Category Archives: Home improvement

Finance education and data burning

In the wake of the DataMustFall campaign, it seems that the data revolution might have a valid and legitimate plea. The campaign founders made a presentation before the Parliamentary Communications and Postal Committee on September 21 on the costs of data in the country. According to the soon-to-be launched findings of the FinScope South Africa 2016 consumer survey, the results show that the average South African spends about 9% of their purse on airtime and data recharge, cellphone contracts, telephone lines and internet payments. The average person spends approximately R700 a month for communication-related expenses.

Parallel to the #DataMustFall campaign, which is gaining traction, is the #FeesMustFall (reloaded) campaign, which is also resurfacing in light of the announcement of an up to 8% fee increase made by the Higher Education Minister Blade Nzimande. While university students would like to see a 0% increase, universities are requesting increases to sustain operations and fund research.

Therefore, in light of these developments and expenses, how does the purse of the South African consumer fair? The preliminary results of the FinScope 2016 survey shows that South Africans spend R688 per month on average on education.

In the wake of the #DataMustFall campaign, it seems that the data revolution might have a valid and legitimate plea. The campaign founders made a presentation before the Parliamentary Communications and Postal Committee on September 21 on the costs of data in the country. According to the soon-to-be launched findings of the FinScope South Africa 2016 consumer survey, the results show that the average South African spends about 9% of their purse on airtime and data recharge, cellphone contracts, telephone lines and internet payments. The average person spends approximately R700 a month for communication-related expenses.

Parallel to the #DataMustFall campaign, which is gaining traction, is the #FeesMustFall (reloaded) campaign, which is also resurfacing in light of the announcement of an up to 8% fee increase made by the Higher Education Minister Blade Nzimande. While university students would like to see a 0% increase, universities are requesting increases to sustain operations and fund research.

Therefore, in light of these developments and expenses, how does the purse of the South African consumer fair? The preliminary results of the FinScope 2016 survey shows that South Africans spend R688 per month on average on education.

What it means for your financial plan

Traditionally, the focus of every financial plan was retirement. Everything was built around the day that you have to leave formal employment at the age of 60 or 65.

However, more and more people are having to ask what happens next. In a time when life expectancy is steadily increasing, the idea of throwing away your briefcase and putting your feet up to live out your ‘golden years’ in peace and quiet is looking increasingly less appealing, and less practical.

For a start, there is little point in retiring ‘to do nothing’. Many retirees find that they are actually busier than they were during the working lives, but the difference is that they can do what they enjoy.

“We are finding more and more people who are re-thinking retirement,” says Kirsty Scully from CoreWealth Managers. “In most cases, they have been professionals in their careers and they want to stay employed to continue with their personal and professional growth and development, yet they don’t want a typical work schedule. They are looking for flexible working arrangements so as to have a good balance between work and leisure.”

Wouter Dalhouzie from Verso Wealth says that from both a mental and physical well-being point of view, it is important for retirees to keep themselves occupied.

“I had a client whose health started failing shortly after retirement,” he says. “He started a little side-line business and his health immediately improved. When he retired from doing that, his health went downhill and he passed away within a matter of months.”

Verso Wealth’s Allison Harrison adds that she recently attended a presentation that discussed how important it is for people to remain active. “The speaker explained that if we don’t continue using our faculties, we lose them as part of the normal ageing process,” Harrison says. “The expression she used was ‘use it, or lose it’!”

She relates the story of a retiree who had been in construction his entire working life.

“After a year in retirement, he decided to buy a second home, renovate it and sell it,” Harrison says. “This was very successful, so he decided to repeat the exercise using his primary residence.  This yielded a bigger return than the first one and thereafter then moved from house to house, renovating, selling and moving on.”

This way he ended up making more money in his 20 years of retirement then he did in his 40 year building career.

How to be an employable

Luthuli Capital was founded and structured as a Pan-African multi specialist company that offers a global approach to wealth management portfolios. The company offers investment advisory services to local and foreign individuals and multinationals, among others. I’m joined in the studio by one of the co-founders, Mduduzi Luthuli. Thank you so much for your time.

MDUDUZI LUTHULI:  Thank you for the invitation. Glad to be here.

NASTASSIA ARENDSE:  Let’s take it back to the beginning and start off with how Luthuli Capital came together.

MDUDUZI LUTHULI:  I think if you are going to start a company it’s always something that’s there. It’s just a matter of acquiring the skills for you to be confident to run the company and wait for the circumstances to be there.

I’ve been in the corporate sector now – from banking into the financial advisory industry – for about seven years. My previous employer gave me a great opportunity in management and it’s really there where I got to cut my teeth and get to the point where I realised I think it’s time for me to go out there and do this on my own.

We’ve got two offices here in Sandton and one in Durban. It really was the Durban office that was also the big motivator because we’ve got a project going on down there which involves the internship, and that also just got to that point where, if ever you are going to do this, this is the time.

NASTASSIA ARENDSE:  And I know that you work with Trudy as well. How did the two of you decide that it’s our synergies and both our characteristics and everything we’ve learned from our own sort of corporate size that can work together – and let’s do this?

MDUDUZI LUTHULI:  We both come from the same industry. So from a product knowledge side, services, the competency was there. I think really where the synergy comes from is they say I’m the driving force, I’m the bully, I’m the hard-core one. My real talent is bringing the clients into the business, going out there and selling the dream and convincing them that this is something you should back.

And Trudy, as head of client services, is the mother of the business, if I can put it that way. And really her strength is in client retention. You play a fine balance between finding new clients and also looking after your existing clients. And that’s really where we work with each other’s strengths and work very well together, because she heads up the client retention. I bring them and she looks after them.

NASTASSIA ARENDSE:  How competitive is the industry that you are in right now?

MDUDUZI LUTHULI:  It’s extremely competitive. I don’t think I have the words to truly describe how competitive an industry it is. One of the fantastic things and one of the shining lights about South Africa is that we have a very good financial system. Or let me say that the governance and the legislation here is very good and that really translates into the financial advisory system with the initiatives that the FSB puts out there – the financial planning institution, to make sure that as financial advisors or wealth managers we move away from a culture of just selling for the sake of selling, and seeing ourselves and conducting ourselves as professionals and as a professional field.

Questions from a reader who is selling a house

Q: I bought a house in Pretoria in December 2011 for around R1.1 million. I lived there until October 2013 but then moved to Johannesburg and decided to rent it out.

I did not buy a new place in Johannesburg as I intended to move back to Pretoria eventually. With the monthly rental income I received on my Pretoria property, I paid rates and levies of around R2 000 per month, although I did not pay any municipal rates.

In time, I realised that I was not going to move back to Pretoria again and decided in February 2015 that I wanted to sell my house and found a buyer for it.

My questions relate to how all of this should be reflected in my tax return.

For the last two years I have included the rental income in my return, whilst deducting items such as interest and levies. I paid the full outstanding municipal rates of around R30 000 when I sold my house in June 2015. For the 2016 tax year, can I deduct all of the rates for the period that I was renting out the property, which is about 18 months?

Secondly, when it comes to the proceeds of the sale, am I eligible for the R2 million exemption on capital gains tax for a primary residence?

 

To answer all of your questions, let us first consider the tax treatment of rental income. Any rental income you receive should be added to any other taxable income you may have, and assessed in its entirety.

The taxable amount of rental income may, however, be reduced, as you may incur expenses during the period that the property was let. Only expenses incurred in the production of that rental income can be claimed. Any capital and/or private expenses won’t be allowed as a deduction.

Expenses that may be deducted from taxable income are your rates and taxes, interest on the bond, advertisements, fees paid to estate agents, homeowners insurance (not household contents), garden services, repairs in respect of the area let, and security and property levies.

It is important that maintenance and repairs should be noted as specific costs and not confused with improvement costs. Improvements are a capital expense and cannot be claimed as an expense. They can, however, be included in the base cost of the property to effectively reduce the capital gain (or loss) on the disposal of the property, for capital gains tax (CGT) purposes.

To answer your first question then, the municipal rates were paid as a lump sum amount of R30 000 in June 2015 on the sale of the house. Assuming that the property was still being let during the 2016 tax year that runs from March 2015 until February 2016, the seller would be able to deduct the full amount of R30 000 in the 2016 tax year.

On the second question, current legislation entitles individuals to disregard any capital gain on the disposal of their primary residence if the proceeds do not exceed R2 million. In such event the individual does not need to determine the base cost of the residence.

In order to claim this exclusion we need to determine what qualifies as a primary residence.

To meet the requirements, it must be a structure (including a boat, caravan or mobile home) which is used as a place of residence by an individual. An individual or special trust must own an interest in the residence. And the individual with an interest in the residence, beneficiary of the special trust, or spouse of that person or beneficiary must ordinarily reside in the home and use it mainly for domestic purposes as his or her ordinary residence.

The financial services sector needs to meet the challenges

Relative to its peers in the SADC region, South Africa has a high percentage of people with formal bank accounts. While 94% of the adult population in the Seychelles has a bank account, and 85% do so in Mauritius, South Africa’s banked adult population stands at 77%.

This contrasts starkly with the likes of Madagascar or the Democratic Republic of Congo, where only 12% of adults have bank accounts. In Angola, the ratio is 20%.

These are figures produced by the Finmark Trust, an organisation set up more than a decade ago to promote financial inclusion. And at face value, they may appear to suggest that South Africa is measuring up reasonably well.

However, the Trusts’s Dr Prega Ramsamy says that there is a lot more to financial inclusion than whether or not someone has a bank account.

“It’s a multi-dimensional problem,” he told the Actuarial Society 2016 Convention in Cape Town. “There is an element of access, but there is also an element of affordability, an element of proximity, and most importantly an element of quality. We might have huge access in terms of people having bank accounts, but it doesn’t necessarily mean that they are financially included because the quality of such access might not be there.”

He pointed out that often products are inappropriate or inaccessible.

“At the moment there are about 20.9 million people in South Africa with access to insurance,” he pointed out, “and of those, 18.9 million have funeral cover. So funeral insurance completely dominates the sector.”

He acknowledged that there is a cultural aspect to why this is such a popular product, but he questioned why so many people are able to afford funeral policies but don’t have any other long term risk cover or savings.

Ramsamy pointed out that ten years ago, about one million South Africans had multiple cover, in that they held more than one funeral policy. That number has grown to five million. Yet the penetration of other risk products has remained very low.

“We sit in an office and think we can provide insurance, but we don’t really know if this kind of insurance fits the needs of the people we are selling it to,” he argued. “Agents are also just interested in selling numbers for commissions, but don’t ask if what they’re selling is the type of insurance or product that their customers need.”

Speaking at the same event, Ruth Benjamin Swales of the Asisa Foundation acknowledged that there is a real challenge for financial services companies to design more relevant offerings.

“For instance we have many people in South Africa who work intermittently,” Swales said. “But most savings and investment or insurance products require monthly contributions. Just that minimum requirement excludes many people from being able to access relevant products that could improve their financial well-being.”

Medical scheme cover for diabetes

A friend was on holiday in a small town when her baby’s scheduled immunisation was due. After being directed to the local clinic who had the stock of the required vaccination, she duly fell in line with other patients to open a new clinic file. Although it seemed that many patients waiting in the queue could read, the clinic assistant in charge was adamant on reading the questions and completing the forms on their behalf.

“Do you have disabilities?” It would thunder through the room, and so forth. By the time it was my friend’s turn, she insisted on reading the questions herself. And to her surprise, the “disabilities” everybody was questioned about, turned out to be “diabetes”. None of those in front of her had disabilities, but should they have been questioned correctly, they could have confirmed their diabetic status.

Among the top five most prevalent chronic conditions

Diabetes is one of the world’s fastest growing lifestyle diseases. In 2015 South Africa had 2.28 million cases of diabetes according to the International Diabetes Federation (IDF). The problem is that for every diagnosed adult, there is an estimated one undiagnosed adult. The number of undiagnosed cases in South Africa is projected at around 1.39 million.

Both diabetes mellitus types 1 and 2 rank among the top five most prevalent chronic conditions under medical scheme members.

Applications affect your credit score

There is a view among many South African consumers that applying for a bond at more than one bank will have negative consequences. The belief is that these enquiries will impact on your credit score and therefore hurt your chances of getting a loan or push up its cost if you are successful.

Many people only apply at their own bank for just this reason. They think that they are taking a risk if they shop around.

This raises some obvious concerns. After all, you are only exercising your rights as a consumer to compare prices, so why should you be penalised for it?

Footprinting

What is a given is that every time you apply for a loan of any sort, this will be recorded on your credit profile. This is called footprinting, and credit providers may use this information to assess you.

“Credit providers consider a multitude of factors when vetting applications for credit, one of which would be demand for certain types of credit,” explains David Coleman, the head of analytics at Experian South Africa. “A sudden surge in demand for unsecured or short term credit, linked with signs of stress building on indebtedness and repayment capacity of the consumer, would result in the credit provider taking a more cautious approach in extending further credit to such a consumer.”

However, short term credit is not the same as long term credit like a home loan in this regard. In fact, Nedbank says that it views multiple applications for a bond made at the same time as a single enquiry.

The head of credit for FNB retail, Hannalie Crous explains that they also make a distinction:

“From an FNB perspective we do not look at number of bureau enquiries pertaining to home loans as a key determinant of a credit score,” she says. “The handful of credit bureau enquires associated with a bond application will have no effect, however  a consistent trend indicating that a consumer is taking on multiple loans could influence the outcome of a credit application.”

Not all bureaus will see you the same

In other words, the banks don’t see it as a negative if you shop around for a bond. A number of credit bureaus approached by Moneyweb also took the same line, although with a caveat:

“Each credit bureau and each credit provider that has their own in-house score will score consumers using their own criteria,” says Michelle Dickens, the MD of TPN. “It’s not a one size fits all. As a result there will be a higher weighting towards different aspects of data that will improve or decline the ultimate overall score.”

The head of the consumer bureau at XDS, Alex Moir, explains that different companies may therefore use information differently.

“Not all credit bureaus will use the application data in the credit scores, which means that a customer could go to as many banks as they like and their risk score with these bureaus would not be impacted,” he says. “Some credit bureaus do however use the application data and, in this instance, the consumer’s score could actually be impacted positively if they do enquiries at different banks. There is generally a threshold that some of the bureaus would have, where making one to three enquiries would add points to your score, three to five enquiries would leave the score as is and more than five could deduct points from your score.”

Excessive pessimism over SA economy

Old Mutual Investment Group sees domestic equities, property and bonds delivering higher returns in 2017, on the back of improving economic prospects.

It expects peaking interest rates and inflation in South Africa to create a positive environment for interest rate sensitive assets such as domestic property and bonds.  It sees inflation averaging at 5.4% in 2017 compared with 6.3% in 2016 and the benchmark repurchase rates falling to 6.5% by the end of 2017, down from 7% currently.

According to Peter Brooke, head of Old Mutual Investment Group’s MacroSolutions Boutique the 13.5% return on domestic bonds year-to-date as at November 24 2016 is artificially high due to an oversold bond market.

Instead, he said SA cash – with a 6.8% return in rand terms – is the best performing local asset class thus far. SA listed property delivered returns of 4% and the FTSE-JSE Share Weighted Index (SWIX) returned 2.5% over the same period.

After starting the year with the highest level of cash in its fund ever, the group is seeing more opportunities in equities as the domestic equity market de-rates.

“We’re not at the stage where the JSE is cheap yet. It is on a 13x forward but it does offer a real return in the region of 5%. We’re not back to levels that we have enjoyed for the last 100 years of around 6.5% but value is starting to incrementally rebuild,” he said.

Save for their kids tips

With the start of 2017 looming, many parents may have started to consider the cost of their children’s school and tuition fees for the next school year. While families have a number of financial commitments to attend to every month, this is the time of year where school funds are often moved to the top priority to ensure that the family is financially prepared for the expenses that accompany a new school year.

Saving for a child’s education requires careful consideration and proper planning.

Here are some tips below for parents to ensure that they have planned appropriately for their children’s education costs:

Start early

Parents should start saving for their children’s education as soon as they possibly can. Many people do not consider, or are not aware of, the great advantages of compound interest, and how accumulated savings grow over several years when invested properly. By investing from an early age, parents will eliminate the financial worry of not having sufficient funds to give their children the best education possible, as the funds in their investment will grow every year.

Automate savings

The best way for parents to ensure they are regularly contributing towards their children’s education is to open a dedicated savings account and set up a monthly debit order. This way the parents will automatically save money every month towards this cause. However, they must have a strict rule in place to never withdraw any money from this account if it is not related to the child’s education.

Explore ways to get discounts

It is advisable to do some research and contact schools to find out whether they offer financial incentives that could result in long-term savings. Many schools offer a discount if the fees are paid as a once-off amount in advance. Some also offer a reduction when there is more than one child attending the school. These types of savings can make a big difference over an 18-year period.

Compromising on the festivities

Christmas may be the season of joy and goodwill, but it is also the season of spending. Often our enthusiasm for being festive outpaces our bank balances.

However, there are some simple ways to save some money without taking the enjoyment out of the season. Some of these may even make your Christmas even better.

Here are four simple ideas to curtail your Christmas budget:

  1. Make your own crackers

Who isn’t tired of paying up for expensive crackers with the same gifts, the party hats that make you sweat, and the same lame jokes every year? (What’s Santa’s favourite pizza? One that’s deep pan, crisp and even.)

Making your own crackers might sound like an awful effort, but it can really be quite simple and extremely cost effective. A number of craft shops sell the cracker bodies that just need to be folded into shape, together with the ‘snaps’ that deliver the necessary bang when they are pulled. (You could download the template from the internet and cut some patterned cardboard or wrapping paper yourself, but this would be a lot more time consuming.)

Easy, cheap and always popular fillings, include luxury chocolate balls, mini soaps or lip gloss. Tiny bottles of whisky or liqueur also go down well, depending on the company.

Making Christmas crackers can also be a fun activity for your children to keep them busy for a few hours during the holidays. And that is priceless.

  1. Make your own gifts

Depending on the size of your family, Christmas gift shopping can easily bite a big chunk out of your budget. It could also mean spending hours at crowded malls dodging speeding trolleys and cosmetics salespeople.

A far more relaxing and cost-effective option is to make gifts yourself, and it’s quite possible to do this tastefully. Baking biscuits and making jam are old favourites, but there are other options too.

You can make up your own mini hampers by ordering small hand-crafted pottery dishes online and filling them with personalised treats like artisanal chocolate and home-made confectionery. Wrap these up in cellophane and you have gifts that everyone will love.

  1. Order your drinks online

Christmas almost demands good wine or even some top class South African brandy, and who doesn’t deserve a drink after a long year of hard work? But just popping down to your local off-license and filling a trolley is not always the best idea.

Firstly, you can’t be sure of getting the best prices, and secondly you’re likely to grab more than you really need just because it’s there and you’re in a festive mood.

Ordering drinks online can be a lot cheaper as you can looks for specials at the many local online stores available. You can also be unemotional about how much you actually need when the bottles aren’t staring you in the face.

Some shops also allow you to collect, which means there is no delivery fee. And that’s more money you can keep in your pocket.