
2,527
2,653
2,540
2,693
2,854
3,026
3,207
16
17
18
19
20
21
22
23
24
25
1,860
1,916
1,974
2,033
2,094
2,279
2,370
2,465
2,563
2,666
2,786
2,925
3,071
3,225
3,386
3,399
3,603
3,820
4,049
4,292
21
22
23
24
25
26
27
28
29
30
2,157
2,221
2,288
2,357
2,427
2,772
2,883
2,999
3,119
3,243
3,556
3,733
3,920
4,116
4,322
4,549
4,822
5,112
5,418
5,743
26
27
28
29
30
31
32
33
34
35
2,500
2,575
2,652
2,732
2,814
3,373
3,508
3,648
3,794
3,946
4,538
4,765
5,003
5,253
5,516
6,088
6,453
6,840
7,251
7,686
31
32
33
34
35
36
37
38
39
40
2,898
2,985
3,075
3,167
3,262
4,104
4,268
4,439
4,616
4,801
5,792
6,081
6,385
6,705
7,040
8,147
8,636
9,154
9,703
10,286
36
37
38
39
40
41
42
43
44
45
3,360
3,461
3,565
3,671
3,782
4,993
5,193
5,400
5,616
5,841
7,392
7,761
8,150
8,557
8,985
10,903
11,557
12,250
12,985
13,765
41
42
43
44
45
F32
General
Year
1
2
3
4
5
7%
1,070
1,145
1,225
1,311
1,402
8%
1,080
1,166
1,260
1,360
1,469
9%
1,090
1,188
1,295
1,412
1,539
10%
1,100
1,210
1,331
1,464
1,610
Year
1
2
3
4
5
6
7
8
9
10
1,501
1,606
1,718
1,838
1,967
1,587
1,714
1,851
1,999
2,159
1,677
1,828
1,992
2,172
2,367
1,772
1,949
2,143
2,358
2,594
6
7
8
9
10
11
12
13
14
15
2,105
2,252
2,410
2,578
2,759
2,332
2,518
2,720
2,937
3,172
2,580
2,813
3,066
3,342
3,642
2,853
3,138
3,452
3,797
4,177
11
12
13
14
15
16
17
18
19
20
2,952
3,159
3,380
3,616
3,870
3,426
3,700
3,996
4,316
4,661
3,970
4,328
4,717
5,142
5,604
4,595
5,054
5,560
6,116
6,727
16
17
18
19
20
21
22
23
24
25
4,140
4,430
4,740
5,072
5,427
5,034
5,436
5,871
6,341
6,848
6,109
6,659
7,258
7,911
8,623
7,400
8,140
8,954
9,850
10,835
21
22
23
24
25
26
27
28
29
30
5,807
6,214
6,649
7,114
7,612
7,396
7,988
8,627
9,317
10,063
9,399
10,245
11,167
12,172
13,268
11,918
13,110
14,421
15,863
17,449
26
27
28
29
30
31
32
33
34
35
8,145
8,715
9,325
9,978
10,676
10,868
11,737
12,676
13,690
14,785
14,462
15,763
17,182
18,728
20,414
19,194
21,114
23,225
25,548
28,102
31
32
33
34
35
36
37
38
39
40
11,424
12,224
13,079
13,995
14,974
15,968
17,246
18,625
20,115
21,724
22,251
24,254
26,437
28,816
31,409
30,913
34,004
37,404
41,145
45,259
36
37
38
39
40
41
42
43
44
45
16,023
17,144
18,344
19,628
21,002
23,462
25,339
27,367
29,556
31,920
34,236
37,317
40,676
44,337
48,327
49,785
54,764
60,240
66,264
72,890
41
42
43
44
45
General
F33
Year
1
2
3
4
5
11%
1,110
1,232
1,368
1,518
1,685
12%
1,120
1,254
1,405
1,573
1,762
13%
1,130
1,277
1,443
1,630
1,842
14%
1,140
1,300
1,481
1,689
1,925
15%
1,150
1,322
1,521
1,749
2,011
Year
1
2
3
4
5
6
7
8
9
10
1,870
2,076
2,304
2,558
2,839
1,974
2,211
2,476
2,773
3,106
2,082
2,353
2,658
3,004
3,394
2,195
2,502
2,852
3,252
3,707
2,313
2,660
3,059
3,518
4,045
6
7
8
9
10
11
12
13
14
15
3,152
3,498
3,883
4,310
4,784
3,478
3,896
4,363
4,887
5,473
3,836
4,334
4,898
5,535
6,254
4,226
4,818
5,492
6,261
7,138
4,652
5,350
6,153
7,076
8,137
11
12
13
14
15
16
17
18
19
20
5,311
5,895
6,543
7,263
8,062
6,130
6,866
7,690
8,613
9,646
7,067
7,986
9,024
10,197
11,523
8,137
9,276
10,575
12,056
13,743
9,358
10,761
12,375
14,232
16,366
16
17
18
19
20
21
22
23
24
25
8,949
9,933
11,026
12,239
13,585
10,804
12,100
13,552
15,179
17,000
13,021
14,714
16,627
18,788
21,230
15,667
17,861
20,362
23,212
26,462
18,822
21,645
24,891
28,625
32,919
21
22
23
24
25
26
27
28
29
30
15,080
16,739
18,580
20,624
22,892
19,040
21,325
23,884
26,750
29,960
23,990
27,109
30,633
34,616
39,116
30,166
34,390
39,204
44,693
50,950
37,857
43,535
50,066
57,575
66,212
26
27
28
29
30
31
32
33
34
35
25,410
28,205
31,308
34,752
38,575
33,555
37,582
42,091
47,142
52,800
44,201
49,947
56,440
63,777
72,068
58,083
66,215
75,485
86,053
98,100
76,143
87,565
100,700
115,805
133,175
31
32
33
34
35
36
37
38
39
40
42,818
47,528
52,756
58,559
65,001
59,135
66,232
74,180
83,081
93,051
81,437
92,024
103,987
117,506
132,782
111,834
127,491
145,340
165,687
188,883
153,152
176,125
202,543
232,925
267,863
36
37
38
39
40
41
42
43
44
45
72,151
80,087
88,897
98,676
109,530
104,217
116,723
130,730
146,417
163,988
150,043
169,549
191,590
216,497
244,641
215,327
245,473
279,839
319,017
363,679
308,043
354,249
407,387
468,495
538,769
41
42
43
44
45
F34
General
Year
1
2
3
4
5
16%
1,160
1,346
1,561
1,811
2,100
17%
1,170
1,369
1,602
1,874
2,192
18%
1,180
1,392
1,643
1,939
2,288
19%
1,190
1,416
1,685
2,005
2,386
20%
1,200
1,440
1,728
2,074
2,488
Year
1
2
3
4
5
6
7
8
9
10
2,436
2,826
3,278
3,803
4,411
2,565
3,001
3,511
4,108
4,807
2,699
3,185
3,759
4,435
5,234
2,840
3,379
4,021
4,785
5,695
2,986
3,583
4,300
5,160
6,192
6
7
8
9
10
11
12
13
14
15
5,117
5,936
6,886
7,987
9,265
5,624
6,580
7,699
9,007
10,539
6,176
7,287
8,599
10,147
11,974
6,777
8,064
9,596
11,420
13,589
7,430
8,916
10,699
12,839
15,407
11
12
13
14
15
16
17
18
19
20
10,748
12,468
14,462
16,776
19,461
12,330
14,426
16,879
19,748
23,105
14,129
16,672
19,673
23,214
27,393
16,171
19,244
22,900
27,252
32,429
18,488
22,186
26,623
31,948
38,337
16
17
18
19
20
21
22
23
24
25
22,574
26,186
30,376
35,236
40,874
27,033
31,629
37,006
43,297
50,658
32,324
38,142
45,008
53,109
62,669
38,591
45,923
54,649
65,032
77,388
46,005
55,206
66,247
79,497
95,396
21
22
23
24
25
26
27
28
29
30
47,414
55,000
63,800
74,008
85,850
59,270
69,345
81,134
94,928
111,065
73,949
87,260
102,966
121,500
143,371
92,092
109,589
130,411
155,189
184,675
114,475
137,370
164,845
197,813
237,376
26
27
28
29
30
31
32
33
34
35
99,586
115,519
134,003
155,443
180,314
129,946
152,036
177,883
208,123
243,503
169,177
199,629
235,562
277,964
327,997
219,764
261,519
311,207
370,337
440,701
284,851
341,822
410,186
492,223
590,668
31
32
33
34
35
36
37
38
39
40
209,164
242,631
281,451
326,484
378,721
284,899
333,332
389,998
456,298
533,869
387,037
456,703
538,910
635,914
750,378
524,434
624,076
742,650
883,754
1051,667
708,802
850,562
1020,675
1224,810
1469,771
36
37
38
39
40
41
42
43
44
45
439,316
509,607
591,144
685,727
795,444
624,626
730,813
855,051
1000,410
1170,479
885,446
1044,827
1232,896
1454,817
1716,684
1251,484
1489,266
1772,227
2108,950
2509,651
1763,726
2116,471
2539,765
3047,718
3657,262
41
42
43
44
45
General
F35
Table E - Present value of R1 per period
What R1 payable annually in arrears is worth today
Year
1
2
3
4
5
3%
0,97087
1,91347
2,82861
3,71710
4,57971
4%
0,96154
1,88609
2,77509
3,62990
4,45182
5%
0,95238
1,85941
2,72325
3,54595
4,32948
6%
0,94340
1,83339
2,67301
3,46511
4,21236
7%
0,93458
1,80802
2,62432
3,38721
4,10020
8%
0,92593
1,78326
2,57710
3,31213
3,99271
Year
1
2
3
4
5
6
7
8
9
10
5,41719
6,23028
7,01969
7,78611
8,53020
5,24214
6,00205
6,73274
7,43533
8,11090
5,07569
5,78637
6,46321
7,10782
7,72173
4,91732
5,58238
6,20979
6,80169
7,36009
4,76654
5,38929
5,97130
6,51523
7,02358
4,62288
5,20637
5,74664
6,24689
6,71008
6
7
8
9
10
11
12
13
14
15
9,25262
9,95400
10,63496
11,29607
11,93794
8,76048
9,38507
9,98565
10,56312
11,11839
8,30641
8,86325
9,39357
9,89864
10,37966
7,88687
8,38384
8,85268
9,29498
9,71225
7,49867
7,94269
8,35765
8,74547
9,10791
7,13896
7,53608
7,90378
8,24424
8,55948
11
12
13
14
15
16
17
18
19
20
12,56110
13,16612
13,75351
14,32380
14,87747
11,65230
12,16567
12,65930
13,13394
13,59033
10,83777
11,27407
11,68959
12,08532
12,46221
10,10590
10,47726
10,82760
11,15812
11,46992
9,44665
9,76322
10,05909
10,33560
10,59401
8,85137
9,12164
9,37189
9,60360
9,81815
16
17
18
19
20
21
22
23
24
25
15,41502
15,93692
16,44361
16,93554
17,41315
14,02916
14,45112
14,85684
15,24696
15,62208
12,82115
13,16300
13,48857
13,79864
14,09394
11,76408
12,04158
12,30338
12,55036
12,78336
10,83553
11,06124
11,27219
11,46933
11,65358
10,01680
10,20074
10,37106
10,52876
10,67478
21
22
23
24
25
26
27
28
29
30
17,87684
18,32703
18,76411
19,18845
19,60044
15,98277
16,32959
16,66306
16,98371
17,29203
14,37519
14,64303
14,89813
15,14107
15,37245
13,00317
13,21053
13,40616
13,59072
13,76483
11,82578
11,98671
12,13711
12,27767
12,40904
10,80998
10,93516
11,05108
11,15841
11,25778
26
27
28
29
30
31
32
33
34
35
20,00043
20,38877
20,76579
21,13184
21,48722
17,58849
17,87355
18,14765
18,41120
18,66461
15,59281
15,80268
16,00255
16,19290
16,37419
13,92909
14,08404
14,23023
14,36814
14,49825
12,53181
12,64656
12,75379
12,85401
12,94767
11,34980
11,43500
11,51389
11,58693
11,65457
31
32
33
34
35
36
37
38
39
40
21 83225
22,16724
22,49246
22,80822
23,11477
18,90828
19,14258
19,36786
19,58448
19,79277
16,54685
16,71129
16,86789
17,01704
17,15909
14,62099
14,73678
14,84602
14,94907
15,04630
13,03521
13,11702
13,19347
13,26493
13,33171
11,71719
11,77518
11,82887
11,87858
11,92461
36
37
38
39
40
41
42
43
44
45
23,41240
23,70136
23,98190
24,25427
24,51871
19,99305
20,18563
20,37079
20,54884
20,72004
17,29437
17,42321
17,54591
17,66277
17,77407
15,13802
15,22454
15,30617
15,38318
15,45583
13,39412
13,45245
13,50696
13,55791
13,60552
11,96723
12,00670
12,04324
12,07707
12,10840
41
42
43
44
45
F36
General
Year
1
2
3
4
5
9%
0,91743
1,75911
2,53129
3,23972
3,88965
10%
0,90909
1,73554
2,48685
3,16987
3,79079
11%
0,90090
1,71252
2,44371
3,10245
3,69590
12%
0,89286
1,69005
2,40183
3,03735
3,60478
13%
0,88496
1,66810
2,36115
2,97447
3,51723
14%
0,87719
1,64666
2,32163
2,91371
3,43308
Year
1
2
3
4
5
6
7
8
9
10
4,48592
5,03295
5,53482
5,99525
6,41766
4,35526
4,86842
5,33493
5,75902
6,14457
4,23054
4,71220
5,14612
5,53705
5,88923
4,11141
4,56376
4,96764
5,32825
5,65022
3,99755
4,42261
4,79877
5,13166
5,42624
3,88867
4,28830
4,63886
4,94637
5,21612
6
7
8
9
10
11
12
13
14
15
6,80519
7,16073
7,48690
7,78615
8,06069
6,49506
6,81369
7,10336
7,36669
7,60608
6,20652
6,49236
6,74987
6,98187
7,19087
5,93770
6,19437
6,42355
6,62817
6,81086
5,68694
5,91765
6,12181
6,30249
6,46238
5,45273
5,66029
5,84236
6,00207
6,14217
11
12
13
14
15
16
17
18
19
20
8,31256
8,54363
8,75563
8,95011
9,12855
7,82371
8,02155
8,20141
8,36492
8,51356
7,37916
7,54879
7,70162
7,83929
7,96333
6,97399
7,11963
7,24967
7,36578
7,46944
6,60388
6,72909
6,83991
6,93797
7,02475
6,26506
6,37286
6,46742
6,55037
6,62313
16
17
18
19
20
21
22
23
24
25
9,29224
9,44243
9,58021
9,70661
9,82258
8,64869
8,77154
8,88322
8,98474
9,07704
8,07507
8,17574
8,26643
8,34814
8,42174
7,56200
7,64465
7,71843
7,78432
7,84314
7,10155
7,16951
7,22966
7,28288
7,32998
6,68696
6,74294
6,79206
6,83514
6,87293
21
22
23
24
25
26
27
28
29
30
9,92897
10,02658
10,11613
10,19828
10,27365
9,16095
9,23722
9,30657
9,36961
9,42691
8,48806
8,54780
8,60162
8,65011
8,69379
7,89566
7,94255
7,98442
8,02181
8,05518
7,37167
7,40856
7,44120
7,47009
7,49565
6,90608
6,93515
6,96066
6,98304
7,00266
26
27
28
29
30
31
32
33
34
35
10,34280
10,40624
10,46444
10,51784
10,56682
9,47901
9,52638
9,56943
9,60857
9,64416
8,73315
8,76860
8,80054
8,82932
8,85524
8,08499
8,11159
8,13535
8,15656
8,17550
7,51828
7,53830
7,55602
7,57170
7,58557
7,01988
7,03498
7,04823
7,05985
7,07005
31
32
33
34
35
36
37
38
39
40
10,61176
10,65299
10,69082
10,72552
10,75736
9,67651
9,70592
9,73265
9,75696
9,77905
8,87859
8,89963
8,91859
8,93567
8,95105
8,19241
8,20751
8,22099
8,23303
8,24378
7,59785
7,60872
7,61833
7,62684
7,63438
7,07899
7,08683
7,09371
7,09975
7,10504
36
37
38
39
40
41
42
43
44
45
10,78657
10,81337
10,83795
10,86051
10,88120
9,79914
9,81740
9,83400
9,84909
9,86281
8,96491
8,97740
8,98865
8,99878
9,00791
8,25337
8,26194
8,26959
8,27642
8,28252
7,64104
7,64694
7,65216
7,65678
7,66086
7,10969
7,11376
7,11733
7,12047
7,12322
41
42
43
44
45
General
F37
Year
1
2
3
4
5
15%
0,86957
1,62571
2,28323
2,85498
3,35216
16%
0,86207
1,60523
2,24589
2,79818
3,27429
17%
0,85470
1,58521
2,20958
2,74324
3,19935
18%
0,84746
1,56564
2,17427
2,69006
3,12717
19%
0,84034
1,54650
2,13992
2,63859
3,05763
20%
0,83333
1,52778
2,10648
2,58873
2,99061
Year
1
2
3
4
5
6
7
8
9
10
3,78448
4,16042
4,48732
4,77158
5,01877
3,68474
4,03857
4,34359
4,60654
4,83323
3,58918
3,92238
4,20716
4,45057
4,65860
3,49760
3,81153
4,07757
4,30302
4,49409
3,40978
3,70570
3,95437
4,16333
4,33893
3,32551
3,60459
3,83716
4,03097
4,19247
6
7
8
9
10
11
12
13
14
15
5,23371
5,42062
5,58315
5,72448
5,84737
5,02864
5,19711
5,34233
5,46753
5,57546
4,83641
4,98839
5,11828
5,22930
5,32419
4,65601
4,79322
4,90951
5,00806
5,09158
4,48650
4,61050
4,71471
4,80228
4,87586
4,32706
4,43922
4,53268
4,61057
4,67547
11
12
13
14
15
16
17
18
19
20
5,95423
6,04716
6,12797
6,19823
6,25933
5,66850
5,74870
5,81785
5,87746
5,92884
5,40529
5,47461
5,53385
5,58449
5,62777
5,16235
5,22233
5,27316
5,31624
5,35275
4,93770
4,98966
5,03333
5,07003
5,10086
4,72956
4,77463
4,81219
4,84350
4,86958
16
17
18
19
20
21
22
23
24
25
6,31246
6,35866
6,39884
6,43377
6,46415
5,97314
6,01133
6,04425
6,07263
6,09709
5,66476
5,69637
5,72340
5,74649
5,76623
5,38368
5,40990
5,43212
5,45095
5,46691
5,12677
5,14855
5,16685
5,18223
5,19515
4,89132
4,90943
4,92453
4,93710
4,94759
21
22
23
24
25
26
27
28
29
30
6,49056
6,51353
6,53351
6,55088
6,56598
6,11818
6,13636
6,15204
6,16555
6,17720
5,78311
5,79753
5,80985
5,82039
5,82939
5,48043
5,49189
5,50160
5,50983
5,51681
5,20601
5,21513
5,22280
5,22924
5,23466
4,95632
4,96360
4,96967
4,97472
4,97894
26
27
28
29
30
31
32
33
34
35
6,57911
6,59053
6,60046
6,60910
6,61661
6,18724
6,19590
6,20336
6,20979
6,21534
5,83709
5,84366
5,84928
5,85409
5,85820
5,52272
5,52773
5,53197
5,53557
5,53862
5,23921
5,24303
5,24625
5,24895
5,25122
4,98245
4,98537
4,98781
4,98984
4,99154
31
32
33
34
35
36
37
38
39
40
6,62314
6,62881
6,63375
6,63805
6,64178
6,22012
6,22424
6,22779
6,23086
6,23350
5,86171
5,86471
5,86727
5,86946
5,87133
5,54120
5,54339
5,54525
5,54682
5,54815
5,25312
5,25472
5,25607
5,25720
5,25815
4,99295
4,99412
4,99510
4,99592
4,99660
36
37
38
39
40
41
42
43
44
45
6,64502
6,64785
6,65030
6,65244
6,65429
6,23577
6,23774
6,23943
6,24089
6,24214
5,87294
5,87430
5,87547
5,87647
5,87733
5,54928
5,55024
5,55105
5,55174
5,55232
5,25895
5,25962
5,26019
5,26066
5,26106
4,99717
4,99764
4,99803
4,99836
4,99863
41
42
43
44
45
F38
General
Table F - Present value of R1
What R1 due in the future is worth today
Year
1
2
3
4
5
3%
0,970874
0,942596
0,915142
0,888487
0,862609
4%
0,961538
0,924556
0,888996
0,854804
0,821927
5%
0,952381
0,907029
0,863838
0,822702
0,783526
6%
0,943396
0,889996
0,839619
0,792094
0,747258
Year
1
2
3
4
5
6
7
8
9
10
0,837484
0,813092
0,789409
0,766417
0,744094
0,790315
0,759918
0,730690
0,702587
0,675564
0,746215
0,710681
0,676839
0,644609
0,613913
0,704961
0,665057
0,627412
0,591898
0,558395
6
7
8
9
10
11
12
13
14
15
0,722421
0,701380
0,680951
0,661118
0,641862
0,649581
0,624597
0,600574
0,577475
0,555265
0,584679
0,556837
0,530321
0,505068
0,481017
0,526788
0,496969
0,468839
0,442301
0,447265
11
12
13
14
15
16
17
18
19
20
0,623167
0,605016
0,587395
0,570286
0,553676
0,533908
0,513373
0,493628
0,474642
0,456387
0,458112
0,436297
0,415521
0,395734
0,376889
0,393646
0,371364
0,350344
0,330513
0,311805
16
17
18
19
20
21
22
23
24
25
0,537549
0,521893
0,506692
0,491934
0,477606
0,438834
0,421955
0,405726
0,390121
0,375117
0,358942
0,341850
0,215571
0,310068
0,295303
0,294155
0,277505
0,261797
0,246979
0,232999
21
22
23
24
25
26
27
28
29
30
0,463695
0,450189
0,437077
0,424346
0,411987
0,360689
0,346817
0,333477
0,320651
0,308319
0,281241
0,267848
0,255094
0,242946
0,231377
0,219810
0,207368
0,195630
0,184557
0,174110
26
27
28
29
30
31
32
33
34
35
0,399987
0,388337
0,377026
0,366045
0,355383
0,296460
0,285058
0,274094
0,263552
0,253415
0,220359
0,209866
0,199873
0,190355
0,181290
0,164255
0,154957
0,146186
0,137912
0,130105
31
32
33
34
35
36
37
38
39
40
0,345032
0,334983
0,325226
0,315754
0,306557
0,243669
0,234297
0,225285
0,216621
0,208289
0,172657
0,164436
0,156605
0,149148
0,142046
0,122741
0,115793
0,109239
0,103056
0,097222
36
37
38
39
40
41
42
43
44
45
0,297628
0,288959
0,280543
0,272372
0,264439
0,200278
0,192575
0,185168
0,178046
0,171198
0,135282
0,128840
0,122704
0,116861
0,111297
0,091719
0,086527
0,081630
0,077009
0,072650
41
42
43
44
45
General
F39
Year
1
2
3
4
5
7%
0,934579
0,873439
0,816298
0,762895
0,712986
8%
0,925926
0,857339
0,793832
0,735030
0,680583
9%
0,917431
0,841680
0,772183
0,708425
0,649931
10%
0,909091
0,826446
0,751315
0,683013
0,620921
Year
1
2
3
4
5
6
7
8
9
10
0,666342
0,622750
0,582009
0,543934
0,508349
0,630170
0,583490
0,540269
0,500249
0,463193
0,596267
0,547034
0,501866
0,460428
0,422411
0,564474
0,513158
0,466507
0,424098
0,385543
6
7
8
9
10
11
12
13
14
15
0,475093
0,444012
0,414964
0,387817
0,362446
0,428883
0,397114
0,367698
0,340461
0,315242
0,387533
0,355535
0,326179
0,299246
0,274538
0,350494
0,318631
0,289664
0,263331
0,239392
11
12
13
14
15
16
17
18
19
20
0,338735
0,316574
0,295864
0,276508
0,258419
0,291890
0,270269
0,250249
0,231712
0,214548
0,251870
0,231073
0,211994
0,194490
0,178431
0,217629
0,197845
0,179859
0,163508
0,148644
16
17
18
19
20
21
22
23
24
25
0,241513
0,225713
0,210947
0,197147
0,184249
0,198656
0,183941
0,170315
0,157699
0,146018
0,163698
0,150182
0,137781
0,126405
0,115968
0,135131
0,122846
0,111678
0,101526
0,092296
21
22
23
24
25
26
27
28
29
30
0,172195
0,160930
0,150402
0,140563
0,131367
0,135202
0,125187
0,115914
0,107328
0,099377
0,106393
0,097608
0,089548
0,082155
0,075371
0,083905
0,076278
0,069343
0,063039
0,057309
26
27
28
29
30
31
32
33
34
35
0,122773
0,114741
0,107235
0,100219
0,093663
0,092016
0,085200
0,078889
0,073045
0,067635
0,069148
0,063438
0,058200
0,053395
0,048986
0,052099
0,047362
0,043057
0,039143
0,035584
31
32
33
34
35
36
37
38
39
40
0,087535
0,081809
0,076457
0,071455
0,066780
0,062625
0,057986
0,053690
0,049713
0,046031
0,044941
0,041231
0,037826
0,034703
0,031838
0,032349
0,029408
0,026735
0,024304
0,022095
36
37
38
39
40
41
42
43
44
45
0,062412
0,058329
0,054513
0,050946
0,047613
0,042621
0,039464
0,036541
0,033834
0,031328
0,029209
0,026797
0,024584
0,022555
0,020692
0,020086
0,018260
0,016600
0,015091
0,013719
41
42
43
44
45
F40
General
Year
1
2
3
4
5
11%
0,900901
0,811622
0,731191
0,658731
0,593451
12%
0,892857
0,797194
0,711780
0,635518
0,567427
13%
0,884956
0,783147
0,693050
0,613319
0,542760
14%
0,877193
0,769468
0,674972
0,592080
0,519369
15%
0,869565
0,756144
0,657516
0,571753
0,497177
Year
1
2
3
4
5
6
7
8
9
10
0,534641
0,481658
0,433926
0,390925
0,352184
0,506631
0,452349
0,403883
0,360610
0,321973
0,480319
0,425061
0,376160
0,332885
0,294588
0,455587
0,399637
0,350559
0,307508
0,269744
0,432328
0,375937
0,326902
0,284262
0,247185
6
7
8
9
10
11
12
13
14
15
0,317283
0,285841
0,257514
0,231995
0,209004
0,287476
0,256675
0,229174
0,204620
0,182696
0,260698
0,230706
0,204165
0,180677
0,159891
0,236617
0,207559
0,182069
0,159710
0,140096
0,214943
0,186907
0,162528
0,141329
0,122894
11
12
13
14
15
16
17
18
19
20
0,188292
0,169633
0,152822
0,137678
0,124034
0,163122
0,145644
0,130040
0,116107
0,103667
0,141496
0,125218
0,110812
0,098064
0,086782
0,122892
0,107800
0,094561
0,082948
0,072762
0,106865
0,092926
0,080805
0,070265
0,061100
16
17
18
19
20
21
22
23
24
25
0,111742
0,100669
0,090693
0,081705
0,073608
0,092560
0,082643
0,073788
0,065882
0,058823
0,076798
0,067963
0,060144
0,053225
0,047102
0,063826
0,055988
0,049112
0,043081
0,037790
0,053131
0,046201
0,040174
0,034934
0,030378
21
22
23
24
25
26
27
28
29
30
0,066314
0,059742
0,053822
0,048488
0,043683
0,052521
0,046894
0,041869
0,037383
0,033378
0,041683
0,036888
0,032644
0,028889
0,025565
0,033149
0,029078
0,025507
0,022375
0,019627
0,026415
0,022970
0,019974
0,017369
0,015103
26
27
28
29
30
31
32
33
34
35
0,039354
0,035454
0,031940
0,028775
0,025924
0,029802
0,026609
0,023758
0,021212
0,018940
0,022624
0,020021
0,017718
0,015680
0,013876
0,017217
0,015102
0,013248
0,011621
0,010194
0,013133
0,011420
0,009931
0,008635
0,007509
31
32
33
34
35
36
37
38
39
40
0,023355
0,021040
0,018955
0,017077
0,015384
0,016910
0,015098
0,013481
0,012036
0,010747
0,012279
0,010867
0,009617
0,008510
0,007531
0,008942
0,007844
0,006880
0,006035
0,005294
0,006529
0,005678
0,004937
0,004293
0,003733
36
37
38
39
40
41
42
43
44
45
0,013860
0,012486
0,011249
0,010134
0,009130
0,009595
0,008567
0,007649
0,006830
0,006098
0,006665
0,005898
0,005219
0,004619
0,004088
0,004644
0,004074
0,003573
0,003135
0,002750
0,003246
0,002823
0,002455
0,002134
0,001856
41
42
43
44
45
General
F41
Year
1
2
3
4
5
16%
0,862069
0,743163
0,640658
0,552291
0,476113
17%
0,854701
0,730514
0,624371
0,533650
0,456111
18%
0,847458
0,718184
0,608631
0,515789
0,437109
19%
0,840336
0,706165
0,593416
0,498669
0,419049
20%
0,833333
0,694444
0,578704
0,482253
0,401878
Year
1
2
3
4
5
6
7
8
9
10
0,410442
0,353830
0,305025
0,262953
0,226684
0,389839
0,333195
0,284782
0,243404
0,208037
0,370432
0,313925
0,266038
0,225456
0,191064
0,352142
0,295918
0,248671
0,208967
0,175602
0,334898
0,279082
0,232568
0,193807
0,161506
6
7
8
9
10
11
12
13
14
15
0,195417
0,168463
0,145227
0,125195
0,107927
0,177810
0,151974
0,129892
0,111019
0,094888
0,161919
0,137220
0,116288
0,098549
0,083516
0,147565
0,124004
0,104205
0,087567
0,073586
0,134588
0,112157
0,093464
0,077887
0,064905
11
12
13
14
15
16
17
18
19
20
0,093041
0,080207
0,069144
0,059607
0,051385
0,081101
0,069317
0,059245
0,050637
0,043280
0,070776
0,059980
0,050830
0,043077
0,036506
0,061837
0,051964
0,043667
0,036695
0,030836
0,054088
0,045073
0,037561
0,031301
0,026084
16
17
18
19
20
21
22
23
24
25
0,044298
0,038188
0,032920
0,028380
0,024465
0,036991
0,031616
0,027022
0,023096
0,019740
0,030937
0,026218
0,022218
0,018829
0,015957
0,025913
0,021775
0,018299
0,015377
0,012922
0,021737
0,018114
0,015095
0,012579
0,010483
21
22
23
24
25
26
27
28
29
30
0,021091
0,018182
0,015674
0,013512
0,011648
0,016872
0,014421
0,012325
0,010534
0,009004
0,013523
0,011460
0,009712
0,008230
0,006975
0,010859
0,009125
0,007668
0,006444
0,005415
0,008735
0,007280
0,006066
0,005055
0,004213
26
27
28
29
30
31
32
33
34
35
0,010042
0,008657
0,007463
0,006433
0,005546
0,007696
0,006577
0,005622
0,004805
0,004107
0,005911
0,005009
0,004245
0,003598
0,003049
0,004550
0,003824
0,003213
0,002700
0,002269
0,003511
0,002926
0,002438
0,002032
0,001693
31
32
33
34
35
36
37
38
39
40
0,004781
0,004121
0,003553
0,003063
0,002640
0,003510
0,003000
0,002564
0,002192
0,001873
0,002584
0,002190
0,001856
0,001573
0,001333
0,001907
0,001602
0,001347
0,001132
0,000951
0,001411
0,001176
0,000980
0,000816
0,000680
36
37
38
39
40
41
42
43
44
45
0,002276
0,001962
0,001692
0,001458
0,001257
0,001601
0,001368
0,001170
0,001000
0,000854
0,001129
0,000957
0,000811
0,000687
0,000583
0,000799
0,000671
0,000564
0,000474
0,000398
0,000567
0,000472
0,000394
0,000328
0,000273
41
42
43
44
45
F42
General
Medical Schemes
1.
Introduction
The Medical Schemes Act, No. 131 of 1998 as amended (called the
Act) and the subordinate legislation thereto, in the main, regulate
medical schemes. Extracts of certain of these provisions are dealt
with below.
2.
Purpose of the Act
The purpose of the Act is to consolidate the laws relating to
registering medical schemes and to provide for the establishment
of the Council for Medical Schemes as a juristic person.
Furthermore, its purpose is to provide for the appointment of the
Registrar of Medical Schemes, to make provision for the
registration and control of certain activities of medical schemes, to
protect the interest of members of the Medical Schemes; to
provide for measures for the co-ordination of medical schemes;
and to provide for incidental matters.
3.
Role-players
3.1
Council for Medical Schemes and Registrar of Medical
Schemes
The Council for Medical Schemes has been established in
terms of s.3 of the Act. The Council is a juristic entity
entitled to sue and to be sued. The Council consists of up to
15 members appointed by the Minster of Health, with its
head office in Pretoria.
The Minister of Health appoints a Registrar of Medical
Schemes and any Deputy Registrars, after consultation with
the Council (s.18). The Registrar is appointed as the
executive officer of the Council managing the affairs of the
Council.
Functions of the Council (s.7)
Functions of the Council include the following:

Protecting the interest of the beneficiaries of medical
schemes at all times
General
F43

Controlling and co-ordinating the functioning of
medical schemes in a manner that is complementary
with the National Health policy

Making recommendations to the Minister on criteria
for measurements of quality and outcomes of the
relevant health services provided for by medical
schemes, and such other services as the Council may
from time to time determine

Collecting and disseminating information about private
health care

Investigating complaints and settling of
relating to the affairs of medical schemes

Making rules not inconsistent with the provisions of
the Act, for the purpose of performing its functions
and exercising its powers

Advising the Minister on any matter concerning
medical schemes

Performing any other function conferred on
Council by the Act or by the Minister of Health
disputes
the
Powers of the Council (s.8)
The powers of the Council include the following:

Approving
the
registration,
suspension
and
cancellation of registration, of medical schemes or
benefit options

Exempting, in exceptional cases, medical schemes
from certain provisions of the Act

In general, taking any appropriate steps to perform its
functions in accordance with the provisions of the Act

This is a summary; for more details see Section 8 of
the Act.
Functions and Powers of the Registrar (s.42 - s.46)
The function of the Registrar, generally, is to manage the
affairs of the Council. Certain powers of the Registrar are set
out in s.42 to s.46 of the Act and include the following:
F44
General

Request of the principal officer of a medical scheme,
further particulars where an application is made to be
registered as a medical scheme or where the rules of
the medical scheme are to be amended.

Dealing with enquiries regarding a medical scheme.
Note that schemes are obliged to reply to such
enquiries within 30 days or such other period as
stipulated.

Inspecting or requiring the production of any report or
other relevant documents of the medical scheme, to
enable it to obtain any information pertaining to the
medical scheme.

On the authority and in accordance with the
instructions and directions of the Council, place any
restriction on the administration costs of a medical
scheme and may further prescribe the basis on which
such
costs
shall
be
calculated
in
certain
circumstances.

If the Registrar is of the opinion that a medical
scheme is not financially sound, directing the scheme
to take steps to rectify the situation. In this regard,
the Registrar is also empowered to give written notice
to the medical scheme to amend its rules.
In addition to those provisions under chapter 9 of the Act,
the Registrar has a variety of other duties and powers.
3.2
Administrator
The administrator is defined as any person who has been
accredited by the Council in terms of s.58, and shall, where
any obligation has been placed on a medical scheme in
terms of the Act, also mean a medical scheme.
In terms of s.58 no person is allowed to administer a
medical scheme unless the Council has granted accreditation
to such person. The Regulations provide that accreditation
as an administrator is only valid for a period of 24 months.
The administrator must enter into an agreement with a
medical scheme wherein the terms and conditions of the
administration of the scheme are recorded. Provisions
General
F45
relating to the administrator may be found in Chapter 6 of
the regulations.
3.3
Board of Trustees
The board of trustees is defined to mean the board of
trustees charged with managing the affairs of a medical
scheme, and which has been elected or appointed under its
rules.
Structure
The Act, in terms of s.57(1 to 3), provides the following:
Every medical scheme must have a board of trustees
consisting of persons who are fit and proper to manage the
business of the medical scheme.
At least 50% of the members of the board of trustees must
be elected from amongst members.
An employee, director, officer, consultant or contractor of
the holding company, subsidiary, joint venture or associate
of the administrator of the medical scheme or a broker is not
allowed to be a member of the board of trustees.
Duties
In terms of s.57(4) and s.57(6) of the Act, duties of the
board of trustees include the following:

Appointing a principal officer of the medical scheme
who is a fit and proper to hold such office

Ensuring proper records are kept of all operations and
resolutions pertaining to the medical scheme

Ensuring proper control systems are employed

Ensuring adequate and appropriate information is
communicated to the members of the medical scheme
relating to their rights, benefits, contributions and
duties in terms of the rules of the medical scheme.

Ensuring that the rules, operation and administration
of the medical scheme comply with the Act and other
applicable laws

Ensuring confidentiality of medical records relating to
the member’s state of health
F46
General
3.4

Taking steps to ensure that the
beneficiaries are protected at all times
interests

Acting with due care, diligence, skill and good faith

Taking reasonable steps to avoid conflicts of interest

Acting with impartiality in respect of all beneficiaries
of
Officer and Principal Officer
A principal officer is appointed by the board of trustees in
terms of s.57(4) of the Act. A principal officer must be a
person who is fit and proper to hold such office.
Any notice required or permitted to be given to a medical
scheme in terms of the Act, if given to the principal officer,
will be deemed to have been given to the medical scheme.
3.5
Member and Prospective Member
A member is defined in s.1 of the Act as a person who has
been enrolled or admitted as a member of a medical scheme
or who, in terms of the rules of a medical scheme, is a
member of such medical scheme.
3.6
Dependant
The Act defines a dependant to mean:
(a)
the spouse or partner, dependant children or other
members of the member’s immediate family in respect
of whom the member is liable for family care and
support;
(b)
any other person who, under the rules of a medical
scheme, is recognised as a dependant of a member.
In terms of the current prescribed model rules issued by the
Council, “Dependant” is defined as:

“a member’s spouse or partner who is not a member
or a registered dependant of a member of a medical
scheme;

a dependent child;

the immediate family of a member in respect of whom
the member is liable for family care and support;
General
F47

any other person who is recognised by the Board as a
dependant for purposes of these Rules”.
The model rules define the word “spouse” as “the person to
whom a member is married in terms of any law or custom”.
The model rules also define a “member family” to mean “the
member and all the registered dependants”.
Furthermore, the model rules define the word “partner” as
“a person with whom the member has a committed
relationship based on objective criteria of mutual
dependency, irrespective of the gender of either party”.
The model rules further define the word “dependent” - “in
relation to a dependant other than the member’s spouse or
partner, a dependant who is not in receipt of a regular
remuneration of more than the maximum social pension per
month or a child who, due to a mental or physical disability,
is dependent upon the member. (Note that the scheme may
specify an amount greater than the maximum social
pension.)”
3.7
Child Dependant
A child dependant is not defined in the Act, but in the
Regulations published in terms of s.67 of the Act.
In terms of the Regulations, a “child dependant” is defined
as a dependant who is under the age of 21 or older if the
rules of the scheme permit it.
The current model rules define a “child” as “a member’s
natural child, or a stepchild or a legally adopted child or a
child in the process of being legally adopted or a child in the
process of being placed in foster care, or a child for whom
the member has a duty of support or a child who has been
placed in the custody of the member or his/her spouse or
partner and who is not a beneficiary of any other medical
scheme”.
3.8
Beneficiary
In terms of the Act, “beneficiary” means a member or a
person admitted as a dependant of a member.
F48
General
3.9
Broker
In terms of the Act, a ”broker” is defined as a person whose
business, or part thereof, entails providing broker services,
but does not include (i)
an employer or employer representative who provides
service or advice exclusively to the employees of that
employer;
(iii)
a trade union or trade union representative who
provides service or advice exclusively to members of
that trade union; or
(iii)
a person who provides service or advice exclusively
for the purposes of performing his or her normal
functions as a trustee, principal officer, employee or
administrator of a medical scheme,
unless a person referred to in (i), (ii) or (iii) elects to be
accredited as a broker, or actively markets or canvasses for
membership of a medical scheme.
The Act also defines “broker services” namely, the provision
of service or advice in respect of the introduction or
admission of members to a medical scheme; or the ongoing
provision of service or advice in respect of access to, or
benefits or services offered by, a medical scheme.
3.10 Late joiner
In terms of the regulations a “late joiner” means an
applicant or the adult dependant of an applicant who, at the
date of application for membership or admission as a
dependant, as the case may be, is 35 years of age or older,
but excludes any beneficiary who enjoyed coverage with one
or more medical schemes as from a date preceding 1 April
2001, without a break in coverage exceeding three
consecutive months since 1 April 2001.
The regulations prescribe a formula to calculate the penalties
payable by such late joiners.
General
F49
Calculating the late joiner penalty
The premium penalties are as follows:
Penalty bands Maximum penalty
1–4 years ................................ 0,05
× contribution
5–14 years ............................... 0,25
× contribution
15–24 years .............................. 0,5
× contribution
25+ years.................................. 0,75
× contribution
To determine the applicable penalty band to be applied to a
late joiner in terms of the first column of the table the
following formula is applied:
A = B minus (35 + C)
Where:
“A” means the number of years referred to in the first
column of the table;
“B” means the age of the late joiner at the time of his or her
application for membership or admission as a dependant;
and
“C” means the number of years of creditable coverage which
can be demonstrated by the late joiner.
In terms of regulation 13 the late joiner penalty can only be
applied to the portion of the contribution related to the
member or any adult dependant who qualifies for late joiner
penalties.
4.
Medical Schemes
4.1
Types of Medical Schemes
There are two types of medical schemes: commercial and
restricted membership schemes (or so-called in-house
schemes).
A commercial medical scheme is also referred to as an open
scheme and is open for membership to the general public.
F50
General
In-house schemes (defined in the Act as “restricted
membership schemes”) are formed by large companies who
wish to establish a private (closed) medical scheme for their
employees. To be eligible for membership of this type of
scheme, the member must be an employee or pensioner of
the employer and membership is, therefore, closed to the
general public.
The Act defines a “restricted membership scheme” as a
medical scheme, the rules of which restrict the eligibility for
membership by reference to:
4.2
(a)
employment or former employment or both in a
profession, trade, industry or calling;
(b)
employment or former employment or both by a
particular employer, or by an employer included in a
particular class of employers;
(c)
membership or former membership or both of a
particular profession, professional association or
union; or any other prescribed matter.
Membership
Admission
In terms of s.24(2)(e), a medical scheme is not allowed to
unfairly discriminate against any person on one or more
arbitrary grounds, including race, age, gender, marital
status, ethnic or social origin, sexual orientation, pregnancy,
disability and state of health.
The Rules of a medical scheme pertaining to the terms and
conditions applicable to the admission of a person to a
medical scheme, must provide for the determination of
contributions on the basis of income or the number of
dependants, or both the income and the number of
dependants, may not provide for any other grounds,
including age, sex, past or present state of health, of the
applicant or one or more of the applicant’s dependants, the
frequency of rendering relevant health services to an
applicant, or one or more of the applicant’s dependants
other than the provisions as prescribed (s.29(1)(n)).
In terms of s.29(3)(a to c), a medical scheme may not
provide in its rules:
General
F51
(a)
for the exclusion of any applicant or a dependant,
subject to the Act, from membership except for a
restricted membership scheme;
(b)
for the exclusion of any applicant or dependant who
would otherwise be eligible for membership to a
restricted membership scheme;
(c)
and for the imposition of waiting periods other than as
provided for in s. 29(A). (Refer to waiting periods
below.)
Continued Membership
The Registrar will not register a medical scheme under s.24
unless provision is made in the scheme’s rules for the
following:
The continuation, subject to conditions as may be
prescribed, of the membership of a member, who retires
from the service of his employer or whose employment is
terminated by his employer on account of age, ill-health or
other disability and his dependants (s.29(1)(s)).
Continued membership of a member’s dependants, subject
to conditions as may be prescribed, after the death of that
member, until such dependant becomes a member of, or is
admitted as a dependant of a member of another medical
scheme (s. 29(1)(t)).
Benefit Options
In terms of s.33, a medical scheme must apply to the
Registrar for the approval of any benefit option if the
medical scheme provides members with more than one
benefit option.
In order to remain financially sound, medical schemes
impose certain limits on the amount and type of relevant
health services that members may claim annually. However,
the Act provides that every medical scheme is to offer
prescribed minimum benefits (PMB) to its members.
Annexure A of the Regulations list the PMB package and
every medical scheme must provide cover for these PMB
conditions and the treatment prescribed.
The medical
scheme may provide in their rules that the cost of a PMB
condition will only be paid in full, if those services are
F52
General
obtained from a designated service provider. The medical
scheme may specify a co-payment in their rules which may
be imposed if the member voluntarily receives treatment for
a PMB condition at a provider other than the designated
service provider. (See regulation 8)
Limits on benefits (Reg. 9, 9A, 9B and 10)
Except for PMB, a medical scheme may pro rata reduce
annual benefits in respect of persons joining the scheme
within a particular financial year.
In terms of the regulations, a medical scheme may not
provide in its rules for the accumulation of unexpended
benefits from one year to the next other than funds in
personal medical savings accounts (PSA) of the member.
Medical schemes are prohibited from allocating more than
25% of the total gross contributions toward the PSA during
the financial year.
PSA funds must be used for the exclusive benefit of the
member and his or her dependants but may not be used to
offset contributions, provided that the medical scheme may
use funds in a member’s personal medical savings account
to offset debt owed by the member to the medical scheme
following that member’s termination of membership of the
medical scheme.
A PSA credit balance must be transferred to another medical
scheme or benefit option with a PSA, as the case may be,
when the member changes medical schemes or benefit
options.
A PSA credit balance must be taken as a cash benefit,
subject to applicable taxation laws, when the member
terminates his or her membership of a medical scheme or
benefit option and then enrols in another benefit option or
medical scheme without a PSA; or does not enrol in another
medical scheme.
It is important to note that funds in the member’s PSA
cannot be used to pay for the costs of PMB.
General
F53
Waiting Periods
The Act defines a “general waiting” period to mean a period
in which a beneficiary is not entitled to claim any benefits.
“Condition-specific waiting period” is defined in the Act as a
period during which a beneficiary is not entitled to claim
benefits in respect of a condition for which medical advice,
diagnosis, care or treatment was recommended or received
within the twelve-month period ending on the date on which
an application for membership was made.
The provisions of s.29A state the following:
(1)
A medical scheme may impose upon a person in
respect of whom an application is made for
membership or admission as a dependant, and who
was not a beneficiary of a medical scheme for a period
of at least 90 days preceding the date of application (a)
a general waiting period of up to three months;
and
(b)
a condition-specific waiting period of up to twelve
months.
Note that the member will not be covered
for any treatment or diagnostic procedures
for PMB conditions for the duration of the
waiting periods.
(2)
A medical scheme may impose upon any person in
was previously a beneficiary of a medical scheme for a
continuous period of up to 24 months, terminating
less than 90 days immediately prior to the date of
application (a)
a condition-specific waiting period of up to twelve
months, except in respect of any treatment or
diagnostic procedures covered within the PMB;
(b)
in respect of any person contemplated in this
subsection, where the previous medical scheme
had imposed a general or condition-specific
waiting period, and such waiting period had not
F54
General
expired at the time of termination, a general or
condition-specific
waiting
period
for
the
unexpired duration of such waiting period
imposed by the former medical scheme.
(3)
A medical scheme may impose upon any person in
was previously a beneficiary of a medical scheme for a
continuous period of more than 24 months,
terminating less than 90 days immediately prior to the
date of application, a general waiting period of up to
three months, except in respect of any treatment or
diagnostic procedures covered within the prescribed
minimum benefits.
(4)
A medical scheme may not impose a general or a
condition-specific waiting period on a beneficiary who
changes from one benefit option to another within the
same medical scheme, unless that beneficiary is
subject to a waiting period on the current benefit
option, in which case any remaining period may be
applied.
(5)
A medical scheme may not impose a general or a
condition-specific waiting period on a child dependant
born during the period of membership.
(6)
A medical scheme may not impose a general or
condition-specific waiting period on a person in
respect of whom application is made for membership
or admission as a dependant, and who was previously
a beneficiary of a medical scheme, terminating less
than 90 days immediately prior to the date of
application, where the transfer of membership is
required as a result of (a)
change of employment; or
(b)
an employer changing or terminating the medical
scheme of its employees, in which case such
transfer shall occur at the beginning of the
financial year, or reasonable notice must have
been furnished to the medical scheme to which
General
F55
an application is made for such transfer to occur
at the beginning of the financial year.
4.3
(7)
A medical scheme may require an applicant to provide
the medical scheme with a medical report in respect of
any proposed beneficiary only in respect of a condition
for which medical advice, diagnosis, care or treatment
was recommended or received within the twelvemonth period ending on the date on which an
application for membership was made.
(8)
In respect of members who change medical schemes
in terms of subsection (6), where the former medical
scheme had imposed a general or condition-specific
waiting period and such waiting period had not
expired at the time of termination, the medical
scheme to which the person has applied may impose a
general or condition-specific waiting period for the
unexpired duration of such waiting period imposed by
the former medical scheme.
Provisions relating to Complaints and Appeals
Chapter 10 of the Act deals with Complaints.
In terms of s.47(1) and (2) the Registrar must, where he
has received a complaint, furnish the party concerned with
full details of the complaint and request that such party
furnish the Registrar with written comments thereon within
30 days or such further period as the Registrar may allow.
Once the Registrar is in receipt of the comments he may
either resolve the matter or submit the matter to the
Council, whereupon they will take such steps, as deemed
necessary to resolve the complaint.
In essence a complaint is defined as a complaint against any
person who is regulated by the Act and who contravened the
Act or acted improperly in respect of a matter that falls
within the jurisdiction of the Council.
Parties may appeal against the decision of the Registrar and
the provisions relating thereto are found in s.48 to s.50 of
the Act.
F56
General
4.4
Provisions relating to Financial Soundness of the
Scheme
Stringent requirements are provided for in s.35 of the Act
and under Reg. 29.
5.
Duties and Obligations of the Broker
Certain provisions relating to brokers are set out hereunder.
Compensation of brokers (S.65 and Reg. 28)

Section 65 of the Act provides that no person may act or be
compensated as a broker unless the Council has accredited
such person. This section provides further that a broker may
not be directly or indirectly compensated for providing
broker services by any person other than 
a medical scheme;

a member or prospective member, or the employer of
such member or prospective member, in respect of
whom such broker services are provided; or

a broker employing such broker.

Reg. 28(1) provides that a medical scheme is not allowed to
compensate any person in terms of section 65 for acting as
a broker unless such person enters into a prior written
agreement with the medical scheme concerned.

Reg. 28(2) provides that, subject to sub-regulation (3), the
maximum amount payable to a broker by a medical scheme
in respect of the introduction of a member to a medical
scheme by that broker and the provision of ongoing service
or advice to that member, shall not exceed 
R65,65 plus value-added tax (VAT), per month, or
such other monthly amount as the Minister shall
determine annually in the Government Gazette, taking
into consideration the rate of normal inflation; or

3% plus value added tax (VAT) of the contributions
payable in respect of that member,
whichever is the lesser.
General
F57

Reg. 28(3) states that a medical scheme may not
differentiate the amount of compensation offered to brokers
for the introduction of members to the scheme based upon
the anticipated claims experience, age, health status or
employment status of the members being introduced.

Reg. 28(4) goes on to state that sub-regulation (2) must not
be construed to restrict a medical scheme from applying a
sliding scale based on the size of the group being introduced
provided that prescribed maximum amount is not exceeded
and that it may not pay a lesser amount for the introduction
of individual members than the per capita amount payable in
respect of introduction of members who form part of a
group.

Reg. 28(6) provides that the ongoing payment by a medical
scheme to a broker in terms of this regulation is conditional
upon the broker 
continuing to meet service levels agreed to between
the broker and the medical scheme in terms of the
written agreement between them;and

receiving no other direct or indirect compensation in
respect of broker services from any source, other than
a possible direct payment to the broker of a
negotiated professional fee from the member himself
or herself (or the relevant employer, in the case of an
employer group).

In terms of Reg. 28(7), a medical scheme shall immediately
discontinue payment to a broker in respect of services
rendered to a particular member if the medical scheme
receives notice from that member (or the relevant employer,
in the case of an employer group), that the member or
employer no longer requires the services of that broker.

Reg. 28(8) provides that a medical scheme may not
compensate more than one broker at any time for broker
services provided to a particular member.

Reg. 28(9) provides that any person who has paid a broker
compensation
where
there
has
been
a
material
misrepresentation, or where the payment is made
consequent to unlawful conduct by the broker, is entitled to
F58
General
the full return of all the money paid in consequence of such
material misrepresentation or unlawful conduct.
Admission of members to a medical scheme (Reg. 28A)
A medical scheme must not prevent a person from applying for
membership of a medical scheme for the reason that such person
is not using a broker to apply for such membership.
Accreditation of brokers (Reg. 28B)


Any person desiring to be accredited as a broker must apply
in writing, and the application must be accompanied by –

documentary proof of a recognised
qualification and appropriate experience;

documentary evidence of having passed or current
enrolment in a relevant course of study recognised by
the Council;

in the case of a juristic person, documentary proof
and a sworn affidavit that any person employed by the
person, or acting under the auspices of the person,
who provides or will provide advice on medical
schemes to clients, is accredited with Council as a
broker or an apprentice broker; and

such additional information as the Council may deem
necessary.
A recognised educational
experience means
qualification
or
educational
and
appropriate
equivalent
educational

Grade 12 education
qualification; and

a minimum of two years demonstrated experience as
broker or apprentice broker in health care business.

Those not meeting the qualifications for a broker may apply
to the Council for accreditation as apprentice brokers and
such applications must be accompanied by prescribed
documentary proof.

In the case of a natural person, an application for
accreditation as a broker or an apprentice broker must also
be accompanied by information to satisfy the Council that
the applicant complies with
General
F59

any requirements for fit and proper brokers which
may be determined by the Council, by notice in the
Gazette; and

any relevant requirements for fit and proper financial
services providers or categories of providers which
may be determined by the Registrar of Financial
Service Providers in terms of the Financial Advisory
and Intermediary Services Act.

The Council must, after consideration of an application,
either grant the application (which could be subject to
certain conditions), or refuse the application providing
reasons for such refusal.

Accreditation is only granted for a period of twenty-four
months. The Council will also provide the successful
applicant with a certificate from the Registrar, clearly
specifying the expiry date of the accreditation and any
conditions that may be imposed by the Council in terms of
the regulations.

The Council may add, withdraw or amend any condition or
restriction in respect of the accreditation (after affording the
broker an opportunity to be heard), if the Council is satisfied
that any such addition, withdrawal or amendment is justified
and will not unfairly prejudice the interests of clients.

An application for a renewal of accreditation must be made
to the Council at least three months prior to the date of
expiry of the accreditation and upon such other conditions as
prescribed.

A person will be disqualified from accreditation as a broker
or an apprentice broker if he or she 
is an unrehabilitated insolvent;

is disqualified under any law from carrying on his or
her profession; or

has at any time been convicted of any offence
involving dishonesty (e.g. fraud, theft, corruption or
forgery), and has been sentenced therefore to
imprisonment without the option of a fine.
F60
General
Suspension or withdrawal of accreditation (Reg. 28C)

The Council may at any time suspend or withdraw any
accreditation granted in terms of these regulations if the
Council is satisfied that the relevant broker or apprentice
broker 
no longer meets the requirements contemplated in the
regulations;

failed to make a full disclosure of all relevant
information to the Council, or furnished false or
misleading information;

has contravened or failed to comply with any provision
of the Act;

has failed to comply in a material manner with any
relevant code of conduct for financial service providers
published in terms of the Financial Advisory and
Intermediary Services Act;

has conducted business in a manner that is seriously
prejudicial to clients or the public interest; or

is disqualified from performing broker services in
terms of the regulations.

Before suspending or withdrawing any accreditation, the
Council is to afford the broker or apprentice broker
concerned, a reasonable opportunity to make a submission
in response to any allegation made against such broker or
apprentice broker. Where the accreditation is suspended or
withdrawn, the Council must make known the terms of the
suspension or withdrawal or subsequent lifting thereof, by
means of any appropriate public media announcement.

On withdrawal of the accreditation of a person as a broker or
apprentice broker, the Council may determine a reasonable
period within which such person may not reapply for
accreditation as a broker or apprentice broker, taking into
account the nature of the circumstances giving rise to such
withdrawal.
General
6.
F61
Penalties
In terms of s.66 of the Act, any person who contravenes the
legislation may be fined or imprisoned for a period not exceeding
five years, or both a fine and imprisonment.
S.66(3) read with the regulations also provide that a penalty of R1
000 per day for non-compliance will be payable where any person
fails to furnish the Council or the Registrar with
a return,
information, financial statement, document or a reply to an
enquiry (contemplated in the legislation), within the prescribed or
specified period.
F62
General
Money Laundering
1.
Introduction
This section gives a broad overview of the concept of money
laundering and South African legislation relating thereto.
Money laundering may generally be described as any process that
obscures the illegal nature or existence, location or application of
the proceeds of a crime. Put differently, money laundering is a
process of using the proceeds of an unlawful activity and
converting it so that the proceeds appear to be derived from a
legitimate source.
2.
Prevention of Organised Crime Act 121 of 1998
(POCA)
This Act repealed the entire Proceeds of Crime Act 76 of 1996 and
repealed the money laundering provisions contained in the Drugs
and Drug Trafficking Act 140 of 1992.
Chapter 3 of POCA deals specifically with money laundering
provisions, namely:
2.1
Offences
Section 4 makes it an offence for any person who knowingly
launders the proceeds of unlawful activities. For example, an
intermediary will contravene this section if he or she sells a
client an insurance policy with the knowledge that the
money for such policy has been derived from the proceeds
of an unlawful activity.
Section 5 makes it an offence for any person to knowingly
assist another person to benefit from the proceeds of
unlawful activities.
Section 6 makes it an offence to acquire, use or possess
property that one knows is the proceeds of unlawful
activities.
Note that the knowledge requirement referred to in s.4, s.5
and s.6 will also be satisfied if a person ought reasonably to
have known that the property concerned is or forms part of
the proceeds of unlawful activities.
General
2.2
F63
Unlawful activities
Proceeds of unlawful activities are defined as:

any property or service, advantage, benefit or reward;

which was derived, received or retained, directly or
indirectly, in SA or elsewhere, at any time before or
after the commencement of the Act,

in connection with or as a result of any unlawful
activity carried on by any person.
Unlawful activity is defined as any conduct which constitutes
a crime or which contravenes any law, whether the conduct
occurred before or after the commencement of the Act or
whether it occurred in SA or elsewhere.
2.3
Reporting
S.7 of POCA dealt with the reporting obligations in respect of
suspicious transactions. S.7 has since been repealed and
replaced by S.29 of the Financial Intelligence Centre Act
(FICA) to extend the obligation to any person who carries on
business or who is in charge of a business or who is
employed by a business. Refer to the FICA section for
further detail.
2.4
Penalties
Section 8 provides for substantial penalties for the
contravention of the sections mentioned above.
Upon
conviction of contravening s.4, s.5 or s.6 one could face a
fine not exceeding R100 million or imprisonment not
exceeding 30 years. Furthermore, the proceeds of the crime
may also be forfeited to the state in terms of the
confiscation and forfeiture powers under Chapter 5 of POCA.
F64
3.
General
Financial Intelligence Centre Act 38 of 2001
(FICA)
Certain definitions in POCA have been incorporated by the
Financial Intelligence Centre Act 38 of 2001 (FICA). These include
the meaning of money laundering, assisting persons to benefit
from the proceeds of unlawful activities, and the acquisition,
possession or use of proceeds of unlawful activities. FICA also
repealed the reporting duty under POCA, which has the effect that
suspicious transactions must now be reported under FICA.
FICA has further been amended by the provisions of the Protection
of Constitutional Democracy Against Terrorist and Related
Activities Act 33/2004, POCDATARA (refer to the note at the end of
this section).
A broad overview of the salient provisions of FICA is set out
hereunder.
3.1
Purpose of FICA
The purpose of FICA is to establish a Financial Intelligence
Centre and a Money Laundering Advisory Council in order to
combat money laundering activities; to impose certain
duties on institutions and other persons who might be used
for money laundering purposes and to amend POCA.
3.2
Definitions

“Accountable Institution” means a person referred to
in Schedule 1 of the Act. In this regard, item 8 of the
Schedule includes a person who carries on a long-term
insurance business, as defined in the Long-term
Insurance Act 52 of 1998, including an insurance
broker and an agent of an insurer.

“Business relationship” means an arrangement
between a client and an accountable institution for the
purpose of concluding transactions on a regular basis.

“Centre” means the Financial Intelligence Centre (FIC)
established by the Act.

“Council” means the Money Laundering Advisory
Council established in terms of the Act, and “Director”
means the director of the aforesaid Council.
General
F65

“Money laundering” or “money laundering activity”
means an activity which has or is likely to have the
effect of concealing or disguising the nature, source,
location, disposition or movement of the proceeds of
unlawful activities or any interest which anyone has in
such proceeds. The definition extends the aforesaid
meaning to include any activity contemplated in POCA.
Note: The knowledge requirement will be satisfied if a person
ought reasonably to have known that the property concerned is or
forms part of the proceeds of unlawful activities.
3.3

“Proceeds of unlawful activity” has the meaning
attributed to it in terms of POCA.

“Single transaction” means a transaction other than a
transaction concluded in the course of a business
relationship.

“Unlawful activity” has the meaning attributed to it in
terms of POCA.
Role-players
Accountable Institutions
The provisions of FICA are applicable to those persons or
entities listed in Schedule 1 to the Act. It includes, amongst
others, assurers, independent brokers, attorneys, banks and
estate agents.
Financial Intelligence Centre (FIC)
The FIC has been established in terms of the Act.
Accountable institutions are required to provide FIC with
certain information as required by the Act.
The principal objective of FIC is to assist in the identification
of the proceeds of unlawful activities and the combating of
money laundering activities.
Other objectives of FIC include, amongst others, to make
available information collected to investigating authorities,
the South African Revenue Services and to exchange
information with similar bodies in other countries regarding
money laundering activities.
F66
General
A Director of the FIC must be a fit and proper person,
appointed by the Minister of Finance.
Money Laundering Advisory Council (Council)
The Council is to advise the Minister of Finance on policies
and best practices in identifying and combating money
laundering. It must also act as a forum in which the FIC,
associations
representing
categories
of
accountable
institutions, organs of state and supervisory bodies can
consult one another.
Supervisory Bodies
In Schedule 2 to FICA, the Supervisory Bodies are listed,
namely: the Financial Services Board, the South African
Reserve Bank, the Registrar of Companies, the Estate
Agents Board, the Public Accountants and Auditors Board,
the National Gambling Board, the JSE Securities Exchange
and the Law Society.
In terms of the provisions of FICA these bodies are obliged
to report to the FIC all suspicions of money laundering
activities relating to accountable institutions and the FIC
may also require related information from such bodies.
3.4
Identification and verification of clients and
other persons
FICA provides that an accountable institution may not
establish a business relationship or conclude a single
transaction with a client unless it has taken the prescribed
steps to establish and verify the identity of a client and, if
such client is represented by another person, to also
establish the authority of such person in the business
relationship and to verify the identity particulars relating to
such person. Implementation of this provision took effect on
30 June 2003 and is therefore applicable to clients who
transacted with the accountable institution on or after 30
June 2003.
Where an accountable institution had established a business
relationship with a client prior to FICA, such accountable
institution may not conclude a transaction in the course of
that business relationship unless the prescribed steps have
General
F67
been taken. Implementation of this provision (i.e. relating to
existing clients) took effect on 30 June 2004.
Reference is made above to the “prescribed steps” in the
identification and verification process. In this regard
regulations have been promulgated which set out the duties
of the accountable institution. Depending on the entity that
an accountable institution is dealing with, certain information
is to be obtained in the identification of such an entity and
which information must then be verified by comparing the
particulars with other information. A further distinction is
also made between South African citizens, residents, legal
entities and foreign nationals and legal entities.
So, for example, where a natural person (RSA citizen) wants
to purchase a life assurance policy, the accountable
institution would need to identify the client by obtaining the
full names, date of birth, identity number and residential
address of such client. These details must then be verified
by comparing it, for example, with the identity document of
the client. As far as the particulars relating to the residential
address are concerned, the regulations require the
accountable institution to verify such details by comparing
these particulars with information which can reasonably be
expected to achieve such verification and is obtained by
reasonably practical means, taking into account any
guidance notes concerning the verification of identities which
may apply to that accountable institution.
Guidance Notes
The regulations allow accountable institutions to have regard
to guidance notes in certain instances of identification and
verification of clients. In the case of verifying the client’s
residential address, the guidance notes could, for example,
provide that a utility bill reflecting the name and residential
address of the client may be used.
Specific Exemptions
The legislation also provides for exemptions in terms of
which accountable institutions do not have to identify and
verify clients under certain circumstances.
There are
general exemptions and exemptions that apply to certain
accountable institutions in particular. Some of the specific
F68
General
exemptions applicable to life assurers and independent
brokers include, amongst others, the following:

Any long-term insurance policy, which provides
benefits only upon the death, disability, sickness or
injury of the life insured under the policy.

Any long-term insurance policy in respect of which
recurring premiums are paid, which will amount to an
annual total not exceeding R25 000, subject to the
condition that identification and verification obligations
would have to be complied with in respect of every
client –



who increases the recurring premiums so that
the amount of R25 000 is exceeded;

who surrenders such a policy within three years
after its commencement; or

to whom that accountable institution grants a
loan or extends credit against the security of
such policy within three years after its
commencement.
Any long-term insurance policy in respect of which a
single premium not exceeding R50 000 is payable,
subject to the condition that identification and
verification obligations would have to be complied with
in respect of every client –

who surrenders such a policy within three years
after its commencement;

to whom that accountable institution grants a
loan or extends credit against the security of
such a policy within three years after its
commencement.
Any contractual agreement to invest in unit trust or
linked product investments in respect of which
recurring payments are payable amounting to an
annual total not exceeding R25 000, subject to the
condition that identification and verification obligations
would have to be complied with in respect of every
client who liquidates the whole or part of such an
General
F69
investment within one year after the making of the
first payment.

Any unit trust or linked product investment in respect
of which a once-off consideration not exceeding R50
000 is payable, subject to the condition that
identification and verification obligations would have
to be complied with in respect of every client who
liquidates the whole or part of such an investment
within one year after making the first payment.

Any other long-term insurance policy on condition that
within the first three years after the commencement
of the policy the surrender value of the policy does not
exceed 20% of the value of the premiums paid in
respect of that policy.
General Exemptions
A significant general exemption applicable to all accountable
institutions provides that:
Every accountable institution is exempted from compliance
with the identification and verification obligations in respect
of a business relationship or single transaction which is
established or concluded with that institution (the second
accountable institution) by another accountable institution
(the primary accountable institution) acting on behalf of a
client of that primary accountable institution, subject to the
condition that the primary accountable institution confirms in
writing to the satisfaction of the second accountable
institution that 
It has established and verified the identity of the client
in accordance with the Act, or

In terms of its internal rules and the procedures
ordinarily applied in the course of establishing
business
relationships
or
concluding
single
transactions the primary accountable institution will
have established and verified the identity of every
client on whose behalf it will be establishing business
relationships or concluding single transactions with the
second accountable institution.
F70
General
3.5
Record keeping
FICA requires that, whenever an accountable institution
establishes a business relationship or concludes a
transaction with a client, it must keep record of, inter alia,
the following:

The identity of the client

The identity and authority of a person acting on behalf
of the client

The identity and authority of a client acting on behalf
of another person

The manner in which the identity was established

The nature of the business relationship or transaction

The parties and amounts involved in the case of a
transaction

The name of the person who obtained the information
on behalf of the accountable institution

Documents used to identify and verify the client or
other person
Records may be kept in electronic form and accountable
institutions must keep records, which relate to:

the establishment of a business relationship, for at
least five years from the date on which the business
relationship is terminated, and

in respect of a transaction which is concluded, for at
least five years from the date on which that
transaction is concluded.
FICA also provides that third parties may keep records on
behalf of the accountable institution as long as the
accountable institution has free and easy access to the
records. Where third parties are used to keep records, the
accountable institution must provide FIC with the particulars
of such third parties.
General
3.6
F71
Reporting duties and access to information
Note: The provisions outlined below came into operation on
3 February 2003.
Accountable institutions to advise
FIC may require an accountable institution to advise whether
a specified person is or has been a client or whether any
specified person has acted on behalf of such a client.
Cash transactions above prescribed limit
The FIC requires that an accountable institution report
particulars of transactions concluded with a client in excess
of the prescribed amount within a prescribed period.
Suspicious and unusual transactions
A person who carries on a business or is in charge of or
manages a business or who is employed by a business and
who knows or suspects that 
the business has received or is about to receive the
proceeds of unlawful activities;

a transaction or series of transactions to which the
business is a party is unlawful;

the business is facilitated or is likely to facilitate the
transfer of the proceeds of unlawful activities;

has no apparent business or lawful purpose;

a transaction is conducted for the purpose of avoiding
to give rise to a reporting duty under the Act; or

business conducted may be relevant to the
investigation of an evasion or attempted evasion of a
duty to pay any tax, duty or levy imposed by
legislation administered by the Commissioner for the
South African Revenue Service; or

the business has been used or is about to be used in
any way for money laundering purposes,
F72
General
must, within the prescribed period (i.e. 15 days) after the
knowledge was acquired or the suspicion arose, report to
FIC the grounds for the knowledge or suspicion and the
prescribed particulars concerning the transaction or series of
transactions.
A person who knows or suspects that a transaction or a
series of transactions about which enquiries are made, may,
if that transaction or those transactions had been concluded,
have caused any of the consequences referred to in the
paragraph above, must report to the FIC the grounds for the
knowledge or suspicion and the prescribed particulars
concerning the transaction or series of transactions.
No person who made or must make a report as required by
FICA may disclose that fact or any information regarding the
contents of any such report to any other person, including
the person in respect of whom the report is or must be
made, unless such disclosure is made 
within the scope of the powers and duties of that
person in terms of any legislation;

for the purpose of carrying out the provisions of FICA;

for the purpose of legal proceedings, including any
proceedings before a judge in chambers; or

in terms of an order of court.
Similarly, no person who knows or suspects that a report
has been or is to be made in terms of FICA may disclose
that knowledge or suspicion or any information regarding
the contents or suspected contents of any such report to any
other person, including the person in respect of whom the
report is or is to be made.
Reporting procedures and furnishing of additional
information
The FIC may request an accountable institution to furnish it
with further information after having received a report from
such an institution and which information is to be provided
without delay.
General
F73
Continuation of transactions
An accountable institution may continue with and carry out
the transaction in respect of which the report is required to
be made unless FIC directs otherwise.
Intervention and monitoring orders by FIC
Under certain circumstances the FIC may direct an
accountable institution not to proceed with the carrying out
of a particular transaction or proposed transaction for a
specified period, to enable the FIC to make the necessary
inquiries concerning such a transaction and, if necessary, to
inform an investigating authority thereof.
The FIC may also, under certain circumstances, obtain a
court order in terms of which an accountable institution is to
report to the FIC on such terms and in such confidential
manner as may be specified in the court order.
Information held by supervisory bodies and the South
African Revenue Services
The FIC requires of these supervisory bodies to report any
suspicions they may have relating to an accountable
institution that, wittingly or unwittingly, has or is about to
receive proceeds of unlawful activities.
The FIC may also require such bodies or SARS to provide it
with relevant information pertaining to suspected money
laundering activities.
Confidentiality
Except under certain circumstances relating to attorney
client privilege, there is no duty of secrecy or confidentiality
or any other restriction on the disclosure of information
required to be provided in terms of FICA.
Protection of persons making reports
Unlike POCA, FICA protects those persons and/or
accountable institutions against criminal or civil action who
in good faith performed obligations set out in the Act.
Any person or accountable institution who had made a
report or supplied information in terms of the Act cannot be
F74
General
compelled to give evidence in criminal proceedings arising
from such a report.
Access to information held by the FIC and protection
of confidential information
Only certain specific investigating authorities or supervisory
bodies may, subject to certain conditions, have access to the
information held by FIC.
No person may disclose confidential information held by or
obtained from FIC except 
within the scope of the powers and duties of that
person in terms of any legislation;

for the purpose of carrying out the provisions of FICA;

for the purpose of legal proceedings, including any
proceedings before a judge in chambers; or

in terms of an order of court.
Referral of suspected offences
FIC may, upon reasonable grounds of suspecting an
accountable institution of failing to comply with FICA, refer
the matter to the relevant investigating authority or
supervisory body.
3.7
Measures to promote compliance by accountable
institutions
Note: The provisions set out hereunder came into operation
on 30 June 2003.
Formulation and implementation of internal rules
Every accountable institution is obliged to formulate and
implement internal rules concerning, amongst others, the
identification and verification requirements and the record
keeping requirements.
Accountable institutions are also required to make its
internal rules available to each of its employees involved in
transactions to which FICA applies and must supply FIC or
an applicable supervisory body with a copy of such rules
upon request.
General
F75
Training and monitoring of compliance
Accountable institutions must provide training to its
employees to enable them to comply with FICA and the
internal rules of the particular accountable institution.
Accountable institutions must also appoint a person with the
responsibility to ensure compliance by –
3.8

the employees of the accountable institution with the
provisions of FICA and the internal rules applicable to
them; and

the accountable institution with its obligations under
FICA.
Offences and Penalties
The following offences and penalties are applicable :

Failure to identify persons - imprisonment not
exceeding 15 years or a fine not exceeding R100 000
000

Failure to keep records - imprisonment not exceeding
15 years or a fine not exceeding R100 000 000

Failure to formulate and implement internal rules imprisonment not exceeding 5 years or a fine not
exceeding R10 000 000

Failure to provide training or appoint compliance
officer- imprisonment not exceeding 5 years or a fine
not exceeding R10 000 000
Provisions relating to the offences listed below have come
into operation on 3 February 2003. If convicted of any of the
offences listed below, a penalty of imprisonment not
exceeding 15 years or a fine not exceeding R 100 000 000,
may be imposed:

Failure to comply with a request of FIC

Failure to comply with direction of FIC

Failure to comply with monitoring order

Disclosure of information obtained from FIC
F76
General

Obstructing FIC representative in performing his/her
duty

Conducting transactions to avoid reporting duties
Note: The Protection of Constitutional Democracy Against Terrorist and
Related Activities Act 33 of 2004 (POCDATARA) amended certain
provisions of FICA (sec 29) to extend the reporting of suspicious
and unusual transactions to also cover reporting of property which
is connected to terrorist activities. It also amended sec 28A of
FICA which requires the reporting of any property that is
associated with terrorist activities. These provisions came into
operation on 20 May 2005.
General
F77
Compliance in terms of the Policyholder
Protection Rules
(Long-term Insurance Act 52/1998)
On 1 July 2001 the Policyholder Protection Rules (PPR) were promulgated
in terms of the Long-term Insurance Act. As of 30 September 2004
these rules have subsequently been repealed, and replaced by a new set
of rules.
The new PPR has as its objective to ensure that long-term policies are
entered into, executed and enforced in accordance with sound insurance
principles and practice in the interest of the parties and the public
interest.
The rules furthermore specifically state that it does not impact on the
duty of any person to comply with the provisions of FAIS.
The Financial Advisory and Intermediary Services Act of 37/2002, has
effectively included the provisions of the previous PPR as part of the Act.
The new PPR deals with amongst other issues regarding direct
marketers, agreements with intermediaries, and rules on cancellation of
polices and rules of fund policies.
F78
General
The Financial Advisory and
Intermediary Services Act
1.
Introduction
The Financial Advisory and Intermediary Services Act 37 of 2002
(FAIS) was promulgated on 15 November 2002. Anyone rendering
financial services, as defined, must be licenced in order to operate.
The purpose of FAIS is to regulate the rendering of financial
advisory and intermediary services, and thereby make the financial
services industry more professional. FAIS will be regulated by the
Financial Services Board.
A broad overview of certain provisions of the legislation and
subordinate legislation is set out hereunder.
2.
Pertinent definitions
“Financial services providers” (FSP or simply a provider) are
defined as persons who furnish advice and/or render intermediary
service as part of a regular feature of their business.
“Advice” means any recommendation, guidance or proposal of a
financial nature furnished, by any means or medium to any client
or group of clients in respect of dealings with financial products,
and whether or not:

the advice is given while doing financial planning for the
client, or

a financial product is sold as a result of such advice.
However, advice does not include giving factual advice:

On the procedure for entering into a transaction in respect of
a financial product;

In relation to the description of a financial product;

In answer to routine administrative queries regarding a
financial product;

In the form of objective information about a financial
product, or

By displaying or distributing promotional material.
General
F79
“Financial Product” is defined very widely and includes, amongst
others, long and short-term insurance policies, benefits provided
by pension fund organisations, shares, money-market instruments,
participatory interests in collective investment schemes (e.g. unit
trusts), foreign currency denominated investment instruments,
bank deposits, and health service benefits provided by medical
schemes. However, it does not include fixed property.
“Product Supplier” means any person who issues a financial
product by virtue of any law.
“Intermediary Services” is defined as any act, other than the
furnishing of advice as defined, performed by a person for, or on
behalf of a client or product supplier which:

Results in a client entering into a transaction with a product
supplier in respect of a financial product; or

Is done with a view to a dealing in, managing, keeping in
safe custody, maintaining or servicing a financial product in
which a client has invested, or collecting or accounting for
premiums, or processing a client’s claim against a product
supplier.
“Client” means a specific person or group of persons, excluding the
public, who is or may become the subject to whom a financial
service is rendered intentionally, or is the successor in title of such
person or the beneficiary of such service.
“Key Individuals” are defined as natural persons responsible for
the managing or overseeing, either alone or together with other
people, the activities of an FSP, or of a representative.
“Representative” means any person who renders a financial service
for or on behalf of an FSP, in terms of conditions of employment or
any other mandatory agreement, but excludes a person rendering
clerical, technical, administrative, legal, accounting service, which
service:

does not require judgement on the part of that person; or

does not lead a client to any specific transaction in respect
of a financial product in response to general enquiries.
“Administrative” & “Discretionary” FSP’s. The former renders
intermediary services in respect of certain financial products on the
instruction of clients or other FSP’s through the method of bulking
F80
General
(e.g. a LISP). The latter provides a discretionary intermediary
service as regards the choice of financial product, but does not
bulk client’s funds or financial products belonging to clients (e.g.
an asset manager). There is a specific code relating to these FPS’s
which will not be covered hereunder.
3.
Licensing
As from 30 September 2004, any person rendering financial
services, as defined, must be licensed.
In applying for a licence, the FSP must include details of its key
individuals and, if applicable, details of its representatives.
The Act makes provision for FSP’s to apply for any exemption from
any provision of the legislation.
Once the Registrar is satisfied with the application, it will issue the
FSP with a licence authorising the FSP to act as such.
The Registrar has certain powers such as the imposition of certain
conditions to the licence. The Registrar may also, for example,
suspend or withdraw a licence where the FSP no longer meets the
requirements of the legislation.
Once licensed, the FSP must display a certified copy of the licence
in each of the FSP’s business premises; ensure that all the FSP’s
business documentation, advertisements and other promotional
material indicate that the FSP is licensed to act as such; and
ensure that the licence is available to persons requesting proof of
such licence.
4.
Key Individuals
Both FSP’s and their representatives may need to have key
individuals.
The FSP must include details of its key individuals in its licence
application to act as an FSP.
Key individuals are required to possess personal character qualities
of honesty and integrity; meet the competency and operational
requirements; and also the financial standing requirements as
provided for in the Fit and Proper Requirements contained in the
subordinate legislation.
General
F81
The Registrar may require to seek prior approval for a key
individual to act as such, if one key individual takes over from
another key individual; a new key individual is appointed; or a key
individual’s personal circumstances have changed so that the
individual is no longer a fit and proper person, as defined.
5.
Representatives
A Representative is a person who renders a financial service to a
client for or on behalf of an FSP. (Refer to the definition above.)
A person may not carry on business by rendering financial services
to clients for or on behalf of a person who is not registered to act
as an FSP.
A person may not act as a representative of an FSP, unless that
person is able to provide clients with confirmation certified by the
FSP, that:

the representative has a service contract or other mandatory
agreement to represent the FSP, and

the FSP accepts responsibility for the activities that the
representative performs within the scope of, or in the course
of implementing, such contract or agreement.
Representatives must meet similar requirements, as those
required for key individuals, namely that they have to possess
personal character qualities of honesty and integrity and meet the
competency requirements, as set out in the Fit & Proper
Requirements.
FSP’s must maintain registers of representatives (and key
individuals of such representatives, where applicable), which must
be regularly updated and be available to the Registrar for
reference or inspection purposes. The register must:

contain the name and business address of every
representative (and key individual of a representative,
where applicable);

state whether representatives act for the FSP as employees
or as mandatories, and

specify in which categories representatives are competent to
render financial services.
F82
General
A FSP must ensure that representatives who are no longer
competent to act when rendering a financial service on behalf of
the FSP, are prohibited from rendering any further financial
service. Put differently, such a representative is to be debarred
from rendering financial services on behalf of the FSP.
The FSP must remove such representatives’ names (and the
names of the key individuals of such representatives, where
applicable) from its register, and inform the Registrar in writing
within a period of 30 days of having done so.
The provider is under a further obligation to take immediate steps
to ensure that debarment does not prejudice the interests of such
representatives’ clients, and to properly conclude any unconcluded
business of such representatives.
6.
Fit and Proper Requirements
FAIS has introduced a number of fit and proper requirements
applicable to financial services providers. In order to be deemed fit
and proper an FSP, and where applicable any key individual and/or
representative of such FSP, must meet the experience and
qualification requirements as well as complete the necessary
regulatory examinations and continuous professional development
requirements as set out in the FSB’s Board Notice 106 of 2008
(hereinafter referred to as “Board Notice 106”) (as amended). The
date by which a particular requirement will need to be
obtained/completed, will depend on when the individual was first
authorised to render financial services in the financial services
industry.
(i)
Experience
FSP’s, key individuals and representatives need to meet the
experience requirements as stipulated in Part IV of Board Notice
106.
(ii)
Qualifications
FSP’s, key individuals and representatives need to meet the
qualification requirements as stipulated in Part V of Board Notice
106.
General
(iii)
F83
Regulatory Examinations
Details regarding the regulatory examinations are contained in Part
VI of Board Notice 106. There are two levels of regulatory
examinations:
(iv)

Regulatory Examinations Level 1 – All persons in the
financial services industry will need to complete these
examinations, which will test knowledge relating to the
regulatory framework that governs the financial services
industry.

Regulatory Examinations Level 2 – Only representatives will
need to complete these examinations, which will be product
specific examinations. Where a key individual also renderers
financial services, these examinations would also have to be
completed by such individual.
Continuous Professional Development (CPD)
The CPD requirement has been introduced to ensure that financial
services providers maintain professional competence, knowledge
and skill at a level required to ensure that the client receives
competent professional service based on up-to-date developments
in legislation and the financial services industry. Details regarding
the CPD requirements are contained in Part VII of Board Notice
106.
F84
General
The table that follows is a summary of the qualifications,
regulatory examinations and CPD requirements of Board Notice
106.
Date by which
qualifications must
be obtained
Representat
ives and
KI’s
authorised
prior to
31/12/2007
Representatives
and KI’s
authorised in
2008 and 2009
KI’s authorised
in 2010
Representatives
authorised in
2010
31/12/2009
Choice:
Present
Qualification:
31/12/2011
Must already be
in possession of
required
qualification
31/12/2015
31/12/2012
31/12/2012
Date by which RE1
must be obtained
30/06/2012
New
Qualification:
31/12/2013
30/06/2012
Date by which RE2
must be obtained
31/12/2013
31/12/2013
31/12/2014
31/12/2016
Date by which 1st
round of CPD’s must
be completed
31/12/2016
31/12/2016
31/12/2017
31/12/2017
KI’s authorised as from 1 Jan
2011 and onwards
Representatives authorised as from
1 Jan 2011 and onwards
Date by which
qualifications must
be obtained
Must already be in possession
of required qualification
Complete a FSB approved
qualification within 5 years of
authorisation
Date by which RE1
must be obtained
Must already be in possession
of RE1
Complete within 2 years of
authorisation
Date by which RE2
must be obtained
authorising as a representative
authorisation
Date by which 1st
round of CPD’s must
be completed
Start the year after completing
RE 2
Start the year after completing RE 2
General
F85
Where a representative or a key individual has not held a
regulated role in terms of FAIS for a period of 5 years or longer,
he or she will be deemed a new applicant and will need to obtain
the qualification and regulation examinations requirements
relevant to his or her new application date.
Note:
For ease of reference, all of the Board Notices and all the
abovementioned information can be accessed via the FSB website
at www.fsb.co.za
7.
Compliance Officer
A FSP must ensure that an independent compliance function exists
or is established, as part of its obligation to manage the risks of its
business.
A FSP with more than one key individual, or one or more
representatives, must appoint at least one compliance officer to
monitor compliance with the Act by the FSP and its
representatives.
It follows that it is not necessary for a natural person, conducting
business as an FSP alone and for his/her own account, to appoint a
Compliance Officer.
If it is unnecessary to appoint a compliance officer; however, the
FSP or key individual is personally responsible for the compliance
obligations laid down in the Act and, in this regard, certain persons
could fulfil this function including, inter alia, a sole proprietor, a
member of a close corporation or a director of a company, trustee
or an auditor of a firm.
The FSP may appoint a person who does not fall into one of these
categories, provided the person possesses the prescribed minimum
qualifications and experience.
Where compliance monitoring is by an FSP to a corporate body,
partnership or trust, the individual (“natural person”) responsible
for the compliance function must have the required qualification
and experience.
The Registrar may not approve any person as a compliance officer
unless that person is suitably qualified, fit and proper, has
appropriate knowledge of FAIS and will be able to keep written
records and submit written reports.
F86
General
Compliance Officers are obliged to fulfil their function with the
diligence, care and degree of competency which may be expected
from a person responsible for such function.
Compliance Officers must submit reports in the manner and
regarding the matters prescribed by the Registrar.
8.
General Code of
Representatives
Conduct
for
FSP’s
and
General Provisions
Providers must at all times render financial services honestly,
fairly, with due skill, care and diligence, and in the interests of
clients and the integrity of the financial services industry.
All representations made and information provided to a client
must be as follows:

Factually correct;

Easily comprehensible with no misleading statements;

Adequate and appropriate in the light of the financial service
offered and the client’s financial knowledge, allowing the
client sufficient time to make an informed decision;

Reflected in specific monetary terms if they pertain to
amounts, sums, values, charges, fees, remuneration or
monetary obligations. Where the latter is not reasonably
pre-determinable, the basis of calculation must be
adequately described.
A client may request written confirmation of representations made
and information provided orally. Such a request must be fulfilled
within a reasonable time period. Representations made and
information provided in writing must be in a clear and readable
print size, spacing and format.
The provider must disclose to the client the existence of any
personal interest in the relevant service, or an actual or potential
conflict of interest in relation to such service, and take all
reasonable steps to ensure fair treatment of the client. Services
must be rendered in accordance with the contractual relationship
between the parties and the reasonable requests of the client.
General
F87
Client instructions must be executed as soon as reasonably
possible, with client interests accorded appropriate priority over
the interests of the provider.
Client transactions must be accurately accounted for by the
provider.
Providers must not deal in any financial products for their own
benefit, where the dealing is based on advance knowledge of
pending transactions for or with clients, or on any non-public
information, the disclosure of which would be expected to affect
the prices of such product.
A provider may not disclose confidential information about a client
or product supplier without their prior written consent, unless such
disclosure is required in the public interest or under any law.
Representations made and information provided to a client by the
FSP need not be duplicated or repeated to the same client unless
material or significant changes affecting that client occur, or the
relevant financial service renders it necessary, in which case a
disclosure of the changes to the client must be made without
delay.
In all client interactions, an FSP must act honourably,
professionally and with due regard to the convenience of the client.
At the commencement of any contact initiated by the provider, the
FSP must explain the purpose of the contact.
Where a provider’s licence, terms of employment or mandate
enable such provider to render financial services in respect of a
choice of product suppliers, the provider must exercise judgement
objectively in the interest of the client concerned.
When comparing different financial products, product suppliers,
providers or representatives, a provider must make clear the
differing characteristics of each.
An FSP may not make inaccurate, unfair or unsubstantiated
criticisms of any financial product, product supplier, provider or
representative.
When rendering a financial service, a provider may not request a
client to sign any written or printed form or document unless all
the details which must be inserted by the client, or on behalf of the
client, have already been inserted.
F88
General
A provider must, at the request of a client, provide the client with
a written statement of an account in connection with any financial
service rendered to the client.
An FSP must fully inform a client in regard to the completion or
submission of any transaction requirement:

That all material facts must be accurately and properly
disclosed, and that the accuracy and completeness of all
answers, statements or other information provided by or on
behalf of the client, are the client’s own responsibility

That, if the provider completes or submits any transaction
requirement on behalf of the client, the client should be
satisfied as to the accuracy and completeness of the details

Of the possible consequences of the misrepresentation or
non-disclosure of a material fact or the inclusion of incorrect
information

That the client must on request be supplied with a copy or
written or printed record of any transaction requirement
within a reasonable time.
Information on FSP (Provider)
A provider must, at the earliest reasonable opportunity, furnish the
client with the following:

Full business and trade names, and registration number (if
any)

Postal and physical addresses

Telephone number and cell phone numbers (if any)

Internet and e-mail addresses

Contact details of appropriate contact persons or offices

Confirmation of the legal relationship between the FSP,
product supplier(s) and representative (if any), to make
clear which entity accepts responsibility for the provider’s
actions

Representatives
need
to
confirm
relationship with the licence holder
their
contractual
General
F89

Names and contact details of the relevant compliance
department or, in the case of a representative, such detail
concerning the FSP to which the representative is contracted

Details of the financial services which the provider is
authorised to provide in terms of the relevant licence and of
any conditions or restrictions applicable thereto

Whether the FSP holds suitable guarantees or professional
indemnity or fidelity insurance cover or not
Where information is provided orally, the FSP must confirm such
information in writing within 30 days.
Information on Product Supplier
A provider must, at the earliest reasonable opportunity and only
when appropriate, furnish the client with the following:

Name, postal and physical address and telephone numbers
of the relevant product supplier

Contractual relationship between the provider and product
supplier (if any), and whether the provider has contractual
relationships with other product suppliers

Names and contact details of the relevant compliance
department of the product supplier

Client complaints procedures maintained by the relevant
product supplier

Existence of any conditions or restrictions imposed by the
product supplier with regard to the types of financial
products or services that may be provided or rendered by
the provider.

Where applicable, the fact that the provider directly or
indirectly holds more than 10% of the relevant product
supplier’s shares, or has any equivalent substantial financial
interest in the product supplier

Where applicable, the fact that the provider, during the
preceding 12-month period, received more than 30% of
total remuneration, including commission, from the product
supplier
Where information is provided orally, the provider must confirm
such information in writing within 30 days.
F90
General
Within a reasonable time of being requested to do so, an FSP who
is also a product supplier must provide other FSP’s with sufficient
particulars to enable such other FSP’s to make the necessary
disclosures about the product supplier and its product.
Information about Financial Service
A provider must give the client a reasonable and appropriate
general explanation of the nature and material terms of the
relevant contract or transaction, and generally make full and frank
disclosure of any information that would reasonably be expected to
enable the client to make an informed decision.
Any material illustrations, projections or forecasts in the
possession of the provider must be given to the client, whenever
reasonable and appropriate.
A provider must, at the earliest reasonable opportunity, furnish the
client with the following:

Name/class/type of financial product

Nature and extent of benefits to be provided, including
details of the manner in which such benefits are calculated
and the manner in which they will accrue

For investment products or products with an investment
component: concise details of the manner in which the value
of the investment is determined, including concise details of
any underlying assets or other financial instruments;
separate disclosure of any charges and fees to be levied
against the product; and information concerning the past
investment performance of the product

Nature and extent of monetary obligations assumed by
client, and the manner of payment or discharge thereof, the
consequences of non-compliance and any anticipated or
contractual escalations, increases or additions. Monetary
obligations include commission, consideration, fees, charges
or brokerages payable to the provider by the client, or
payable by the product supplier or any other person other
than the client concerned

Concise details of any special terms or conditions, exclusions
of liability, waiting periods, loadings, penalties, excesses,
restrictions or circumstances in which benefits will not be
provided
General
F91

Any guaranteed minimum benefits or other guarantees

To what extent the product is readily realisable or the funds
concerned are accessible

Any restrictions on or penalties for early termination of or
withdrawal from the product, or other effects, if any of such
termination or withdrawal

Material tax considerations

Whether cooling-off rights are offered and, if so, procedures
for the exercise of such rights

Any material investment or other risks associated with the
product

In the case of an insurance product in respect of which
provision is made for increase of premiums, the amount of
the increased premium for the first 5 years, and thereafter
on a 5-year basis, but not exceeding 20 years
Furnishing of advice
The FSP or representative of the FSP must, prior to providing a
client with advice –

take reasonable steps to seek from the client appropriate
and available information regarding the client’s financial
situation, financial product
experience and objectives to
enable the provider to provide the client with appropriate
and suitable advice;

conduct an analysis based on the information obtained;

identify the financial products that will be appropriate to the
client’s risk profile and financial needs, subject to the
limitations imposed on the provider in terms of FAIS or any
contractual arrangement.
The provider must disclose to the client the financial implications,
costs and consequences, including:

fees and charges in respect of the replacement product;

special terms and conditions, exclusions of liability, waiting
periods, loadings, penalties, excesses, restrictions or
circumstances in which benefits will not be provided, which
may be applicable to the replacement product;
F92
General

in the case of an insurance product, the impact of age and
health changes on the premium payable;

differences between the tax implications of the replacement
product and the terminated product;

material differences between the investment risk of the
replacement product and the terminated product

penalties or unrecouped expenses deductible or payable due
to termination of the terminated product;

to what extent the replacement product is readily realisable
compared to the terminated product

vested rights, minimum guaranteed benefits or other
guarantees or benefits which will be lost as a result of the
replacement;
Note: A replacement contemplated in FAIS is a replacement of
one financial product with another. Accordingly, the meaning of
replacement is not confined to the replacement of a long-term
policy with another long-term policy.
A provider providing advice to a client to replace an existing longterm insurance policy with any other financial product must, within
5 working days from the date of providing the advice, notify the
issuer of the long-term insurance policy of such advice.
In the process of giving advice, the provider must provide written
motivation as to why a specific financial product is recommended
to the client; ensure that the client understands the advice, and
ensure that the client is in a position to make an informed
decision.
Where a full analysis could not be undertaken, because of the
following:

The client has not provided all the information requested by
the provider to conduct the analysis.

In the light of the surrounding circumstances there was not
reasonably sufficient time to conduct the analysis.
The provider must ensure that the client clearly understands the
following:

A full analysis could not be undertaken.
General
F93

There may be limitations to the appropriateness of the
advice given.

The client should take particular care to consider on his or
her own whether the advice is appropriate considering the
client’s objectives, financial situation and particular needs.
Where a client elects not to follow the provider’s advice, or elects
to receive more limited information or advice than the provider is
able to provide:

the provider must alert the client as soon as reasonably
possible of the clear existence of any risks.

the provider must advise the client to take particular care to
consider whether any product selected is appropriate to the
client’s needs, objectives and circumstances.
A provider must keep a record of the advice furnished to a client.
Such record must reflect the basis on which the advice was given
and, in particular, must include the following:

A brief summary of the information and material on which
the advice was based.

The financial products which were considered.

The financial product(s) recommended, with an explanation
of why the product(s) selected are likely to satisfy the
client’s identified needs and objectives.
Risk management
A provider must employ resources, procedures and appropriate
technology that can reasonably be expected to eliminate, as far as
reasonably possible, the risk that clients, product suppliers and
other providers or representatives will suffer financial loss through
theft, fraud, other dishonest acts, poor administration, negligence,
professional misconduct, and culpable omissions.
A provider must, to the extent required by the registrar, maintain
in force suitable guarantees or professional indemnity or fidelity
insurance cover.
Advertising
An advertisement is defined to mean any written, printed,
electronic or oral communication (including public radio service
communications), directed at the general public, or to a client on
F94
General
request, by a provider to call attention to the marketing or
promotion of financial services offered by the provider, and which
does not purport to provide detailed information regarding such
financial services. Advertisements must not contain fraudulent,
untrue or misleading information.
When advertising financial products, there are prescribed details,
which must be disclosed by such providers relating to, for
example, illustrations, warning statements and past performance.
Where a provider advertises a financial service by telephone, the
provider:

must keep an electronic, voice-logged record of all
communications, until such time as it becomes clear that no
rendering of a financial service will follow.

must be able to provide a copy of such record on request by
a client or the Registrar within seven days of being
requested to do so.

Need not provide the full complement of compulsory
disclosures over the telephone. If the promotion results in
the rendering of a financial service, however, the
compulsory disclosures pertaining to the provider and the
product supplier must be provided to the client in writing
within 30 days of the relevant interaction with the client.
Similar provisions apply to advertisements by public radio
service.
Complaints
A FSP must maintain an internal complaints resolution system and
procedures aimed at:

ensuring that complaints can be resolved in a manner which
is fair to both clients and the FSP and its staff.

ensuring that clients have full knowledge of the procedures
established for internal resolution of their complaints, details
of which must be reduced to writing. The details to be
reduced to writing include the client’s rights to refer his
complaint to the Ombud, should his complaint be dismissed
or remain unresolved after four weeks from receipt thereof,
as well as the name, address and other particulars of the
Ombud.
General
F95

ensuring that clients have easy access to such procedures at
any office/branch or through ancillary postal, telephonic or
electronic help desk support and that such access is
appropriately made known by public press or electronic
announcement or separate business communications to
existing clients.
A FSP must ensure that adequate human resources, properly
trained in the provisions of, and other resources, are employed
within such system and that provision is made for both complaints
of a routine nature, as well as the escalation of serious non-routine
complaints.
On receipt of a complaint at any office/branch of a FSP or ancillary
postal, telephonic or electronic help desk support, the FSP is to
notify the client that the complaint must, if possible, be submitted
in writing, contain all relevant information and copies of all
relevant documentation.
The FSP must promptly acknowledge in writing receipt of
complaints and communicate details of contact staff to be involved
in the resolution of the complaint.
The FSP must ensure that the complaint is forwarded to the
relevant staff member and that it receives proper consideration, by
ensuring that management controls are available to exercise
effective control and supervision of the process.
If the complaint cannot be resolved within four weeks from receipt
thereof, or in the event of the FSP having decided not to
accommodate the client, the FSP must advise the client of his/her
right to pursue the matter with the Ombud within six months, and
provide the client with the necessary contact details pertaining to
the Ombud and a clear summary of the relevant provisions of the
Act regarding the adjudication of complaints by the Ombud.
The provider’s internal complaints resolution system
procedures must be contained in a written policy document.
and
Termination of Agreement or Business
Subject to any contractual obligations, a provider must give
immediate effect to a client’s request to terminate any agreement
with the provider or relating to a financial product or advice.
F96
General
Where a client makes such request on the advice of the provider,
the provider must take reasonable steps to ensure that the client
fully understands all the implications of the termination.
A provider who totally ceases to operate as such must notify all
affected clients and take the necessary steps to ensure that any
outstanding business is completed promptly or transferred to
another provider.
Where a representative ceases to act for a provider, such provider
must immediately take the necessary steps to notify all affected
clients and ensure that outstanding business is completed or
transferred to such provider or another representative of such
provider.
Waiver of Rights
No provider may request or induce a client to waive any right or
benefit conferred on the client by or in terms of the General Code
of Conduct, and no provider may recognise, accept or act on any
such waiver by the client, and any such waiver is null and void.
9.
Record Keeping
A FSP must maintain a register of representatives (and key
individuals of such representatives where applicable), which must
contain the name and business address of each representative
(and key individual) and the categories in which such
representative is competent to render financial services.
A FSP must ensure that representatives who no longer comply with
the Fit & Proper Requirements are removed from the register and
that the Registrar is informed accordingly.
In terms of the Act, an FSP must maintain records for a minimum
period of five years, regarding the following:

Known premature
products.
cancellations

Complaints received and whether or not resolved.

Continued compliance
restrictions, if any.

Cases of non-compliance with the Act and the reasons
therefore.
with
its
of
transactions/financial
licence
conditions
and
General
F97
A FSP is not required to keep such records itself, but must ensure
that they are available for inspection within seven days from
receipt of a request by the Registrar.
A provider must be able to store and retrieve transaction
documentation, and record all written communications relating to a
financial service rendered to a client.
Records of all clients’
instructions must be reduced to writing and kept.
All records must be kept for a period of five years after
termination, to the knowledge of the provider, of the product
concerned or, in any other case, after the rendering of the financial
service concerned.
Records may be kept in an electronic format that is readily
reducible to printed form.
10. Offences and Penalties
A person will be guilty of an offence and liable on conviction to a
fine not exceeding R1 000 000, or to imprisonment for a period not
exceeding ten years, or to both a fine and imprisonment, if that
person:

acts, or offers to act, as a FSP, without possessing a valid
licence issued by the Registrar.

fails to comply with the duties relating to the availability and
display of the licence at the premises and on the
documentation of the FSP.

renders financial services as a representative for or on
behalf of a person who is not an authorised FSP.

acts as a representative for an FSP without being able to
provide confirmation, certified by the FSP, that he or she
may render financial services for or on behalf of the FSP,
and that the FSP accepts responsibility for such services.

acting as an FSP, fails to debar a representative who is no
longer competent to act as such.

fails to maintain records as prescribed.

(unless exempted) fails to have its financial statements
audited and reported on by an external auditor.
F98
General

carries on any activity which has been declared to be an
undesirable business practice, or fails to comply with a
direction issued by the Registrar in this regard, within 60
days.

deliberately
makes
misleading,
false
or
deceptive
statements, or conceals any material fact in any application
in terms of FAIS.
General
F99
Notes

Old Mutual Premiums and Problems 2012

Transcription

Similar documents

Term Life Insurance - American Family Insurance

HCANJ RiskCure Brochure

TAKE THE REBOSA EQUALITY PLEDGE TODAY

about take command health

The Ziff Agency Monthly

before they were brokers

Tweet your support #RespectAllMusic

DIBELLA`S REAL ESTATE CRITERIA

BeauBox Property: River Palms Two Bedroom Condo