Monthly Archives: July 2022

Donations tax ….estate duty in advance

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Be careful not to give to much away too soon, the tax man will charge you a fortune.You can only give up to R100 000 per year after which your will have to pay 20% in donations tax.
Yes. effectively, this tax is the same as the tax applied to your estate. Donations tax is there to stop you from offloading your estate before you die. Think about it. You could avoid a huge amount of tax by giving your property away to others before you die instead of having to pay 20% estate duty.
So, to discourage you donations tax comes into play taxing you above R100 000 at a rate of 20%.
Spouse is exempt
You can give and receive any amount to your spouse without paying donations tax. This falls in line with tax on your estate. Property bequeathed to your spouse when you die avoids estate duty in the same way as donations tax.
Child maintenance exempt
However, when it comes to the children SARS puts the breaks on. Donations to children who are dependent on you are exempt from donations tax with the overriding proviso that it is for the maintenance of the child.
So if you suddenly bought your child a million rand house and a fancy German car then SARS could be after you in terms of how necessary and reasonable the donation was towards the upkeep of your child.
When you really study the taxation formula of donations tax you realise that it is a form of tax to stop you from offloading your assets before you die, thereby avoiding estate duty. You see, when you die your estate is taxed after exemptions, costs and liabilities at a rate of 20%. The easiest thing you could do if this was not in place would be to give the children everything just before you die. This way SARS won’t get much. So, donations tax is a mechanism put in place to ensure that SARS gets its slice of the revenue whilst you are alive. When you die SARS will collect the rest.
So. be aware of donating to others. It could cost you more than you realise!
SARS also applies a principle of collecting the tax from the donee if they can’t get the tax from the doner.

Interest rates and how they affect us….

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The Reserve Bank Monetary Policy Committee (MPC) announced on Thursday another interest rate hike of 75 basis points.This extends to the banks prime lending rate to 9%..

Inflation

The Reserve Bank has a mandate to protect the future value of our purchasing power which is measured by what is known as the Consumer Price Index or CPI. Essentially, this is a basket of goods which is monitored by Stats SA. 

Year on year inflation is running away from us at a 13 year high of 7.4% % which is way outside the target range of 3 to 6%. This means one rand is now worth 92,6 cents from 12 months ago. .

So how does that affect you and me?

The main mechanism used by the Reserve Bank is the control of the interest rate on the money it supplies to the banks, known as the repo rate which is now 5,5%. The banks in turn lend money to the public at a rate which is called prime. The intended effect is that consumers will spend less which pulls back demand on goods and services which in turn slows down increases in prices.

Double edge sword for the consumer

On one side if you are in debt (which most households are), the cost of debt is simply that much more expensive. All loans – mortgage, cars, credit cards, overdrafts and personal lending move directly with the new increase. This has a direct impact on expenses driving down any disposable income in the household.

On the other side the cost of living is already expensive with the high rate of inflation. The consumer is left with the problem of getting through the month same income which is technically worth less.

The main culprit is the fuel price which we unfortunately import as we don’t have any oil in South Africa. Since oil is priced in US Dollars we have a double whammy if the high prices are paid by a weak rand. This is the current status and we will have to wait for a drop in oil oil price and the rand to strengthen before we will see the pump price of fuel come down.

It’s a global problem

The problem is world wide. The US has inflation of over 9% which is the highest in 40 years. Europe is in the same boat. The main driver is the price of oil which our world is so dependant upon.

So what can we do?

Wean ourselves off the dependency of debt as a starting point. Those households which are not indebted will not feel the squeeze of the rise in interest rates. In fact they will benefit as their personal savings will increase from the extra interest. They still have to contend with the cost of other goods and services but by having no debt costs they will be so much better off.

You will still be better off targeting your debt in the short term as the interest rate charged is much higher that the savings rate earned. The prime lending rate is 9% and the interest on savings is 5%.

The interest rate cycle is on its way up which means that the future cost of debt will be even more costly. Reducing your debt sooner will save you that much more in the long run.

It will be a tough road ahead as the effect of the interest rate hike will take a while to filter into the economy. Prices will take a while before they stabilise. Financial pressure is with us for a while.