Week 1 – Personal Financial Management

Definition of Personal Financial Management:

• A personal financial plan provides the following:
o Provides financial security.
o Facilitates responsibility.
o Provides direction and focus.
o Creates wealth.

Factors affecting the Personal Financial Life Cycle:

• Age
• Level of education
• Income
• No. dependents
• Employment opportunities and skills

The Personal financial life cycle:

• The financial life cycle represents different stages in the life of an individual, each of
which involves a different approach to financial matters.
• The amount of time spent on each stage varies from individual to individual, but
generally, most people go through a six-stage financial life cycle.
1. Stage 1 – The dependent stage
- They typically depend on parents or relatives.
- There is no income earned.
2. Stage 2 – The single stage
- At this stage of the individual earns their first income.
- The income is typically low and does not exceed expenses.
- As a result, saving potential is low.
3. Stage 3 – The paired stage
- During this stage the individual is no longer alone and starts to share financial
responsibilities with a partner or spouse.
- It becomes possible to start saving for the future.
4. Stage 4 – The family stage
- It now becomes more difficult to take up financial risk.
- Additionally, income growth may not keep up with new expenses such as
education, medical expenses, groceries, and children’s clothing.
5. Stage 5 – The post-family stage
- Income of the household nearing its maximum and allows increased savings.
- Retirement planning becomes the main financial focus.
6. Stage 6 – The retirement stage
- During this stage, no income is generated through active employment.
- The only sources of income are returns on investments or investments
previously made.
 - Estate planning becomes important, and medical expenses are often a big
financial concern.
- Usually post mid 60s.

The three phases of Personal Financial Management:

• The following represent an alternative way to view the financial life cycles in terms of
financial priorities:
1. Phase 1 – Accumulation
o Building wealth.
o There often less focus on financial risk.
o Interested in capital appreciation.
o Long term investments.
o This is applicable to stages 2 and stage 4 of the financial life cycle.

2. Phase 2 – Consolidation
o While wealth may still be growing, there is also an increasing emphasis on
avoiding loss of wealth.
o Risk protection (insurance) and investment planning become a major
consideration.
o Lower risk investments.
o Corresponds to stage 4 and stage 5.

3. Phase 3 – Preservation
o There is no longer any new income or wealth being generated by individuals or
households.
o New wealth comes from appreciation in value of income generated by existing
assets.
o Capital protection.
o However, due to the individuals no longer generating income, they would
prioritise income generation over capital generation to afford expenses.
o Corresponds to stage 6.

Risk and Return

• These are a few factors that an individual’s ability and desire to take financial risk
depends on:
o Personality
o Age
▪ The older a person is, the less time he or she has to recover from
financial setbacks.
▪ In other words, the more you get older the more you become risk
averse.
o Dependents
▪ It is far easier to take risk if you know that failure will only affect you.
 ▪ It is usually more difficult to take financial risk once there are
dependents such as children involved.
o Skills and abilities
o Financial resources
▪ for instance, the wealthier you are the more likely for you to consider
financial risk.
o Support and back-up
Budgeting
• Budgeting is usually done for a short-term basis, so, its typically done on a monthly basis.
• Benefits of budgeting:
o Identifies potential savings
o Leads to financial discipline
• Steps for budgeting:
o Collect information
▪ Identify income and expenses
▪ The most useful document is the bank statement
o Identify and list all sources of income
o Identify and list all expense
▪ Fixed and variable
o Classify and prioritize expense
o Construct budget
o Balance and adjust the budget
o Keep ongoing records
o Measure outcomes and review budget
o Repeat the process for the next period

Week 2 – Time Value of Money A & B

• Time value of money is a financial concept that describes how money available now is
worth more than the same amount in future due to its earning capacity.
• Importance of time value:
o Opportunity cost
▪ Money available today can be invested and earn returns, whereas money
received in the future misses out on those potential earnings
o Inflation
▪ Inflation reduces the purchasing power of money over time
▪ Money today can buy more goods and services than the same amount in
the future
o Risk and uncertainty
▪ Future cash flows are uncertain and risky
▪ Money today is certain and can be used to mitigate future risks.
• The relationship between present and future values:
 o Annual percentage rate (AER)
▪ Refers to the nominal annual interest rate the bank quotes for borrowing.
▪ The annual rate charged for borrowing or earned through an investment,
without compounding.
▪ Quoted interest rates are not comparable if the number of compounding
periods per year are different.
o Effective annual rate (EAR)
▪ The actual interest rates an investor earns or pays in a year after accounting
for compounding.
▪ More accurate reflection of the real financial impact.
• Week 4 – Investment Planning A
• Investment risk:
o Types of investment risk:
▪ Business/Unsystematic risk
• Risk that is specific to a business or company. This may refer to the
risk that the company will perform poorly due to internal factors such
as management decision.
▪ Market/systematic risk
• Refers to the risk of losses due to factors that affect the entire market
or asset class.
• This type of risk cannot be eliminated through diversification.
▪ Interest rate risk
• is the risk that changes in interest rates will negatively affect the value
of an investment.
▪ Inflation risk
• is the risk that the purchasing power of an investment's returns will
be eroded by inflation.
▪ Political and regulatory risk
• is the risk that changes in government policy, regulations, or political
stability will negatively impact an investment.
• Types of investment:
o Financial investments
▪ Fixed deposits
▪ Bonds
▪ Equities (shares and stocks)
▪ Derivatives
▪ Cryptocurrencies
o Non-financial investments
▪ Real estate
▪ Collectables (art, antiques, gems, and jewellery)
▪ Alternative assets (commodities and precious metals)
• Investment returns:
o This is usually calculated using the Holding Period Returns:
 o Investors can determine the average returns for each period from the Holding
Period Returns by utilizing both the arithmetic and geometric average returns.
▪ Arithmetic average returns:
• This indicates how the investment performed on average over a
period, without taking into consideration compounding.
• The arithmetic mean is appropriate as an indication of future annual
returns.

•
▪ Geometric average returns:
• This measure is appropriate for assessing and comparing past
investment performances.
• Geometric average gives a lower, more conservative estimate
compared to arithmetic average but accurately reflects the long-term
performance.

•
• Diversification:
▪ Diversification is a portfolio strategy designed to reduce risk by combining a
variety of investments, such as bonds, shares, property, which are unlikely to
move in the same direction.
▪ The purpose of diversification is to reduce the standard deviation of a portfolio,
thus being able to reduce the unsystematic risk.
▪ Benefits of diversification:
a. A diversified portfolio is less likely to experience extreme volatility because
the performance fluctuations of different assets can balance each other out.
b. Diversification helps protect capital from significant losses
c. Diversification allows investors to take advantage of opportunities in
different sectors or asset classes.
▪ Types of investment strategies:
o Active strategy
▪ This refers to the strategy involving frequent changes in an existing
portfolio over a certain period of time for maximum returns and
minimum risks.
o Passive strategy
▪ This refers to a strategy involving rare changes in portfolio and only
under certain predetermined rules such as formula plans.
• Measuring risk:
o Standard deviation
▪ beta = 1 (the stock moves with the market).
▪ beta > 1 (the stock is more volatile than the market).
 ▪ beta < 1 (the stock is less volatile than the market).
• Ponzi schemes and Pyramid schemes:
o Ponzi schemes:
▪ Central operator pays returns using new investors' funds.
▪ Recruitment is not necessary.
o Pyramid schemes:
▪ Participants recruit others, earning based on recruitment.
• Risk-adjusted return
o This represents a measure necessary to compare investments not only to other
risky investments, but also to risk free investments (like government bonds).
o Risk premium = Share less Risk-free rate.
o The risk-adjusted return (RAR) shows the return for every 1% of risk and is
calculated as follows:
Week 5 – Investment Planning B
• Financial markets:
o Financial market is marketplace where individuals and institutions buy and sell
financial instruments, such as stocks, bonds, commodities, and currencies.
o Types of financial markets:
▪ Bonds market
• Markets where debt securities, such as government and corporate
bonds, are issued and traded.
▪ Stock market
• Markets where shares of publicly traded companies are bought and
sold.
• For example: The JSE, New York Stock Exchange (NYSE) and NASDAQ.
▪ Foreign exchange market
• Markets where currencies are traded.
• The forex market is the largest and most liquid financial market in the
world.
▪ Money market
• Markets for short-term debt instruments, typically with maturities of
less than one year.
• Examples include Treasury bills and commercial paper.
▪ Commodities market
• Markets where raw materials and primary products, such as gold, oil,
and agricultural products, are traded
▪ Derivatives market
• Markets where financial instruments derived from other assets, such
as options, futures, and swaps, are traded.
▪ Cryptocurrency market
• Markets where digital assets, such as Bitcoin and Ethereum, are
traded.
• Money market
o Represents financial markets where short-term debt instruments, usually matures
less than a year, are traded.
o The shot-term debt instruments have low risk and low returns.
o Suitable for individuals in the single and retirement stage of the PFLS, seeking
short-term and medium-term investment financial goals.
o Also applicable to individuals in the preservation phase of the personal financial
life cycle.
o Money market instruments include government treasury bills (T-bills), fixed
deposit, and money market accounts.
• Capital market
o Financial market that facilitates trades in shares in equities, stocks, and bonds.
o Capital markets instruments have higher risk and offer higher returns than money
markets instruments and are long-term investments.
o Suitable for individuals in the paired and post-family stages.
o Capital market is comprised of primary and secondary markets.
▪ Primary
• Are financial markets where new shares and bonds are sold by
companies (and governments) to investors for the first time (e.g. via
an IPO).
▪ Secondary
• It’s the market where investors buy and sell securities, they already
own, rather than purchasing directly from the issuer.
• Bonds
o Bond issuers have the responsibility to pay bondholders a fixed interest amount
(coupons) either annually or semi-annually and the face value at the end of the
maturity date.
o It’s also possible for bondholders to experience capital losses if they sell the bond
before the maturity date for less than the purchase price.
o Ideal for individuals in the family, post-family, and retirement stage in which
investors desire current income and capital preservation.
o Bond prices change daily largely due to changes in interest rates in the market.
o When market interest rates decrease, bond prices increase and vice versa.
o Bonds are susceptible to interest rate risk and credit (default) risks.
• Alternative investments:
o Real estate
▪ Types of real estate investments
• Residential properties (apartments and single-family homes)
• Commercial properties (office building and retail spaces)
• Industrial properties (warehouses and factories)
▪ Benefits
• Stable income in the form of regular rental income from tenants
• Appreciation
• Diversification
 • Tax benefits
▪ Risk
• Not liquid
• Unsystematic risk (market risk)
• Interest risk
• Management and maintenance risk
o Cryptocurrency
▪ Cryptocurrencies are digital or virtual currencies that use cryptography for
security and are decentralized in nature.
▪ Cryptocurrencies offer high returns (but high levels of volatility), and they
have low correlations to existing asset classes like stocks and bonds.
▪ Popular cryptocurrencies are Bitcoin, Ripple, Ethereum
Week 6 – Collective Investment Schemes (CIS)
• Understanding CIS and its different types
o A collective investment scheme is an investment that pools money from multiple
investors to invest in a diversified portfolio of assets.
o Benefits of CIS:
▪ It offers an opportunity for the ordinary investor to gain access to
companies listed on the JSE.
▪ The process involved in buying into the trust and selling out of
the trust is simple and straight forward.
▪ Investment is affordable, investors do not need a huge
lump-sum to get into the investment, and they can invest through
monthly debit orders often from as little as R100.
▪ The costs associated with investing are made attractive due
to Rand Cost Averaging.
o The different types of CIS products:
▪ Unit trust
• A unit trust pools funds from different investors to invest in a
diversified portfolio of securities, such as stocks, bonds, and other
assets.
• This is usually traded at the end of the day
• Benefits:
o Allows investors to get access to an already diversified product,
where risk is already spread across multiple assets.
o Highly regulated.
o Offer transparency and liquidity.
▪ Exchange traded fund (ETF)
• An ETF is a “basket of securities”, much like a unit trust but traded on
an exchange at a market determine price, similarly to ordinary shares.
 • Therefore ETFs are said to have more trading flexibility than unit
trusts (which trade once a day, at NAV).
▪ Hedge funds
• These types of investments are unregulated.
▪ Multi-manager funds
• This represents a fund managed by multiple managers
▪ Fund of funds
• Represents another type of unit trust that invests in other unit trusts.
• Rand cost average:
o This refers to the fact an investor can fix the rand amount of shares they buy on a
monthly basis, irrespective of the price movement in the shares.
o Benefits of rand cost averaging:
▪ Reduces risk of poor timing
▪ Takes advantage of market volatility
• Structure of a collective investment scheme:
o Parties involved in the structure of a CIS:
▪ Management company or fund manager
▪ Registrar
▪ Trustee
▪ Portfolio
▪ shareholders
o the relationship between these parties consists of the management company or a
fund manager that facilitates and liaises with the relevant registrars, trustees, in
order to create a portfolio.
o The management company or fund manager is responsible for the investments in
the portfolio and the deed from the trustees.
• Roles of participants:
o Management company:
▪ Are responsible for the administration of the portfolio, appointment of asset
managers, appointment of trustees, and marketing of the fund.
▪ For example, these include companies such as Old mutual and Allan Gray
o Trustees
▪ Are responsible for ensuring that the portfolio of assets is kept separate
from that of the management company.
▪ Taking care of all the cash and securities on behalf of the investors.
▪ Ensure that the CIS is run in accordance with the deed of the scheme and
the requirement of the act.
▪ Deed:
• Responsible for defining the scope and working parameters for the
fund.
• States the type of investment and how much will be invested.
• How returns in the form of income will be calculated and distributed.
o Asset managers
 ▪ Are part of the management team and responsible for employing analysts
to analyze the market and look for good investment opportunities (active
management).
▪ Additionally, make use of computer technology to track specific funds and
invest therein (passive management).
o Investment strategies:
▪ Active investing
• This represents an investment strategy that involves outperforming
the benchmark indices such as the S&P 500 or JSE ALSI.
• This involves analyzing the market trends, economic indicators, and
company specific information to make decisions
▪ Passive investing
• This represents an investment strategy that involves replicating the
performance of the specific market index, such as the S&P 500.
• This is done through holding a portfolio that mirrors the index.
• This strategy is suitable for focusing on long-term growth and
minimizing trading.

• Types of collective investment schemes:

o Money market funds
▪ The money market fund is suitable for individuals with a rather short-term
focus on investment.
▪ The assets in this fund are liquid, with low risk and low returns.
▪ Consists of investment in cash and short-term money market instruments.
o Equity market funds
▪ Consists of investment in a wide range of equities, also include bonds, cash,
money market instrument and derivatives
▪ The equity market fund is suitable for individuals with a long-term horizon
viewpoint on investment and are therefore not averse to taking some risk
because they any loss can be regained over time.
o Bond funds
▪ Investment in government bonds and corporate bonds.
o Hedge funds
▪ Includes derivatives.
o Property unit trusts
▪ Includes commercial and industrial properties.
• Types of CIS risk:
o Market risk
▪ This refers to risk that a particular market experiences, such as how the
bond market performs
o Credit risk
▪ Refers to risk that an investor or manager may default from the investment.
o Interest rate risk
 ▪ Refers to the risk that the interest rate fluctuations may impact the value of
investments.
o Liquidity risk
▪ Liquidity of the cash component of the fund is the main concern.
Week 9 – Saving and Managing credit
• Importance and benefits of savings.
o Reasons for saving:
▪ To have security in case of emergencies.
▪ To invest in a retirement plan.
▪ Saving in order to earn interest and grow wealth.
▪ To prepare for big purchases.
o Good saving habits:
▪ Start early as possible in order to take advantage of earning interest.
▪ Consider purchases carefully.
▪ Do not let income determine spending.
▪ Invest in assets that earn a high return.
• Understanding debt and credit
o Good reasons for borrowing:
▪ To take advantage of high returns from an investment.
▪ To fund education or purchase a lifelong asset.
▪ In cases of emergencies.
▪ Used as a method to bridge finance.
▪ Used to take advantage of an opportunity.
o Bad borrowing reasons:
▪ Matching maturities
• Borrowing to match a long-term loan period with a short-term
asset’s life.
▪ Intending on spending on short-term items
▪ Trying to keep up with others.
o Consequences of bad borrowing and excessive debt.
▪ Consequences of excessive debt:
• Worsens an individual’s credit record.
• Leads to potential loss of possessions.
• Cause conflict and puts pressure on household.
o Financial leverage:
▪ Financial leverage is the use of debt to purchase assets.
▪ The primary purpose is to earn or increase potential returns from the
asset.
▪ This is often done through purchasing fixed property using debt and
selling it at a later period to earn a return on their investment.
o The four Cs of credit:
▪ This refers to the criteria used to determine the feasibility of granting
credit.
▪ Capacity:
 • Does the borrower have enough future sustainable income to
afford interest and capital payments.
• This is checked through pay slips and bank statements.
▪ Capital:
• This is concerned with the how much the borrower’s equity is
worth.
• The purpose is to check whether the borrower has assets such as
savings or cars that could be used to repay the debt if need be.
▪ Collateral:
• This is an asset pledged by a borrower to secure a loan, allowing
the lender to sell it if the borrower defaults, providing the lender
with repayment security.
▪ Character:
• This analyses the borrower’s moral nature and ethical intention to
pay back interest & loan amount.
o Types of credit structures:
▪ Non-instalment credit
▪ Instalment credit
▪ Revolving credit
o Different forms of credit:
▪ Credit cards
▪ Home loans
▪ Bank overdraft
▪ Personal loans
• The link between the term of loan, monthly repayments, and amortization of a loan:
o Increasing the term of the loan, will decrease the monthly payment, but this
comes at the cost of higher overall interest cost [vice versa].
o Reasons to save up for a deposit include, reducing the monthly repayment and
the overall interest paid.
o An amortizing loan is a loan in which both capital and interest are paid off in
each instalment.
o The debt-to-income ratio is the ratio of the payments made every month
towards debt divided by total monthly income.
o Debt to disposable income, which measures the percentage of income after the
necessities have been paid that is spent on debt servicing
• Understanding credit habits:
o Bad credit habits:
▪ Not reading the terms of agreement.
▪ Not determining what the debt really costs.
▪ Skipping payments.
▪ Using debt to pay other debts.
• Guidelines to follow in cases of bad debt
o Admit there is a problem.
o Determine what the cause is.
 o Reduce expenses.
o Find additional sources of income.
Week 10 – Residential Property
• Consideration when buying property:
o Important factors to consider before buying any residential property will
depend on either financial or personal considerations.
o Factors to consider include:
▪ Affordability
• This refers to individuals correctly determining whether they
can manage the monthly bond repayments, ongoing
maintenance, security, home insurance, as well as rates
and taxes (water and lights).
• All these expenses may increase depending on the value of the
property.
▪ Location
• Since individuals not only buy the property, but also buy into
the area, it becomes important to investigate the positive and
negative factors about the area.
• Positive:
o If there are many schools around the area , the value
of the property will be high.
• Negative:
o If the property is located near noisy highways, sports
stadiums, and security issues, the value of the
properties will be lower, due to the impact on the quality of
life and safety considerations.
▪ Neighborhood
• Neighborhoods reflect the demographics in terms of age and
available faculties.
• It’s easier to get an idea of property values in an older established
neighborhood.
• Established neighborhoods tend to have more facilities
such as shops, schools, transport, and security, which appeal to
families seeking stability.
• While, new neighborhoods may be less developed, they
attract investment in infrastructure such as malls and petrol
stations, offering potential for future growth.
• Buying vs Renting
o Renting:
▪ Advantages of renting:
• Renting is usually cheaper than buying property.
• The landlord is responsible for maintenance and repairs.
 • You don’t have to purchase home -owners insurance.
▪ Disadvantages:
• You may be evicted if you fail to pay rent.
• You cannot personalize the house/home.
• Rent may increase annually.
o Buying:
▪ Advantages:
• You have the creative freedom to personalize the house.
• The value of the house may appreciate overtime.
• You gain an equity as the loan decreases.
▪ Disadvantages:
• Increased monthly expenses, such as municipal costs and loan
repayments.
• The value of the house may depreciate overtime depending on the
state of the economy.
• If you miss monthly installments the bank may foreclose on you.
• Limited customization unless renovations are done.
• Building vs buying
o Building or buying property depends on either the cost or personal preference.
o Advantages of building:
▪ Building allows individuals to design and build features to their taste.
▪ Potential for long-term value increase due to modern designs.
o Disadvantages:
▪ May be time consuming with potential delays.
▪ Involves dealing with contractors, permits, and regulations.
• Drivers of property prices
o Macro indicators
▪ Since the price of properties depends on supply and demand, where the
higher the demand for something and the lower the supply, the higher
the price and vice versa.
▪ The economy
• Property prices are influenced by the state of the economy.
• When the economy is strong, higher employment and earnings
make property more affordable, leading to increased property
prices.
• In contrast, during an economic downturn, property prices tend to
drop, creating opportunities to buy at lower prices.
▪ Interest rates
• The higher the interest rates, the higher the bond repayments on
the financed property purchase.
• When the interest rate increases, demand for property declines
because it becomes less affordable to take loans.
• Consequently the decline in demand for fixed property may result
in a drop in property prices.
 ▪ Building costs
• The cost of building materials and labor influence the price of
properties.
• Since prospective buyers have a choice between buying and
building, property prices can never be very different from what is
cost to build a house.
• As a result, sellers cannot price properties significantly higher than
the cost of building, as buyers would opt to build instead. Micro
o Micro indicators
▪ Location
• Access to transport routes, schools, and various other facilities are
important.
• Buyers often prioritize neighborhoods before selecting specific
homes
• Avoid overcapitalization
o Refers to the situation where a property owner invests
excessively in renovations or alterations beyond the average
market value of similar properties in the area
▪ Availability of land
• In areas with limited land for new development, population
growth, migration, and new employment opportunities can drive
up housing demand. Consequently, property prices in these
regions are likely to increase and show greater resilience during
economic downturns compared to other areas
▪ Condition
• Newly renovated homes will sell for more than neglected ones.
• Valuing a property
o The value of a property is related to how much a willing buyer is willing to pay
for it.
o Another good idea of checking how much property cost is by using a valuation
method called sales comparison approach.
▪ This refers to a method used to determine the value of a property by
comparing it to similar properties that have recently sold in the same
are.
• The procedure of buying and selling residential property
o The process involves different parties with specific roles and responsibilities.
o Key role players:
▪ The estate agent
• An estate agent is a person appointed by the seller to find a
suitable buyer for the property in exchange for commission.
• The seller and the estate agent have to enter a mandate contract
which governs the relationship between the two parties.
 • The mandate is usually valid for a given period, during which the
above relationship and commitments may not change without the
consent of both parties.
• Three types of mandates:
o Open mandate
▪ Any estate agent can find a buyer for the property.
o Multi-listing mandate
▪ In this mandate, the estate agency involved will send
the information on the property to other estate
agencies with which it has a multi-listing agreement.
o Sole mandate
▪ This gives the estate agent the sole right to market
and sell the property.
▪ This is the most common mandate in South Africa,
but it also means that the agent gets the full
commission regardless of who finds the buyer.
▪ Attorneys
• Since property transactions involve a lot of legal requirements,
there is a need for property attorneys called conveyancers.
• The attorneys are responsible for facilitating the transfer of fixed
property because this process needs to be legally registered.
▪ The bank
• Since nearly all cases the buyer needs a loan to finance the buying
of the property, the bank will be present in the process.
• The bank will assess the applicant to determine the credit
worthiness.
• The main collateral in this case is the property itself.
▪ Home loans originators
• These serve as intermediaries between the buyer and the bank.
• They are responsible for approaching the different banks on behalf
of the buyer in order to obtain the best possible mortgage
conditions.
• In exchange they earn commission from the bank.
o The process
▪ The typical process starts with the buyer finding a suitable property and
sending an offer to the seller through an estate agent.
▪ The offer often includes suspensive clauses, which represents conditions
that are required in order for the offer to be binding on the buyer and
seller.
▪ This lets the seller accept a cash offer from a new buyer if the
original buyer can't provide a similar cash offer within a set time.
▪ The most common condition is to make the offer subject to the buyer
selling his property and the buyer obtaining a mortgage.
 ▪ If the accepted offer is subject to conditions outside the control of the
seller, there is a clause that allows the seller to cancel the contract.
▪ The seller is responsible for obtaining compliance certificates, which are
required before the ownership of a property can be transferred.
o Physical occupation
▪ In the purchase offer, a date is stipulated for seller to evacuate the
property in order for the buyer to occupy the premises.
▪ A typical transfer usually takes three months to complete.
▪ However, in the meantime the seller still remains the legal owner of the
property, and is still responsible for covering rates, and taxes until the
ownership transfer has been registered.
o Costs
▪ Buyer costs
• Transfer duties
• Attorney costs
▪ Seller costs
• Estate agents commission
• Compliance certificates
• Rates and taxes
• Bond cancellation fee
• Capital gains tax

• Financing property purchases

o Mortgages:
▪ Mortgage is a loan used to finance the purchasing of property.
▪ The loan includes condition such as term, interest rate, and installments
that used to pay off both the capital and interest.
▪ Due to the fluctuations of the interest rate, bank charge a high interest
rate to risky clients and a relatively lower rate to better clients.
▪ It is not advisable to purchase a property at the maximum limit of your
budget, as fluctuations in interest rates could increase your monthly
payments, making it harder to manage financially
o The impact of key mortgages variables:
▪ The higher the starting interest rate is, the greater the impact on the
repayment of a 2% rate increase.
▪ The balance remaining on the loan only decreases slowly, especially at
higher interest rates.
▪ This is because of most of the capital only gets repaid very late in the
term of the loan as a result of the way an amortizing loan work.
▪ The extension of a loan comes at the expense of a much higher interest
cost over the lifetime of the loan
o Fixing interest rates:
 ▪ Borrowing with a fixed interest rate is beneficial if you expect rates to
rise, as it protects you from future increases, though it may start slightly
higher than a variable interest rate.
▪ A variable rate offers lower initial costs but carries the risk of higher
payments if rates increase.
▪ Often the choice depends on your expectations of future interest rate
movements.
o The loan-to-value ratio
▪ This refers to the method of assessing an individual’s worthiness for
being granted a mortgage.

▪
▪ Possible insights from the LTV ratio:
• The higher the ration, the bigger the loan relative to the value of
the property.
• The LTV has a trend to decrease over time due to the paying off
the balance and the appreciation of the property.
• A bank will consider a high LTV for its better clients and a low LTV
for its less creditworthy clients.
o Refinancing
▪ Bond refinancing is the replacement of a current mortgage with a new
one, usually with improved terms or a lower interest rate.
▪ The purpose of refinancing:
• Is to free up money from home loan or
• Save money by changing to a new home loan at a lower rate
▪ If following good refinancing principles an individual should only
consider refinancing when interest rates are low and if you can reduce
your mortgage rate by 2% or more.
o Flipping
▪ Represents the method of finding a property under market value, fixing
and upgrading it, in order to sell the property at a profit.
▪ Mistakes of flipping:
• Lie on loan applications
• Underestimated the upgrade costs
• Overpaid for property
• Bought too many properties
• Quit a day job
• Conveyancing procedure
1. Receipt of deed of sale
- After receiving the deed of sale, the conveyancer verifies the property details,
requests the Title Deed and obtains municipal rates, as well as the relevant
documents
 2. Fulfilment of suspensive conditions
- The suspensive conditions (bond approval or sale of purchaser’s property) are
followed up.
- Once confirmed, the seller issues a cancellation to the bondholder to cancel
the existing bond and collects all the relevant information from both the buyers
and seller.
3. Signature of documents and payment of costs
- The seller and buyer sign the transfer documents.
- The purchaser signs bond documents, as well as paying the necessary costs
(transfer costs).
- The seller pays rates.
4. Compliance certificates
- Seller to provide Plumbing Certificate, as well as an Electrical Beetle, Gas and
Electric Fence certificate.
5. Guarantees and the FICA
6. Lodgement of deed at the deed’s office
7. Registration
8. Delivery of deeds

Week 11 – Tax Planning

• Tax introduction:
¬ Direct taxes are directly paid to SARS, such as company income tax, capital gains
tax, and estate duty.
¬ Indirect taxes are collected by business on behalf of the government, such as VAT,
petrol, sin tax, and transfer duties.
¬ Tax avoidance is the legal means to reduce the tax liability through sound
administration and planning.
¬ Tax evasion is the non-payment of tax and can lead to prosecution.
• Normal tax
¬ Normal tax is tax paid to the state based on income and profits, within a 12-month
period.
¬ Types of individual taxpayers:
- Non-provisional taxpayers
o These individuals derive their income only from remuneration as
employees.
o They pay tax every time they receive their salaries as part of SITE, PAYE,
- Provisional taxpayers
o These individuals don’t get all their income as employees and includes
self-employed individuals.
o Provisional taxpayers are required by law to complete tax assessments
twice a year.
 ▪ The first assessment and payment are supposed to be half of the
estimated tax for the full year.
▪ The second assessment and payment are dependent on the
taxable income:
o If taxable income is equal or less than R1 million, use a basic
amount to avoid penalties or ensure the estimate is within
90% of actual income.
o If taxable income is above R1 million, estimate must be at least
80% of actual income to avoid penalties.

• Capital gains tax (CGT)

¬ CGT is tax payable when an asset is sold and is calculated based on the selling
price less its base cost.
- Base cost is the original amount paid for an asset.
- If the asset is acquired before 1 Oct 2001, the base cost is whatever the fair
value of the property (asset) is as on 1 Oct 2001.
¬ Disposal of asset is only exempt if it’s a primary residence.
- There will be no CGT payable if the primary residence is sold for less than R2
million.
- However, if the asset is sold for more than R2 million, the first R2 million is
exempt from CGT.
- Assets for personal use are also exempt from CGT.
- Was the individual physically occupying the residence during the tax year?
- Is the residence completely or partially used by the individuals?
¬ The concept of exempt primary residence only applies to natural persons not
companies.
• Calculation of normal tax liability:
1. Calculate the gross income
2. Deduct exempt income
3. Deduct allowable deductions
4. Add taxable capital gains
5. Deduct donations
6. Apply tax rates per tax tables
7. Deduct tax rebates

• Gross income:
¬ Physical presence test:
- An individual is a non-resident if the person is out the country, at least 330
consecutive days during the tax year.
- A person is a resident, if they are in the country for 91 days during the tax
year, as well as 91 days per year for each of the prior five tax years and in
915 days in total for the previous five years.
¬ The income can be received within the tax year or have been accrued to the
taxpayer in the tax year.
 ¬ The calculation of gross income excludes any receipt capital in nature.
¬ Allowances less the part of the allowance spent for business expenses may be
included in gross income.
• Capital gains:
¬ All capital gains and losses for the tax year are added and then multiplied by the
inclusion rate (40% for individuals) to get the actual amount to be added to
taxable income.
• Exempt income:
¬ Interest earned.
¬ Dividends.
¬ Scholarship/bursary.
¬ Pension fund
¬ Provident fund.
¬ Retirement annuity receipts (only exempted up to R30 000).
• Deductible expenses:
¬ Contributions to retirement annuities and funds.
- Limited to 27.5% of the greater of Retirement Funding Remuneration or
Taxable income.
¬ Medical aid contributions and medical expenses.

Week 12 – Retirement and Estate Planning

- Estate planning is a method of planning for one’s eventual death and distributing
assets between beneficiaries in the most cost-efficient manner possible.
- The process includes drafting a comprehensive will and winding up of the assets upon
death.
- Estate planning is important because it aims to minimize the costs that may be
incurred after death (funeral, tombstones, etc.)
- New legislation:
o As of 1 March 2021, provident and pension funds will be subject to the same
legal and tax requirements.
o As of 1 September 2024, the introduction of the two-pot system:
▪ Divides retirement savings contributions into two distinct portions:
• Savings pot:
o Comprises of 1/3 of contributions.
o Funds can be accessed before retirement, but this is limited
to only one withdrawal per tax year [>=R2000].
o These withdrawals are subject to income tax.
• Retirement pot:
o Comprises of 2/3 of contributions.
o Funds cannot be accessed until retirement.

• Difference between pensions funds, provident funds, and retirement annuities:

o Difference between retirement planning goals and investment goals:
 ▪ Unlike investment goals, retirement savings have a long-term goal in nature
i. not very liquid.
ii. Often penalized for early withdrawal.
iii. This is compensated with high returns.
▪ This is encouraged by government as it reduces the dependence on state
financial assistance.
o Employee benefits:
▪ Employers are often responsible for creating pension or provident funds for
their employees.
▪ The retirement age for most funds’ ranges from 60 - 65 years of age
▪ The structure of the fund is often predetermined by the employer either as
a one-size fits all or may offer employees ability to customize.
▪ Difference between pension and provident funds:
• The primary difference lies in the handling of tax treatments and the
way benefits are disbursed after retirement.
• Employee’s contributions to a fund are deductible but limited to the
lesser of R350 000 or 27.5% of the greater of remuneration or taxable
income for both pension fund and provident funds.
• Any excess contribution made may be carried over to the next tax
year.
• Provident and pension fund members are only allowed to take
33.33% or 1/3 of their retirement benefits as a lump sum at
retirement, with the remaining 67% or 2/3 disbursed on a monthly
basis.
o Defined benefit and defined contribution for pension funds:
▪ Defined benefit:
• This plan identifies the benefit that will be payable upon retirement.
• The benefit plan accounts for the years of employment and the salary
of the employee.
• A retirement benefit is usually provided in the form of regular
payment over the lifetime of the employee, starting at retirement age
(age 65).
▪ Defined contribution:
• This plan stipulates what percentage of employee’s salary will go into
a retirement plan today.
• This is a more favoured plan from an employer’s perspective because
this shifts the responsibility of saving and investing for retirement on
employees.
o The impact of changing employment on your pension or provident fund:
o This also applies to cases you resign or are dismissed; you also have the
following options:
1. Transferring your accrued benefits to the fund of your new employer.
2. Transferring the funds to a retirement annuity fund.
 3. Choosing to have your pension or provident fund pay out its value in a
lump sum.
4. Choosing to transfer the benefits to a preservation fund.
o Death benefit:
o Often provides lump sum benefit or annuity income to beneficiaries.
o Death benefits are often covered by group life insurance and requires
evidence of good health.
o The employer premiums are tax deductible, while the beneficiaries pay tax
on the benefits.
o Retirement annuity benefits:
o A retirement annuity is a fund that is contributed to by members on a
personal basis (no employer or employee involved).
o Benefits of retirement annuity is paid to beneficiaries as a life annuity.
o If the lump sum benefit is less than R247500, it will be paid in full as a lump
sum to beneficiaries.
o Pros:
▪ They offer tax advantages over other forms of investments.
▪ The benefits cannot be attached by creditors.
▪ Benefits are paid out to beneficiaries without executor’s fees.
o Annuity options:
▪ Life annuity without guarantee
• This is responsible for paying out benefits as long as the
member is alive and ceases on death of member.
• The annuity is often higher.
▪ Life annuity with guarantee
• This is responsible for paying out benefits as long as the
member is alive or as long as annuity falls within the guarantee
period.
• The longer the period the lower the annuity.
▪ Joint life annuity:
• Member receives annuity until death and passes to spouse or
partner.
• This ceases on the death of the partner.
o Tax implication on retirement funds:
▪ Annuity benefits from retirement annuities are taxable at the normal
tax tables.
▪ Lump sum benefit is dependent on whether the benefit is retirement
lump sum benefit or retirement lump sum withdrawal benefit.
▪ When calculating the taxable portion of the lump sum benefit, you
first exclude the tax-free amount, then subtract any non-deductibles
and add previous withdrawals taken before retirement.
• Estate planning:
o This is concerned with the planning of distribution of assets to nominated
beneficiaries upon death.
o Factors to be considered by an estate plan:
▪ Efficient and appropriate administration of the estate.
▪ Minimization of costs.
▪ Liquidity.
▪ Flexibility.
o The will:
▪ A will is a document that specifies the instructions for the distribution of
assets in the event of death.
▪ Requirements of valid will:
• The testator must sign the end of the will and also each page of
the will.
• The will should be signed in the presence of at least two witnesses
(not beneficiaries), which are also required by law to sign the last
page of the will, but the witnesses should be over the age of 14.
• Whenever a will is signed, a commissioner must verify the identity
of the signatory and that the will is the will of the testator.
• Types of wills:
o Single will
▪ This is a will drawn by the testator and represents
instructions on the distribution of his or her estate
only.
o Massing two estates
▪ Provides the ability for any two individuals to
combine their estates.
• Intestate succession
o This refers to the occurrence that the individual has passed
away without a valid will.
o Rules of intestate succession:
▪ First, a portion of the combined estate (50%) is
distributed to the spouse under common of property.
▪ Secondly, the deceased children’s share is determined
from the remaining portion.
▪ Then, the net value of the divided is equally shared
between the spouse and the descendants.
• If portion is less than R125000, the spouse will
receive the full R125000, and the children will
share the remainder.
• If the portion is more than R125000, the
spouse and children will equally share the
amount.
• In the case of no spouse, the estate will be
distributed to each branch of the family equally
(striped method).
 • In the case that the deceased is only survived
only by the spouse, she will inherit the entire
estate.
o The role of the executor of the estate:
▪ Responsible for the administration of the estate during the process of
winding it up.
▪ Has custody of the assets from the estate.
▪ Settles all outstanding liabilities and costs associated with the process
and distributes the net value of the estate to the beneficiaries.
▪ The appointment of the executor is ratified by the master of the high
court.
▪ The duties of the executor include:
• Reporting regularly to the master of high court.
• Informing the creditors of the deceased’s passing.
• Settle all creditors of outstanding debts.
• Prepare liquidation and distribution of account.
• Lodge an application with the master to close the estate.
o Costs associated with estate planning:
▪ Estate duty
• Estates with a net value of R3.5 million or less don’t attract estate
duty.
• But any amount above R3.5 million will accrue estate duty at a
rate of 20%.
▪ Capital gains tax
• Capital gains tax is applied to any asset sales in the estate,
reflecting the increase in asset value over time.
o The role of trusts in estate planning:
▪ The role of trusts:
• Responsible for financial planning and ensuring effective
protection of assets.
• Trusts separate the ownership of assets.
• Separates growth assets from your estate.
▪ Types of trusts:
• Bewind trust – beneficiaries are given the ownership, but trustees
manage and control often until beneficiaries reach a certain age.
• Discretionary trust – trustees determine extent and nature of
benefits to the beneficiaries.
• Vesting trusts – beneficiaries have directed rights to specific
income or capita from trust assets.
▪ The role of trustee:
• A trustee is responsible for the efficient administration of assets in
the trust.
• If a trustee is also a beneficiary, they have to keep their trustee
duties separate from their personal interest.
 • The appointment of a trustee must be authorized by the master of
the high court.
▪ The advantages of trusts:
• Trusts allow for the protection of assets.
• Trust limits the liability of the beneficiaries of the trust.
• Trust allows for growing assets to be separated from the dutiable
estate of an individual.
▪ The disadvantages of trusts:
• The transfer of property to the trust can be costly.
• Can lead to conflict between trustees and beneficiaries.
• Trusts are expensive to administer.
▪ Tax implication of trusts:
• Trusts are taxed independently from individuals and corporations.
• Income or capital gains are not taxed while in the trust, but if
distributed to beneficiaries in the same year, it will be taxed.