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Pretoria News Weekend - - OPINION -

How to cal­cu­late CGT on shares

My late mother has ap­pointed me as the sole ex­ecu­tor of her es­tate and I am at­tend­ing to her liq­ui­da­tion and dis­tri­bu­tion ac­count. She held more than 40 JSE-listed and black eco­nomic em­pow­er­ment (BEE) shares. How do I cal­cu­late the cap­i­tal gains tax (CGT) and the base cost? The shares were bought over the past 30 years. Also, she had changed stock­bro­kers a few times, and I am un­able to work out the costs of the shares. Name with­held Wil­lie Fourie, the head of es­tate and trust ser­vices at PSG Wealth, re­sponds: This is quite a de­tailed is­sue, but I’ll try to stick to the ba­sics.

CGT was in­tro­duced on Oc­to­ber 1, 2001, which is the val­u­a­tion date for all as­sets for CGT pur­poses.

CGT ap­plies to all as­sets dis­posed of af­ter the val­u­a­tion date of Oc­to­ber 1, 2001. Death is an event that trig­gers CGT, be­cause the de­ceased is deemed to have dis­posed of his or her as­sets.

The CGT payable on the dis­posal of an as­set is de­ter­mined by sub­tract­ing the base cost from the pro­ceeds of the dis­posal. There is an an­nual ex­clu­sion of R40 000 for in­di­vid­u­als, which is in­creased to R300 000 in the year in which a per­son dies.

The fol­low­ing meth­ods can be used to de­ter­mine the base cost. The method de­pends on when the as­set was ac­quired.

Ac­qui­si­tion be­fore the val­u­a­tion date: 20% x pro­ceeds, less the al­low­able de­duc­tions;

The mar­ket value of the as­set, which was pub­lished in the Gov­ern­ment Gazette (GG23037);

The time-ap­por­tion­ment method for as­sets that were ac­quired be­fore Oc­to­ber 1, 2001; and

The weighted-av­er­age method can be used for shares listed on the JSE.

When a share port­fo­lio is trans­ferred to an­other stock­bro­ker, a state­ment is usu­ally pro­vided that con­tains full de­tails of the shares, the value at date of trans­fer, and the cost price for the shares. This is rel­a­tively easy now that all shares are traded elec­tron­i­cally. It does cre­ate a prob­lem if shares were pur­chased prior to the com­mence­ment of elec­tronic trad­ing on the JSE when in­vestors held share cer­tifi­cates. It could be dif­fi­cult to ob­tain de­tailed records from pre­vi­ous stock­bro­kers. If there is doc­u­men­ta­tion avail­able to show the date of pur­chase of the shares, you can de­ter­mine the price as at date of pur­chase from the JSE.

The value of BEE shares for CGT will largely de­pend on the spe­cific em­ploy­ment eq­uity scheme when the shares were is­sued. Sec­tion 8 of the In­come tax Act deals with th­ese schemes, and one would have to ob­tain the rules of the scheme to de­ter­mine the val­u­a­tion. The com­pany sec­re­tary of the com­pany that im­ple­mented the scheme will be able to pro­vide the val­u­a­tion.

This is a very com­plex is­sue, and my ad­vice is to ap­point a tax prac­ti­tioner to as­sist with the tax of the es­tate.

Should I con­sider pri­vate eq­uity?

I have read much in the busi­ness press re­cently about pri­vate eq­uity. Is this some­thing that I, who doesn’t know a lot about in­vest­ing, should con­sider in my port­fo­lio? What are the ben­e­fits over in­vest­ing in listed eq­ui­ties and unit trusts? And aren’t the risks much higher?

Name with­held Mar­ius Cor­nelis­sen, a wealth man­ager at PSG Wealth Men­lyn, re­sponds: Pri­vate eq­uity is an as­set class that mainly con­sists of eq­uity se­cu­ri­ties (shares) and debt in com­pa­nies that are not pub­licly traded on a stock ex­change. It en­tails the pool­ing of in­vestors’ cap­i­tal by a pri­vate eq­uity firm to cre­ate a start-up ven­ture cap­i­tal com­pany, buy real es­tate or in­vest in a listed com­pany and take it pri­vate.

High-net-worth in­vestors of­ten di­ver­sify their eq­uity ex­po­sure by plac­ing a por­tion of their as­sets in pri­vate eq­uity in­vest­ments. Th­ese in­vest­ments of­ten have re­turn pro­files that do not cor­re­late with, and can some­times sig­nif­i­cantly out­per­form, listed eq­ui­ties and unit trusts over an ex­tended pe­riod.

How­ever, due to the na­ture of the un­der­ly­ing in­vest­ments, there are also dif­fer­ent types of risk in­volved com­pared with other as­set classes. Pri­vate eq­uity in­vest­ments nor­mally have a lock-in pe­riod, some­times be­tween four and seven years, which means you have to stay in­vested for that pe­riod and will have lit­tle or no liq­uid­ity.

The pric­ing of th­ese in­vest­ments is usu­ally not done daily or monthly, so in­vestors do not al­ways know the up-to-date value of their in­vest­ment. Of­ten pri­vate eq­uity in­vest­ments re­quire sig­nif­i­cant amounts of ini­tial cap­i­tal out­lay, tak­ing them out of reach for a smaller in­vestor. Fi­nally, not all of th­ese in­vest­ments re­sult in a pos­i­tive re­turn and can lead to the per­ma­nent loss of cap­i­tal.

I need to save on in­sur­ance

I haven’t had a salary in­crease in two years, but my ex­penses have con­tin­ued to mount, with mu­nic­i­pal rates and in­sur­ance form­ing a much big­ger part of my monthly ex­penses than they did two years ago. There doesn’t seem to be much I can do about my rates, but what about my in­sur­ance? Should I part ways with my bro­ker and look for a cheaper, di­rect in­sur­ance op­tion? Name with­held Riana Wiese, an ad­viser at PSG In­sure, re­sponds: It is al­ways a good idea to re­view your house­hold bud­get and look for ways to save, but be care­ful of cut­ting cor­ners on your in­sur­ance.

There might be ways to cut your in­sur­ance costs and save a lit­tle ex­tra month to month, but it can be cat­a­strophic for your fi­nances if you need to claim and find your­self un­der­in­sured.

You may be able to find a cheaper pol­icy, but in most cases you’ll dis­cover that the cover is limited and that the terms and con­di­tions put you at a dis­ad­van­tage in the event of a claim.

Here is how you can en­sure that you are ad­e­quately in­sured:

When tak­ing out an in­sur­ance pol­icy, make sure that you de­clare all your pre­vi­ous claims/losses so that you can­not be found to have with­held rel­e­vant in­for­ma­tion from your in­surer, which may in­val­i­date fu­ture claims.

Pro­vide the cor­rect de­tails of the se­cu­rity mea­sures in place on your prop­erty or in your ve­hi­cle.

When it comes to dis­abil­ity cover and life as­sur­ance, it is para­mount that you pro­vide ac­cu­rate, truth­ful in­for­ma­tion about your health and do not with­hold any­thing that may be rel­e­vant, as this could leave you or your de­pen­dants with­out an in­come when it is most needed – even if you’ve been pay­ing your monthly pre­mi­ums for years.

The best way to find out whether there are any in­sur­ance costs you could be sav­ing on – with­out risk­ing any fu­ture ben­e­fits should you need to claim – is to dis­cuss your needs and cir­cum­stances with an ex­pe­ri­enced in­sur­ance ad­viser.

Is the money mar­ket safer?

My hus­band has re­cently be­come con­vinced that we need to move most of our sav­ings from the bal­anced fund where it has been in­vested for the past seven years to a money mar­ket in­vest­ment. He be­lieves we are in for more tough times, so this is the best way to pro­tect our re­tire­ment sav­ings. Do you agree with this think­ing? We are both 48 years old and work­ing.

Name with­held Paul Bos­man, a fund man­ager at PSG As­set Man­age­ment, re­sponds: The an­swer to this ques­tion de­pends on your per­sonal cir­cum­stances, in­clud­ing when you plan to re­tire and start draw­ing an in­come from your sav­ings. I ad­vise you to dis­cuss this with a qual­i­fied fi­nan­cial ad­viser, who will re­quire more in­for­ma­tion than you have pro­vided here. That said, your hus­band is not alone when it comes to look­ing for a “safe har­bour” for your sav­ings. It has been a tough pe­riod in the mar­kets, and no­body likes to see their sav­ings de­cline.

Al­though the money mar­ket may feel safer now, re­search shows that, in the long term, not tak­ing on enough risk is likely to leave you sig­nif­i­cantly worse off.

It is one of the great ironies of in­vest­ing that “play­ing it safe” is not re­ally safe at all over the long term. To make mat­ters worse, the av­er­age in­vestor will start to see this only as they get closer to re­tire­ment – when they will have less time to re­cover their losses.

On the other hand, when in­vest­ing in eq­ui­ties, you may feel like you’re on the los­ing end many times over an ex­tended pe­riod. It takes a strong re­solve to stay com­mit­ted, but it’s crit­i­cal. Re­search shows that in­vestors are un­likely to gen­er­ate re­turns that ex­ceed in­fla­tion by more than 5% (af­ter fees) over the long term if they do not have sig­nif­i­cant eq­uity ex­po­sure. Coun­ter­in­tu­itively, this makes eq­ui­ties a safer long-term bet than cash.

Bal­anced funds have be­come a pop­u­lar choice for in­vestors sav­ing to­wards re­tire­ment. They in­vest suf­fi­ciently in eq­ui­ties to avoid the lowrisk, low-re­turn trap, but are re­quired to have at least 25% in­vested in other as­set classes to mod­er­ate risk.

The av­er­age bal­anced fund in the South African multi-as­set high-eq­uity sub­cat­e­gory has re­turned about 13% a year since the in­cep­tion of the sub-cat­e­gory in 1994. This means that, over the long term, ev­ery R1 000 put into a bal­anced fund has dou­bled about ev­ery six years, which is a sig­nif­i­cantly higher re­turn than you could achieve in the money mar­ket.

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