AVOID MAKING MISTAKES IN SMALL BUSINESS
- by learning from the mistakes others made.
This way you do not have to carry the costs of the mistakes. Have a look at some mistakes other business owners make and avoid making it yourself.
1. Lots of business owners adopt the strategy of ploughing all the profits they make back into their businesses. If you start a business or buy one, this strategy might be necessary at the beginning in order to grow the business, but some or other time you have to review your strategy. If you carry on ploughing all your profits back into your business you are putting all your eggs into one basket. If your business goes insolvent, you will loose everything you have worked for until then. This might happen at a time of your life when you are too old or too ill to start from all over again.
If, however, you take a percentage, say 20% of the profit out of the business and invest it elsewhere, you are diversifying your risk of losing everything. At a rate of 20% per annum you will, within 5 years, have one year’s profit outside the business. If you invest this wisely you will be building on a nest egg to fall back on, on a rainy day, i.e. when your business goes through a difficult period or if you loose your business through insolvency.
2. Lots of business owners do exactly what is described above, but then they choose the wrong investment vehicle. If you invest in a very expensive house for you and your family to live in, you might have to sell that house if you need the capital tied up in it. The same goes for luxury cars or other lifestyle assets.
Therefore, the question you should ask yourself is the following: How much capital will I have available outside my business if I subtract the value of my house, cars and other lifestyle assets from my total nett assets outside my business? If you don’t feel comfortable with the answer you get, do something about it.
That something should be to engage the services of a professional investment adviser to help you plan and implement an investment strategy.
TAX ON YOUR SAVINGS
By Rowan Burger: Liberty Head of Retirement Reform 15 March 2012
There were some surprising announcements on the taxation of investments which will affect the way you structure your financial plan.
The recent tax changes announced in the budget speech provided some tax relief but a number of provisions are detrimental to savers. It is important that these are understood when forming an appropriate investment strategy.
Two important amendments are:
* The introduction of Dividend Withholding Tax (DWT)
* An increase in the taxation of capital gains.
As expected, the secondary tax on companies (STC) fell away and has been replaced by a dividend tax. However, the 15% dividend tax rate was higher than the widely expected 10%, which would have been in line with STC.
This means a 50% increase in the taxation of dividends. Given that the current dividend yield is about 3%, the extra 5% tax will mean a 0.15% reduction in annual equity returns for the individual investor.
For a typical, balanced investment strategy (moderate to aggressive) with about two-thirds in equity, the impact over a 40 year accumulation period for a saver would be roughly 4%.
Capital Gains Tax (CGT)
The minister of finance announced an increase in the inclusion rate for capital gains from 25% to 33%. This means that the maximum rate payable for capital gains tax rises from 10% to 13.3%.
However, to assist middle-income earners the minister also increased the tax exclusion (the amount of capital gains one can make before paying tax) from R20 000 to R30 000. This also extended to the capital gains tax exclusion for primary residence which has risen from R1.5 million to R2 million.
The new proposals mean that one-third of all capital gains will now be taxable for an individual taxpayer as opposed to one-quarter which applied previously. It is a little more difficult to determine the impact in this instance. We will need to make some assumptions to illustrate the effect.
Equities will grow at 8% in addition to the 3% paid as dividends.
We will ignore the tax exclusion for the purposes of the calculation.
The average tax rate of the individual is 35%.
In this situation, CGT would apply to the 8% equity growth – of which one-third is now taxable – as well as to currency appreciation on foreign investments and profits from bond trading. A typical balanced fund would pay 0.2% extra in tax per year, resulting in a roughly 8% reduction in expected value at retirement.
Impact on retirement savings
The good news is that pension funds (and retirement annuities) are granted tax exemptions on both dividend and capital gains tax and therefore will not be paying this tax. This means the full 10% on dividends will be passed on to fund members (previously STC would have been paid).
Applying the logic above, this means an estimated additional 8% for your typical pension fund member at retirement after 40 years of saving.
CGT does not apply to your pension fund savings.
Impact on discretionary savings
The increase in dividend tax and capital gains tax will affect people who have savings outside of a retirement structure, especially if they rely on dividend income or the selling of units for income.
However, it does not necessarily make financial sense to move your savings into a retirement structure. There are normally charges associated with switching products and pension savings products tend to be more expensive than unit trusts because of additional regulation and generally funds are only available at retirement.
You are probably best served by leaving your investments as they are and saving future money into pension products like retirement annuities if you do not need access to the funds.
Tax incentivised savings scheme
Additional taxes may be offset partially by the proposed short-term tax incentivised savings scheme. Government proposes to introduce tax-preferred savings and investment vehicles by 2014.
The proposal is that individuals should be allowed to save up to R30 000 a year in a registered savings or investment product that would be free of tax on interest, dividends or capital gains. This would represent a monthly saving of R2 500.
A R500 000 lifetime limit is proposed which means an individual saving R30 000 a year would reach the limit within 16 years. However, Treasury says this limit will be reviewed and may be increased at a later date.
Tax concessions on retirement savings
In the previous budget, individuals would be allowed to save 22.5% of all income into a retirement structure. This is part of government’s plan to align the rules on all retirement products (pension funds, preservation funds and retirement annuities).
This original proposal has been extended slightly to allow people over 45 to claim a deduction of 27.5%, rather than the original 22.5%, and the maximum contribution a year has been increased from R200 000 to R300 000.
While this has been seen by many commentators as a concession, it should be pointed out that 27.5% is broadly the effective deductible amount for all savers currently if you combine the amount an individual can save through a provident fund and retirement annuity.
The introduction of this cap means that those behind on their savings plans should look to maximise their deductions while the current, more favourable opportunity remains.
Remember, your financial adviser can help you make the most of your finances by helping you develop a financial plan that suits your circumstances and making sure that you stay on track with your finances.