10 Lessons in Investment Principles following the National Budget Speech on 22 February 2012

By Matthew Lester, Professor of Taxation Studies at Rhodes Business School, Grahamstown



For Video go to Part 1

Finance Minister, Pravin Gordhan, had his back to the wall when it came to presenting the 2012/13 National Budget to Parliament on 22 February 2012.

The R10 billion VAT collection shortfall was inevitable due to falling consumer confidence. And the loss of revenue to be caused by dividend tax implementation on 1 April set the numbers back another R10 billion for 2012/13. So he was R20 billion down for starters.

Nobody ever thought that he would force company tax to the rescue.

Trevor Manuel favored companies. Beginning six years ago he started reducing corporate tax rates and then announced the implementation of dividend tax back in Budget 2007. Then he dropped the STC rate to 10% – all to appease foreign investors and tax nerds.

Consequently corporate tax collections fell from nearly 30% of the total tax collection 10 years ago, to 21% today.

Manuel’s dream of appealing to the foreign investor had as much effect as throwing a muffin at a black hole. And the individual taxpayer had to pick up the slack with personal tax growing to 36% of the total, tax collection and VAT to 28%.

To be fair, corporate tax and STC saved the day in the 2011/12 numbers, cancelling out the shortfall on VAT (R10 billion) and individual tax (R3 billion).

Pravin Gordhan is unpredictable. Some pundits thought he would recover the shortfall created by dividends tax implementation by calling on the individual taxpayer again. It would have been so easy simply to cancel or postpone the new dividend tax exemption granted to retirement funds.

But no! The shortfall is to be recovered by increasing the dividends tax rate to 15%.

There is the potential for a double-whammy. Pravin Gordhan also increased the Capital Gains Tax (CGT) inclusion rates for corporates from 50% to 66.7%. Prima facie it simply increases the effective rate of CGT for companies from 15% to 18,67%.

These amendments, coupled with other socio, economic and political issues have changed the very fundamentals of investment strategy in South Africa today.

Here are 10 lessons to be taken from Budget 2012/13.

1. The low interest rate era is here to stay!

Despite huge pressure on Government to spend and deliver more, the National deficit has been contained at a level of below 5% of Gross Domestic Product (GDP). Why?

The answer is simple. South Africa simply cannot afford the consequences of an economic downgrade by the international rating agencies.

A downgrade would result in increased interest rates and that has to be avoided at all costs. Consumer confidence is already failing due to increased fuel and electricity prices, so the economy would come to a standstill if interest rates were to increase.

Lesson 1
Government will do all that it can to continue the low interest cycle that has already been part of our lives for more than a year. This means that interest rates for the investor will probably remain at around 6% pre-tax. And that is equivalent to the current inflation rate. So money invested in cash deposits has little prospect of achieving real growth!


2. Tax collections are increasing for the individual investor

Although the ‘bracket creep adjustment’ to the individuals’ tax tables was set at R9 million for the 2012/13 year, total individuals’ tax collections will increase by R32 billion. This is achieved in a variety of ways. However maintaining the tax exemption on interest receipts at R22,800 for the taxpayer under 65 years old and R33 000 for the over 65’s will have a small negative impact. And there will also be a consequence resulting from the increase in CGT rates (refer below).

Lesson 2
There is just no point in producing more and more income if you are going to pay more and more tax. Management of the investment consequence of an investment portfolio has become ever more important.

For Video go to Part 2


3. Dividend tax has increased

South Africa will move away from the current secondary tax on companies (STC) to dividend tax on 1 April 2012. The STC rate of 10% will be increased to 15% dividend tax at the same time. But the extra 5% on a dividend yield of 3% makes very little difference. Remember dividend tax is less than 3% of total tax collections.

Lesson 3
The change to dividend tax is little reason to shy away from investment in equities.


4. Capital Gains Tax rates have increased

The CGT inclusion rates have been increased from 50% to 66,6% for Companies and Trusts and from 25% to 33,3% for the individual taxpayer.

Lesson 4
Investment companies and trusts used to be the rage. No more!
Today investing in your own name or through a retirement fund is what it’s all about.


5. Increased tax rates sometimes double up

When a company capital gain is distributed by way of dividend, then 15% dividends tax is imposed in the post tax distribution of 81,33%. That’s a further 13,33% tax charge.

The result is an effective tax rate on capital distributions of companies of 32%, compared to 22% pre budget.

Maybe this will encourage companies to reinvest capital gains rather than return capital to shareholders. There is much merit in that.

But you can be certain that there will be some pretty substantial dividends paid in March 2012 prior to the new rate and dividend tax implementation.

Lesson 5
Post tax interest is below inflation.
CGT rates have increased.
Dividend Tax has increased.

But the problems can be solved using retirement funds.


6. Retirement funds now receive the tax breaks

The taxpayer investing in his/ her name pays:-

  • Income tax at full marginal rate on interest income exceeding the tax exemption on interest receipts at R22,800 for the taxpayer under 65 years old and R33,000 for the over 65’s.
  • CGT at up to 13,33%, dependent on marginal tax rate (after an allowance of R30,000 per annum.
  • Dividend tax at 15% flat rate, regardless of marginal rate.

Lesson 6
All of the above taxes are legally avoided if the taxpayer invests through a retirement fund (pension fund, provident fund or retirement annuity.) And the contributions to these funds are tax deductible as well.


Do the calculations. Over a prolonged period the tax savings are enormous.

Download the calculator and instructional video from


7. Watch out for transaction taxes

For video go to Part 3

The VAT rate remains at 14%. But additional VAT of R18 billion will be paid during 2012/13 just due to inflation.

Fuel levy will increase by 28 cents a litre on 1 April 2012.

Sin taxes on alcohol and tobacco have been increased by between 10 and 20%. Today a beer or a tot of spirits contains a tax component of R1,20 to R1,50. And light up a cigarette and pay 75 cents in tax.

Lesson 7
Financial planning is not only about accumulating wealth. It is becoming more and more about lifestyle choices. Do the calculations to demonstrate what your dirty habits cost in the long term.


Download the calculator and instructional video from


8.Watch out for the taxes and costs associated with residential property market

The residential property market is in tatters. There has been little real growth in residential property prices in the past three years. Meanwhile the costs and taxes associated with keeping residential property have increased substantially.

Lesson 8
The residential property market will take years to recover.
Many South Africans have far too many properties.
Downsize on residential property! Bulk up!


9. Remember the +15 million South Africans on social welfare grants

The old age pension has been increased to R1 200 per month and to R1 220 per month for those over 75 years old. There are about 2,5 million South Africans, or 5% of the total population, who receive these grants.

The child grant has been increased to R280 per month. About 11 million children, or 22% of the population receive the grant.

In total there are now more than 15 million South Africans receiving social welfare grants.

Lesson 9
The Government’s resources are limited and the demands are many. Service delivery and making a better life for all 50 million South Africans is now the priority. And taxpayers will have to pay the bill.


10. Costa Concordia Syndrome

Imagine sailing on the Costa Concordia with not a problem in the world. But when it all went wrong it was sink or swim for everyone.

Lesson 10
In South Africa today there is little Government can do to catch you if you fall. Social grants, although huge in number are very limited in amount.

This makes financial planning the top priority for all South Africans today.

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