Investors always make the most noise about the latest budget. What will they be saying about this one?
Belinda Beresford and David Le Page
Was this an investor’s budget? Analysts are likely to be chewing over the reams of documentation provided by the Department of Finance for some time, trying to answer this question.
Adults in good standing with the taxman can now invest offshore up to R750 000 each, up from the previous limit of R500 000. Since exchange controls were relaxed on personal offshore investments a total of R9,4-billion has been taken out of the country, according to the South African Reserve Bank Governor, Tito Mboweni.
Meanwhile, South African residents travelling outside South Africa’s borders will no longer have to have their travel allowance endorsed in their passports. In addition, travel allowances per calendar year are now R130 000 for people aged 12 or older, and R40 000 for children under 12.
A major bone of contention for the financial services industry has been the constraint that only 15% of South African assets could be invested offshore. Demand for international investment from South Africans has seen many unit trusts having to shut their funds to new business because they had hit this ceiling.
Mboweni announced on budget day that the definition would now be changed from 15% of total South African assets to 15% of overall assets – vastly increasing the limits for companies such as Old Mutual.
Unit trusts also benefit from the change in the definition of assets, but their limit is also increased to 20%. Long-term insurance companies, pension funds and unit trust management companies can also apply for foreign currency transfers of up to 10% of net inflows of funds during the 1999 calendar year. This money can be spent on acquiring foreign portfolio investments, subject to the overall limits.
Sandra Gordon of Nedcor Investment Brokers noted that the market reacted favourably to the budget on Wednesday afternoon, especially the tax relief element which should amount to a net R5- billion, compared to last year’s R2,9- billion. She described it “as the most far- reaching tax reform in decades”.
Looking at the capital gains tax proposals, Peter Worthington of JP Morgan commented that currently equities enjoy an advantage over bonds, or other fixed income investments.
He said the Capital Gains Tax, in whatever form it takes after the consultation process, could serve to level the playing field, making bonds an attractive investment.
In addition, the tax would make it impossible for individual companies to mask income as a capital gain and thereby avoid paying tax. In respect of unit trusts, he said the exact form of the tax remains to be seen. It could be levied either on the individual equities within the fund or on the increase in value of the investor’s units.
Worthington said the increase in the ceilings for offshore investment by unit trusts to 20% is “a lot more modest than the market expected” but that it was in line with JP Morgan’s expectations. Other institutions had predicted increases of up to 30%.